Sunday, January 31, 2010

A Double Standard? Part II

A government official has over $7,000 of expenses paid for by an organization hoping to establish a personal connection with the official and seeking access to the official to educate him on a multibillion dollar program favored by the organization.

The same organization spends over $20,000 for baggage-handling tips, alcohol, snacks, refreshments, and other "trip supplies" for another government official.

Sounds like the organization has some FCPA issues, right?

Wrong.

Why?

Because the government officials involved are not “foreign officials,” but rather U.S. government officials and the organization is the U.S. military. (See here for the recent story from the Wall Street Journal).

According to the article, members of Congress are not required to be disclose such expenses and the information is from military expense records obtained through a Freedom of Information Act request.

While not a perfect parallel to an FCPA enforcement action, the above, as well as "A Double Standard Part I" (see here) raise the question of whether there is a double standard.

Will a U.S. company's interaction with a "foreign official" be subject to more scrutiny and different standards than its interaction with a U.S. official?

Do we reflexively label a "foreign official" who receives "things of value" from an organization with a business interest as corrupt, yet when a U.S. official similarly receives "things of value" from an organization with a business interest we merely say "well, no one said our system is perfect"?

Is there any difference between the bottles of wine given to the Thai "foreign officials" in the UTStarcom, Inc. matter (see here para. 23 of the complaint) and the bottles of wine and alcohol given to the U.S. officials by an organization with a business interest pending before the U.S. officials? Is there any difference between the sightseeing trips provided to the Chinese "foreign officials" in the UTStarcom matter and the corporate funded sightseeing trip by the U.S. official discussed in Part I?

One is a crime and the other is ... well what is it, just the way things get done?

As always, your comments are welcome.

Friday, January 29, 2010

Potpourri

A Friday roundup of recent FCPA events.

An FCPA Sentencing Trend?

As noted in yesterday's DOJ release (here), two former executives of Willbros International Inc. (a subsidiary of Houston-based Willbros Group Inc.) were sentenced for their roles in a conspiracy to make improper payments to "foreign officials" in Nigeria and Ecuador.

Jason Edward Steph was sentenced to 15 months in prison and Jim Bob Brown was sentenced to 366 days in prison.

For more on the Willbros matter, see here and here.

The DOJ's sentencing recommendations appear to be sealed, but one can assume, given the "light" sentences, that perhaps the DOJ likely sought sentences greater than those issued by District Court Judge Simeon Lake.

If so, this would appear to continue a trend of judges sentencing FCPA defendants to prison sentences less than those recommended by DOJ.

For instance, in Frederic Bourke case, a case which involved a "massive bribery scheme" according to DOJ, Judge Shira Scheindin rejected the 10-year prison sentence proposed by DOJ and sentenced Bourke to 366 days in prison. (see here). In sentencing Bourke, Judge Scheindin is reported to have said "after years of supervising this case, it's still not entirely clear to me whether Mr. Bourke is a victim or a crok or a little bit of both."

With several FCPA sentencing dates on the horizon, this apparent trend will be an issue to watch.

See here for local media coverage regarding the sentences.

Kozeny's Tan Not in Jeopardy

While Bourke (see here) prepares his appeal, Viktor Kozeny, the alleged master-mind of the scheme to bribe officials in Azerbaijan in connection with privatization of the state-owned oil company, will be staying put in The Bahamas as an appellate court again rejected DOJ's extradition attempts.

As noted in the recent Bahamian Court of Appeals decision (here), Kozeny, a Czech national, has been living in The Bahamas since 1995 and has not departed the country since 1999.

The opinion notes that there is no dispute "that there was a conspiracy to corrupt the Azeri officials and that such officials were paid money, given gifts and provided shares in certain companies under the control of [Kozeny] without payment; and had certain medical procedures paid for them by [Kozeny].

Even so, the court concluded that while The Bahamas did indeed have a bribery/corruption statute, it applied only to bribes within The Bahamas or given to a Bahamian public officer. Thus, because Kozeny's conduct would not violate Bahamian law, the appellate court upheld the lower court's denial of the extradition request.

For additional coverage (see here and here and here).

According to these reports, the decision may be appealed to London's Privy Council pursuant to Bahamian legal procedure. Kozeny's U.S. lawyer is quoted as saying "enough is enough" and U.S. prosecutors should finally accept the fact that Kozney, a non-U.S. citizen, could not violate the FCPA as it existed in 1998 - the year in which the bribe scheme perhaps ended - although, as noted in the opinion, the U.S. alleges that the bribe scheme continued into 1999.

Why is this relevant?

Because the FCPA was amended in 1998 to include, among other provisions, 78dd-3 which applies the antibribery provisions to "any person" (i.e. foreigners) "while in the territory of the U.S." from making use of the mails or any other means or instrumentality of interstate commerce in furtherance of an improper payment.

The SFO Continues to "Step-It-Up"

Today, the U.K. Serious Fraud Office (the functional equivalent of the DOJ) issued a release (here) indicating that a former BAE agent has been charged with "conspiracy to corrupt" for "conspiring with others to give or agree to give corrupt payments [...] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc."

For local media coverage of the charges (see here).

With a new Bribery Bill expected in the U.K. by years end, the SFO continues to "step-it-up" (see here for more on the SFO).

Disclosing FCPA Compliance

Public companies dislose FCPA issues all the time. Rarely though do the disclosures concern issues other than internal investigations and potential enforcement actions.

Accordingly, two recent SEC filings caught my eye.

China MediaExpress Holdings, Inc. (a Delaware company) recently disclosed (here) that it:

"[e]ntered into a securities purchase agreement with Starr Investments Cayman II, Inc. Under this agreement, Starr will, subject to various terms and conditions, purchase from the Company 1,000,000 shares of Series A Convertible Preferred Stock and warrants to purchase 1,545,455 shares of the Common Stock of the Company for an aggregate purchase price of US$30,000,000."

One of the conditions was that the company "shall have adopted a program with respect to compliance with the US Foreign Corrupt Practices Act" and a post-closing covenant obligates the company to "implement a program regarding compliance with the US Foreign Corrupt Practices Act not later than April 30, 2010."

Cardtronics Inc. (an operator of ATM networks around the world) (here) recently disclosed (here) that:

"On January 25, 2010, the Board of Directors by unanimous vote approved three management proposed modifications to the Company’s Code of Business Conduct and Ethics. The modifications as approved by the Board include: (i) adding a section that addressed compliance with the Foreign Corrupt Practices Act and International Anti-Bribery and Fair Competition Act of 1998."

Costa Rica Joins the Club

Last, but certainly not least, Costa Rica recently announced a first ... the first time a foreign corporation has paid the government damages for corruption.

As noted here, telecom company Alcatel-Lucent recently disclosed a $10 million payment to settle a corruption case in Costa Rica in which it was accused of paying kicbacks to former Costa Rican President Miguel Angel Rodriguez (and others government officials) in return for a 2001 contract worth $149 million.

There has been FCPA/corruption issues on both sides "of the hyphen" as noted here in this recent Main Justice article.

And with that, have a nice weekend.

Wednesday, January 27, 2010

Africa Sting - Press Release Parade

As indicated in a prior post (here), the Africa Sting charges, at this point, only involve individuals.

However, these individuals are employees, executives, and in some cases owners of business organizations and under respondeat superior principles the organization can be accountable for the illegal acts of its employees and agents.
This is not to suggest that prosecution of the organizations employing the indicted individuals is likely or even probable; rather the ultimate issue will be one of prosecutorial discretion applying the Principles of Federal Prosecution of Business Organizations (see here).

With that in mind, it is interesting to see the different ways in which the various business organizations are "publicly speaking" on this issue. Many of the business organizations involved are small and the websites do not have a separate news or press release tab or otherwise address the issue.

In the public statements available, you will see that the organizational responses fall across a wide spectrum from solemn yet forceful, to combative and rambling, to short and diplomatic.

ALS Technologies Inc.

Employer of Daniel Alvirez and Lee Allen Tolleson.

Yesterday, the company released this statement (here).

"A Message from Founder, Owner, and Chairman of the Board, David Alvirez"

I would first like to say thank you to all those who know Linda and me for your continuing support.

As everyone in our community knows, A.L.S. has been a good corporate citizen and a strong contributor to the community and the economic well being of Arkansas citizens. A.L.S. has always – and will continue – to operate and support the fine people of this community. It was my intention to share the facts of the case but I have been instructed that I cannot because they are facts in an on going investigation but when the facts are revealable we will prevail.

The federal government has alleged that a manager at our company engaged in illegal activity. These charges will be dealt with in a court of law.

For years A.L.S. has sold its products to many foreign governments and businesses and has conducted these transactions in compliance with all federal, state and local laws. Each international transaction requires State Department or Department of Commerce approval and without exception, every transaction conducted by A.L.S has had proper authorization to move forward.

The management of A.L.S Technologies had no information that there was anything questionable about any of their transactions with the foreign governments. A.L.S. is a law-abiding family business, and having faith in our judicial system will see our people back in good standing soon.

We appreciate your continued support, encouragement, and prayers as we navigate through this situation."

Heavy Metal Armory / Machinegun.com / The Gun Search.com LLC

Entities associated with Andrew Bigelow.

Last weekend, the entities released this statement (here).

"Statement on FBI Sting Operation

Heavy Metal Armory has operated legally and within the confines of the law for many many years. Look around this site for yourself. Here you'll find information everywhere on the correct and legal manner in which we and this industry should operate within the law. We have always taken great pride in doing things correctly and is the only way we believe defense exports should be accomplished, within the law.

While we cannot comment on the details of the case, we can say the following:

The recent FBI / DOJ undercover sting operation which entrapped many executives from many different countries is a clear-cut case of overzealous law enforcement looking to grandstand by targeting law abiding citizens who have no history whatsoever of this sort of alleged activity and in many cases actually fought to improve accountability in the industry to the benefit of law enforcement.

The person who caused this entire mess is Richard Bistrong who is a former Armor Holdings vice president. Mr Bistrong was caught providing more than $4.4 million in bribes to foreign officials including officials of the UN in an ongoing pattern for many many years. His subsequent firing by Armor Holdings and law enforcement contact was never reported. During due diligence process before meeting with Mr. Bistrong, there was no record of his known criminal activities on any of the debarred persons lists nor through background checks which would have alerted industry to a potential issue with this individual such as on the 7 debarred persons/entities lists here on our site. Had law enforcement acted on criminal prosecution of this individual as they should have, this information would have caused his listing on one of the aforementioned alert lists and we are doubtful anyone indicted would have even spoken to Mr. Bistrong for any reason. Mr. Bistrong, then a known criminal and con-man was engaged by law enforcement to spend the next years, yes YEARS, setting up anyone he could come into contact with in the industry.

We thank everyone who has shown support during these difficult times and trust that everyone will listen closely to what is said in court and not believe the media hype. There is so much more to this than most can possibly imagine."

Protective Products of America, Inc.

Employers of R. Patrick Caldwell and Stephen Gerard Giordanella.

Last week, the company released this statement (here) (relevant portions only).

"Protective Products of America, Inc., a leading manufacturer and
distributor of advanced products in ballistics protection, announced today an internal investigation into certain allegations against its Chief Executive Officer, R. Patrick Caldwell, being brought by the U.S. government. Mr. Caldwell was one of 22executives and employees of different companies in the military and law enforcement products industry charged in a criminal indictment with violating the Foreign Corrupt Practices Act. The Company noted that no charges have been filed against PPA, and Mr. Caldwell is the only present employee of PPA to be implicated in the investigation. An internal investigation regarding the allegations has been commenced by the Company's Audit Committee, which is comprised solely of independent directors.

Pending the outcome of its internal investigation, Mr. Caldwell will be on administrative leave from his position as Chief Executive Officer and as a member of the Board of Directors."

Smith and Wesson Holding Corporation

Employer of Amaro Goncalves.

On the day the indictments were announced, the company, a public-company issuer, released this statement (here).

"Smith & Wesson(R) Holding Corporation, parent company of Smith & Wesson Corp., today made the following statement in response to Justice Department enforcement actions that were announced today regarding one of its employees.

Through media reports today, we became aware of the Justice Department enforcement actions which were taken yesterday and which made reference to an employee of our company. We have no information beyond what has been reported and are prepared to cooperate fully with law enforcement in their investigation into this matter."

*****

The organizations employing the indicted individuals are not the only ones with a float in this press release parade.

Yesterday, the FBI released a statement (here) equating the undercover operation to a "ruse [that] played out with all the intrigue of a spy novel."

Tuesday, January 26, 2010

Africa Sting - Entrapment?

As previously indicated (here) a key FCPA issue presented in the Africa Sting indictments is whether offering to bribe or paying a bribe to a fictitious "foreign official" or a real, but non-participating "foreign official" can constitute a substantive FCPA violation given the influence and induce language in the statute.

Another obvious legal issue raised by the Africa Sting indictments is entrapment.

This is an area of law that is a bit "outside of my strike zone" so I went to the bullpen.

On the mound, Dru Stevenson, a Professor of Law at South Texas College of Law (here). With several entrapment publications (here), Professor Stevenson drops in today for a guest post on the law of entrapment and the legal landscape facing the Africa Sting defendants.

*****

There are two versions of the entrapment defense, the “subjective test” (which is the majority rule, and focuses on the defendant’s predisposition) and the “objective test,” (favored by the Model Penal Code and about 15 states, and focused on the egregiousness of the government’s conduct). Given that this “Africa Sting” case is in federal court (brought under a federal statute, the FCPA), the court will have to apply the subjective test, because the United States Supreme Court adopted this rule in a series of five cases spread over several decades.

All federal courts use the subjective test; so this case will focus on the defendant’s “predisposition” rather than the actual government conduct in the case. The conduct of the FBI or their agents (including non-agency individuals recruited to act as informants or recruiters for the sting operation) will matter only to the extent that it sheds light on how much persuasion was necessary to convince the defendant(s) to violate the law, because this is one factor in showing “predisposition.” The same is true for the “inducement” or enticement (in this case, substantial kickbacks or bribes) involved – it will not really matter except to the extent that it suggests the defendant would never have committed the crime “but for” the undercover agent’s inducement.

Other factors that can show “predisposition” by the defendant are a history of committing similar acts, the alacrity/resistance with which the defendant responded to the undercover agent’s proposition, and the amount of time it took to entangle the defendant in the illegal activity. The subjective test is really a “but-for” test: “but for” the government’s inducement, the defense must show, the culprit would never have pursued such a course of action. It is important to keep this idea distinct from the notion of opportunity. The subjective test does not ask whether it was wrong for the government to provide an opportunity, or even if the undercover agents were deceptive or somewhat unethical in the approach that they used. It is a question of the defendant’s predisposition, which relates to both character and willingness, not opportunity. The subjective test looks at the defendant’s subjective preferences, choices, and history.

This is an uphill battle for defendants in sting operations, because the sting itself was planned out ahead of time to catch the defendant “in the act” with plenty of documentation about the time, place, and manner in which the crime occurred (stings are often on video!). It takes a lot of creativity and charisma to convince a jury that the defendant was actually not inclined to commit the act that he did in fact commit. The conventional wisdom among defense attorneys and legal scholars is that the entrapment defense usually does not work, and there is empirical evidence suggesting that fewer and fewer defendants use it each year.

There is also a significant hazard with raising the entrapment defense in federal court: the defendant’s criminal history becomes admissible evidence at the trial, where it otherwise might be excluded completely. Normally, the federal rules of evidence prohibit prosecutors from introducing the defendant’s prior convictions, because this could be so prejudicial for jurors (they might punish the defendant again for his previous crimes, regardless of his guilt under the present charges). With the entrapment defense, however, the defendant has put his own “predisposition” into issue in the case, arguing that he would never have committed the crime but for the government’s pressure. This opens the door for the prosecutor to submit the defendant’s “rap sheet” or “priors” to rebut his assertion that he lacked the predisposition to commit the crime.

The entrapment defense is, in fact, our country’s primary way of regulating sting operations. On a secondary level, the internal, administrative regulation of sting operations comes from the U.S. Attorney General's Guidelines on Federal Bureau of Investigation Undercover Operations, which set rules for sting operations that the Federal Bureau of Investigation (the “FBI”) may conduct. The rules (see here) are the subject of modifications every few years, at the discretion of the Attorney General, and the last modification occurred in 2002, under John Ashcroft, mostly in response to the 9/11 terrorist attacks and the reactionary “War on Terror” that ensued thereafter. These Guidelines help illuminate the type of planning that went into this sting operation, but provide no remedies whatsoever for a defendant who is the victim of entrapment. The Guidelines, however, are a contributing factor to the difficulty of prevailing with an entrapment defense – the FBI knows the rules, is required to plan the sting operation carefully before proceeding or obtaining funding, and will generally plan the operation so that they steer clear of providing a potential entrapment defense to their targets.

A final note that may be relevant for these FCPA cases: there is no such thing as “private entrapment,” and even the notion of “vicarious entrapment” gets little traction in the federal courts. By private entrapment, I mean solicitation to commit a crime by someone who is not working for the government – that is, a false friend setting you up to get caught committing a crime, or even a fellow criminal who makes an “offer you cannot refuse.” If the defendant was induced to commit the crime by a private actor, not working for the FBI, no entrapment defense is available. “Vicarious entrapment” is similar: this is the situation where a defendant was recruited to commit a crime by another defendant, who might actually have a valid entrapment defense. In other words, suppose the FBI really crossed the line and recruited otherwise-innocent Defendant A, who was not predisposed to commit the crime but was overwhelmed by the undercover agent’s pressure or enticements; Defendant A might have a valid entrapment defense. If, however, Defendant A went and recruited his ever-willing colleague, Defendant B, into the conspiracy, Defendant B does NOT have a valid entrapment defense. Defendant A’s entrapment claim is non-transferable.

Monday, January 25, 2010

FCPA Undercover

The Africa Sting case is indeed the largest and most dramatic use of pro-active, undercover investigative techniques in an FCPA investigation.

However, contrary to numerous reports and even statements attributed to DOJ officials, the Africa Sting case is not the first time that pro-active, undercover investigative techniques have been used in an FCPA investigation. In other words, this is not a new development as demonstrated below.

Shu Quan-Sheng

In September 2008, Shu Quan-Sheng (a naturalized U.S. citizen and President, Secretary, and Treasurer of AMAC International ("AMAC"), a high tech company located in Virginia with an office in Beijing, China) was charged in a criminal complaint (see here and here) with, among other things, offering bribes to Chinese "foreign officials" in violation of the FCPA.

An affidavit (see here) in support of the criminal complaint by an FBI special agent describes several pro-active, undercover investigative methods including court authorized electronic surveillance and physical surveillance. Among other things, the affidavit describes several phone conversations Shu participated in connection with the bribery scheme.

Shu plead guilty to FCPA violations (among other charges) and was sentenced to 51 months in prison. (see here).

Gerald and Patricia Green

In January 2008, Gerald and Patricia Green, owners and operators of Film Festival Management (a private Los Angeles based private entertainment company) were criminally indicted for conspiring to bribe an official with the Tourism Authority of Thailand (TAT) and for making improper payments to the TAT official in violation of the FCPA. (see here and here).

The criminal charges were supported by an affidavit (see here) from an FBI special agent which describes several pro-active undercover investigative methods, including a multiple agent trip to Thailand to witness Mr. Green meeting with the Thai "foreign official."

In September 2009 (see here), the Greens were found guilty by a federal jury of substantive FCPA violations, conspiracy to violate the FCPA, and other charges. The Greens are scheduled to be sentenced in March 2010.

William Jefferson

In June 2007, then U.S. Congressman William Jefferson was criminally indicted (see here and here). The charges included substantive FCPA violations and conspiracy.

According to numerous media sources (see here), the FBI affidavit released in connection with the investigation describes several pro-active, undercover investigative techniques including cooperating witnesses wearing FBI wires and video surveillance.

In August 2009, Jefferson was acquitted of substantive FCPA charges by a federal jury, but convicted of a wide range of other charges. (see here for more on the Jefferson case). In November 2009, Jefferson was sentenced to 13 years in prison and he remains free on bail pending his appeal.

WrageBlog (see here) has also identified two other previous instances of pro-active, undercover investigative techniques employed in connection with FCPA investigations.

Friday, January 22, 2010

Africa Sting - "Individual 1" Identified ... and Charged ... In a Different Case

"Individual 1" - a key player in each of the Africa Sting indictments (see here) has been identified by the New York Times (see here) as Richard T. Bistrong, a former employee of Armor Holdings. (Armor Holdings, a former publicly-traded company, is currently a subsidiary of BAE Systems).

In an ironic twist, Bistrong was charged today in a criminal information (see here) with conspiracy - not for his role in the Africa Sting case - but a wholly separate bribe scheme.

The information charges Bistrong with conspiracy to violate the FCPA's antibribery provisions, books and records provisions, and the International Emergency Economic Powers Act and related Export Administration Regulations.

The conspiracy is broad in scope and includes charges that Bistrong conspired with others: (i) to obtain for his employer, United Nations body armor contracts (valued at $6 million) by causing his employer to pay $200,000 in commissions to an agent while knowing that the agent would pass along a portion of that money to a United Nations procurement officer (a "foreign official" per the FCPA) to cause the officer to award the contracts; (ii) to obtain for his employer, a $2.4 million pepper spray contract with the National Police Services Agency of the Netherlands by paying a Dutch agent approximately $15,000 while knowing that the agent would pass along some of that money to a procurement officer with the Police Services Agency to influence the contract; (iii) to obtain for his employer (although it was never obtained), a contract to sell fingerprint ink pads to the Independent National Elections Commission of Nigeria by making kickback payments to a commission official indirectly through an intermediary company.

As the New York times notes, a "criminal information is typically filed when the defendant has waived indictment and is negotiating a plea agreement."

The New York Times story concludes by describing the abrupt end to today's court hearing.

Thursday, January 21, 2010

Indicting a "Foreign Official" - Part II

Yes, there is FCPA news other than the Africa Sting case.

In connection with the Green case (see here), an indictment was recently unsealed (see here) against Juthamas Siriwan and Jittisopa Siriwan.

According to the indictment, Juthamas "was the senior government officer of the Tourism Authority of Thailand (TAT)" and she is the "foreign official" the Greens were convicted of bribing. Jittisopa is the daughter of the "foreign official" and also alleged to be an "employee of Thailand Privilege Card Co. Ltd." an entity controlled by TAT and an alleged "instrumentality of the Thai government."

Incidentally, the Green's sentencing (which was to occur today) in which the government is essentially seeking a life sentence for Mr. Green based on FCPA, as well as other convictions and factors, was postponed until March. For more on that issue, see here.

As noted in the first Indicting a "Foreign Official" post a month ago (see here), the FCPA only covers "bribe-payers, not "bribe-takers."

Thus, like the prior indictment against the alleged Haiti "foreign officials" (Robert Antoine and Jean Rene Duperval), the charges against the Siriwans are not FCPA charges, but largely conspiracy to money launder and "transporting funds to promote unlawful activity."

However, unlike Antoine and Duperval who are alleged to have U.S. bank accounts which were used in the connection with the bribery scheme, the Siriwan's bank accounts were located in Singapore, the United Kingdom, and the Isle of Jersey.

There are however facts alleged in the Siriwan indictment which suggest a U.S. nexus. The indictment alleges that the Greens did on occasion "arrange for cash payments to be made directly to Juthamas Siriwan, including during her trips to Los Angeles, California." The indictment further alleges that Juthamas Siriwan "sent and caused to be sent to co-conspirator Gerald Green a facsimile on TAT letterhead providing wire instructions for transferring funds." Finally, the indictment also alleges that "co-conspirator Patricia Green received instructions to divide 'commission' payments owed to defendant Juthamas Siriwan into wire transfer to three separate accounts." Although the indictment does not say, it is presumed that the facsimile and instructions were sent to the U.S.

The "transporting funds to promote unlawful activity" charges (two - eight) of the indictment rely on 18 USC 1956(a)(2)(A) which reads in pertinent part:

"(2) Whoever transports, transmits, or transfers, or attempts to transport, transmit, or transfer a monetary instrument or funds from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States

(A) with the intent to promote the carrying on of specified unlawful activity

shall be sentenced to a fine of not more than $500,000 or twice the value of the monetary instrument or funds involved in the transportation, transmission, or transfer, whichever is greater, or imprisonment for not more than twenty years, or both."

The specified unlawful activity alleged in the indictment is "namely, bribery of a foreign official" in violation of the FCPA; "bribery of a public official of Thailand" in violation of Thai law; and the "misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official" in violation of Thai law.

In November 2009, Attorney General Eric Holder stated (see here) that the U.S. was committed to recovering funds obtained by "foreign officials" through bribery and the indictment seeks forfeiture of approximately $1.7 million in the foreign bank accounts.

Africa Sting - The Big Question

There is a big question raised by the Africa Sting indictments.

As explained in the indictments, one FBI special agent posed "as a representative of the Minister of Defense of a country in Africa (Country A)" and another FBI special agent posed "as a procurement officer for Country A's Ministry of Defense who purportedly reported directly to the Minister of Defense."

The DOJ release (here) notes that there was "no actual involvement from any minister of defense."

According to an individual who attended the DOJ press conference announcing the charges, DOJ officials: did not identify the African country; did say (as indicated in the release) that the African country was not involved in the investigation; but would not say whether the African country had knowledge or was aware of the investigation.

Given the above, two scenarios seem possible.

The first is that the Minister of Defense was purely fictitious (for instance John Doe, the Minister of Defense of Uganda, when in reality there is no John Doe Minister of Defense of Uganda). This would seem unlikely as the indicted individuals could have easily figured out that John Doe was not the Minister of Defense of Uganda - thereby compromising the entire sting operation.

The second, and more plausible scenario, is that John Doe was indeed the Minister of Defense of Uganda, but (as noted in the DOJ release) he was not involved, did not participate, and was not actually seeking bribe payments. It would seem though that to avoid compromising the entire sting operation, John Doe may have known that his name was being used.

Why is this a big question?

Because a key element of an FCPA violation is the existence of a "foreign official."

Whether a fictitious "foreign official" (the first scenario) or a real, but non-participating "foreign official" (the second scenario) the big question is: can offering to bribe or paying a bribe to such a "foreign official" constitute a substantive FCPA violation?

One can only assume that DOJ thought through this obvious legal issue before seeking the indictments and that it presumably concluded that the answer is yes.

But is that the right answer? What does the FCPA actually say?

The key statutory language is the FCPA's so-called "third-party payment provisions" because, as alleged in the indictments, the bribe payments were paid not directly to the "foreign official," but rather to the FBI agent the defendants believed to be the sales agent representative of the "foreign official."

In pertinent part, these provisions prohibit the payment, offer of payment, etc.

to "any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official [...] for purposes of --

(A) (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such foreign official, or (iii) securing any improper advantage; or

(B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality." (emphasis added).

On this issue, the U.S. Attorneys Manual (here) says:

"The payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person. The FCPA prohibits any corrupt payment intended to influence any act or decision of a foreign official in his or her official capacity, to induce the official to do or omit to do any act in violation of his or her lawful duty, to obtain any improper advantage, or to induce a foreign official improperly to use his or her influence with other government officials or agencies to affect or influence any act or decision." (emphasis added).

Thus, the key statutory language (as indicated in the US Attorneys Manual) requires that the payment or offer of payment influence or induce the "foreign official" to do something.

It's an open question whether one can or seek to influence or induce a fictitious "foreign official" or a real, but non-participating "foreign official."

Could the "securing any improper advantage" be the hook the DOJ is "hanging its hat on?"

That clause was added to the FCPA in 1998. The legislative history of the 1998 amendments (see here) is not illuminating as to what precisely that clause means. It is clear though that this clause was added to the FCPA to conform the statute to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, specifically Art. 1, para. 1.

Art. 1, Par. 1 of the OECD Convention(see here) would seem to hinge on a foreign official "acting or refraining from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business."

Thus, it would still seem to be an open question whether a fictitious "foreign official" or a real, but non-participating "foreign official" can act or refrain from acting in relation to the performance of official duties in order to obtain or retain business or other improper advantage.

Of course this big question is only relevant to the FCPA charges in the indictment and of course the indictments contain non-FCPA charges as well.

Wednesday, January 20, 2010

Africa Sting - The Charges

Set forth below is a summary of the 16 indictments announced yesterday charging 22 individuals in connection with the "Africa Sting."

The Africa Sting case charges individuals across a wide business spectrum.

It involves individuals employed by large companies and small companies; private companies and publicly-traded companies. It involves Chief Executive Officers, Sales Managers, and even a General Counsel. It involves U.S. citizens, U.K. citizens, an Israeli citizen, and a pair of siblings. It involves agents and consultants, and of course, undercover FBI agents posing as representatives of an imaginary Minister of Defense of an African country.

At present, this case only involves individuals.

However, as indicated by Assistant Attorney General Breuer in yesterday's DOJ release (here) the investigation is "ongoing" and you can bet that many of the companies which employ these individuals are "lawyering up" as past FCPA enforcement actions demonstrate the corporate enforcement actions or investigations often, but not always, precede or follow individual enforcement actions.

As to any potential corporate enforcement action, the websites of several of the companies employing the indicted individuals make specific reference to the company being a U.S. General Services Administration vendor. "Under guidelines issued by the Office of Management and Budget, a person or firm found in violation of the FCPA may be barred from doing business with the Federal government." (see here).

However, this sanction (to my knowledge) has never been used against an FCPA violator - not even Siemens (see here). Thus, should corporate enforcement actions ensue, this will be an interesting issue to follow.

Given that one of the individuals indicted is employed by a public-company issuer, the SEC may also be interested in that company from, at the very least, an FCPA books and records and internal control perspective.

Given the number of individuals indicted, and the motivations for pleading under the Sentencing Guidelines, it would seem inevitable that one or more individuals will soon "flip" and cooperate with the government thereby potentially complicating the defenses of the remaining individuals.

All charges have been filed in the U.S. District Court for the District of Columbia and assigned to Judge Richard J. Leon (see here).

As evident below, each of the indictments generally follow the same template, allege the core conduct, and charge the same offenses, including conspiracy to violate the FCPA and substantive FCPA violations.

At present, the indictments are only allegations and the individuals are presumed innocent. There is, of course, a very human event in this case and the lives of the indicted individuals (and countless more when you include family and friends) were turned upside down this week.

Stay tuned for a future post as to the "questions" raised by these indictments.

Daniel Alvirez and Lee Allen Tolleson

Alvirez (see here for his background) is described in the indictment as "the President of Company A, an Arkansas company based in Bull Shoals, Arkansas, that manufactured and sold law enforcement and military equipment."

The company is ALS Technologies, Inc. (see here for its background and here for the company's press releases on this issue).

According to the indictment, Tolleson "was the Director of Acquisitions and Logistics."

According to the indictment, between approximately May 2009 - December 2009, Alvirez and Tolleson "would participate in meetings and have discussions" in which Individual 1 (a "business associate of Alvirez and Tolleson" (as well as most the other indicted individuals) and an "former Vice President of International Sales for a company that manufactured and supplied law enforcement and military equipment to law enforcement and military customers around the world") "said that a friend of his, who was a self-employed sales agent" was tasked by the Minister of Defense of an African country "with obtaining various defense articles for outfitting" the country's presidential guard.

According to the indictment, "in reality, the self-employed sales agent" was an undercover FBI special agent "posing as a representative of the Minister of Defense" of the African country.

According to the indictment, an object of the scheme was for Alvirez and Tolleson to obtain and attempt to obtain business for their company and themselves by making corrupt payments to the "sales agent" (the undercover FBI agent) who was "consulting" on a sale by the company to the Minister of Defense.

Pursuant to this arrangement, the indictment alleges that Aliverz and Tolleson would agree to pay the "sales agent" "a 20% 'commission' in connection with two contract to sell grenades and grenade launchers to the Minister of Defense" "knowing that half of the 'commission' was intended to be paid as a bribe to the Minister of Defense" and "half was intended to be split between" Individual 1 and the "sales agent" "as a fee for their corrupt services."

According to the indictment, money for these payments would be generated through inflating the true price of the grenades and grenade launchers by 20%.

As part of the scheme, the indictment alleges that Alvirez and Tolleson would pay this "commission" into the "sales agent" U.S. bank account "knowing that half of the commission was intended to be paid outside of the United States as a bribe to the Minister of Defense."

According to the indictment, the business deal was worth approximately $15 million and "would involve several suppliers." The indictment alleges that on or about May 13, 2009, Alvirez and Tolleson agreed to proceed with the deal per the above-described arrangements and that Alvirez and Tolleson then proceeded to inflate the price quotations, wire the commission, and otherwise take action in furtherance of the deal.

The indictment alleges that on or about October 5, 2009, Alvirez and Tolleson were told by another FBI special agent "posing as a procurement officer" for the African country's Minister of Defense and "who purportedly reported directly to the Minister of Defense" (the Second FBI Agent) that the "Minister of Defense was pleased with the grenade launchers" sent and the "commission the Minister of Defense had received." The FBI special agent then allegedly told Alvirez and Tolleson "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Alvirez and Tolleson then executed two copies "of the corrupt purchase agreement."

Based on this core conduct, the indictment charges Alvirez and Tolleson with, among other things, conspiracy to violate the FCPA and two substantive FCPA violations.

Helmie Ashiblie

Ashiblie is described in the indictment as the "Vice President and Founder of Company A, a company that was based in Woodbridge, Virginia, and was in the business of supplying tactical bags and other security-related articles for law enforcement agencies and governments worldwide."

That company (see here) is i-Shot, Inc.

The allegations against Ashiblie are substantively similar to the above allegations against Alvirez and Tolleson, but involved two contracts to sell "tactical bags". The indictment alleges that Ashiblie agreed to proceed with the deal and that he then proceeded between August - November 2009 to inflate the price quotations, wire the commission, and otherwise take action in furtherance of the deal.

The indictment also alleges that on or about October 5, 2009, Ashiblie was also told by the Second FBI Agent that the "Minister of Defense was pleased with the tactical bags" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Ashiblie "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Ashiblie then executed an additional purchase agreement and sent "thirteen tactical bags for the purpose of having the tactical bags forwarded" to the African country.

Based on this core conduct, the indictment charges Ashiblie with, among other things, conspiracy to violate the FCPA and four substantive FCPA violations.

Ofer Paz

Paz is described in the indictment as a citizen of Israel and the "President and Chief Executive Officer of Company A, an Israel-based company that acts as a sales agent for companies in the law enforcement and military products industries."

That company is M. Paz Logistics Ltd. (see here).

The allegations against Paz are substantively similar, but involved two contracts to sell "explosives detection kits." The indictment alleges that Paz agreed to proceed with the deal and that he then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furtherance of the deal.

The indictment also alleges that on or about October 5, 2009, Paz was also told by the Second FBI Agent that the "Minister of Defense was pleased with the explosives detection kits" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Paz "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Paz then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Paz with, among other things, conspiracy to violate the FCPA and three substantive FCPA violations.

Andrew Bigelow

Bigelow is described in the indictment as the "Managing Partner and Director of Government Programs for Company A, a company that was based in Sarasota, Florida, and was in the business of selling machine guns, grenade launchers, and other small arms and accessories."

That company has been identified in media reports as The Gunsearch.com LLC (see here).

The allegations against Bigelow are substantively similar, but involved two contracts to sell "M4 carbine rifles." The indictment alleges that Bigelow agreed to proceed with the deal and that he then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Bigelow was also told by the Second FBI Agent that the "Minister of Defense was pleased with the M4 rifles" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Bigelow "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Bigelow then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Bigelow with, among other things, conspiracy to violate the FCPA and two substantive FCPA violations.

R. Patrick Caldwell and Stephen Gerard Giordanella

Caldwell is described in the indictment as the former "Senior Vice President of Sales and Marketing for Company A, a Florida corporation headquartered in Sunrise, Florida, that designed and manufactured concealable and tactical body armor." According to the indictment, in September 2009, "Caldwell was named Chief Executive Officer of Company A."

That company is Protective Products of America, Inc. (see here) and (here) for Caldwell's profile. Of note, Caldwell formerly "served as Deputy Assistant Director, Office of Protective Operations, U.S. Secret Service."

According to the indictment, Giordanella "was the Chief Executive" of Protective Products "until his resignation on or about March 18, 2009" and from then until at least December 2, 2009 he was a "consultant" for the company.

The allegations against Caldwell and Giordanella are substantively similar, but involved two contracts to sell "body armor plates" The indictment alleges that Caldwell and Giordanella agreed to proceed with the deal and that they then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Caldwell was also told by the Second FBI Agent that the "Minister of Defense was pleased with the body armor plates" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Caldwell "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Caldwell then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Caldwell and Giordanella with, among other things, conspiracy to violate the FCPA. Caldwell is additionally charged with two substantive FCPA violations.

Haim Geri

Geri is described in the indictment as "the President of Company A, a company based in North Miami Beach, Florida, that serves as a sales agent for companies in the law enforcement and military products industries."

That company appears to be M.G.S. International Consulting, Inc.

The allegations against Geri are substantively similar, but involved two contracts to sell "the Corner Shot - a special purpose gun accessory that can be used to observe and shoot targets around a corner." The indictment alleges that Geri agreed to proceed with the deal and that he then proceeded between May - June 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Geri was also told by the Second FBI Agent that the "Minister of Defense was pleased with the Corner Shot units" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Geri "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Geri then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Geri with, among other things, conspiracy to violate the FCPA and two substantive FCPA violations.

Saul Mishkin

Mishkin is described in the indictment as "the owner and Chief Executive Officer of Company A, a Florida company headquartered in Aventura, Florida, that sold law enforcement and military equipment."

That company appears to be International Security and Defence Systems (see here).

The allegations against Mishkin are substantively similar, but involved two contracts to sell "riot control suits." The indictment alleges that Mishkin agreed to proceed with the deal and that he then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Mishkin was also told by the Second FBI Agent that the "Minister of Defense was pleased with the riot control suits" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Mishkin "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Mishkin then executed the "corrupt purchase agreement."

The Mishkin indictment contains the additional allegation that he was "advised by his attorney that the deal could violate the laws of the United States." The indictment further alleges that Mishkin then tried to sell the riot control suits indirectly through Individual 1's company and also contains the allegation that Mishkin also tried to sell "Ready to Eat Meal kits" to Individual 1 pursuant to the same original deal structure even though Mishkin "previously had been advised by his attorney that such a deal could violate the laws of the United States."

Based on this core conduct, the indictment charges Mishkin with, among other things, conspiracy to violate the FCPA and one substantive FCPA violations.

John Mushriqui and Jeana Mushriqui

John Mushriqui is described in the indictment as "the owner and Director of International Development for Company A, a Pennsylvania company [located in Upper Darby] that was in the business of manufacturing and exporting bulletproof vests and other law enforcement and military equipment."

Jeana Mushriqui is described as "the General Counsel and United States manager of Company A and the sister of John Mushriqui."

That company is Mushriqui Consulting LLC (see here).

The allegations against the Mushriquis are substantively similar, but involved two contracts to sell "bulletproof vests." The indictment alleges that Mushriquis agreed to proceed with the deal and that they then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, the Mushriquis were also told by the Second FBI Agent that the "Minister of Defense was pleased with bulletproof vests" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told the Mushriquis "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, the Mushriquis then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges the Mushriquis with, among other things, conspiracy to violate the FCPA and five substantive FCPA violations.

Jonathan Spiller

Spiller is described in the indictment as the "owner and President of Company A, a Florida company that was in the business of providing consulting services for companies in the law enforcement and military equipment industries." According to the indictment, "Spiller was also the owner and manager of Company B, a Florida company that was in the business of marketing and selling law enforcement and military equipment. Company A and B were both located in Ponte Vedra Beach, Florida."

The allegations against Spiller are substantively similar, but involved contracts to sell "rifle-mounted cameras and tactical vehicles." The indictment alleges that Spiller agreed to proceed with the deal and that he then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Spiller was also told by the Second FBI Agent that the "Minister of Defense was pleased" with the equipment sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Spiller "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Spiller then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Spiller with, among other things, conspiracy to violate the FCPA and two substantive FCPA violations.

John Benson Wier III

Wier is described in the indictment as the "President of Company A, a Florida company headquartered in St. Petersburg, Florida, that sold tactical and ballistic equipment."

That company is SRT Supply Inc. (see here).

The allegations against Wier are substantively similar, but involved two contracts to sell "laser grips, which are laser sights for handguns." The indictment alleges that Wier agreed to proceed with the deal and that he then proceeded between May - June 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Wier was also told by the Second FBI Agent that the "Minister of Defense was pleased with the laser grips" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Wier "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Wier then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges the Wier with, among other things, conspiracy to violate the FCPA and two substantive FCPA violations.

Amaro Goncalves

Goncalves is described in the indictment as "the Vice President of Sales for Company A, a United States company headquartered in Springfield, Massachusetts. Company A was a world-wide leader in the design and manufacture of firearms, firearm safety/security products, rifles, firearms systems, and accessories. The shares of Company A were publicly traded on the NASDAQ stock exchange."

That company is Smith and Wesson Holding Corporation (see here and here for its press release).

The allegations against Goncalves are substantively similar, but involved two contracts to sell "pistols." The indictment alleges that Goncalves agreed to proceed with the deal and that he then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 6, 2009, Goncalves was also told by the Second FBI Agent that the "Minister of Defense was pleased with the pistols" sent and the "commission the Minister of Defense had received." The FBI special agent then allegedly told Goncalves "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Goncalves then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Goncalves with, among other things, conspiracy to violate the FCPA and three substantive FCPA violations.

Pankesh Patel

Patel is described in the indictment as a United Kingdom citizen and the "Managing Director of Company A, a United Kingdom company that acts as a sales agent for companies in the law enforcement and military products industries."

The allegations against Patel are substantively similar, but involved two contracts to sell "uniforms." The indictment alleges that Patel agreed to proceed with the deal and that he then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Goncalves was also told by the Second FBI Agent that the "Minister of Defense was pleased with the uniforms" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Patel "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Patel then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Patel with, among other things, conspiracy to violate the FCPA and two substantive FCPA violations.

John Gregory Godsey and Mark Frederick Morales

Godsey is described in the indictment as "the owner of Company A, a Georgia company based in Decatur, Georgia, that was in the business of selling ammunition and other law enforcement and military equipment." Morales is described as "a busines associate of Godsey" who "worked with him on deals involving Company A."

The allegations against Godsey and Morales are substantively similar, but involved two contracts to sell "ammunition." The indictment alleges that Godsey and Morales agreed to proceed with the deal and that they then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Godsey and Morales were also told by the Second FBI Agent that the "Minister of Defense was pleased with the ammunition" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Godsey and Morales "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Godsey then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Godsey and Morales with, among other things, conspiracy to violate the FCPA and two substantive FCPA violations.

David Painter and Lee Wares

Painter is described in the indictment as a United Kingdom citizen and "the Chairman of Subsidiary A, a company based in the United Kingdom that was in the business of marketing armored vehicles." Wares is also described as a United Kingdom citizen and the "Director of Subsidiary A."

According to the indictment, "the parent company of Subsidiary A" is a company based in Cincinnati, Ohio that "produces security products."

The allegations against Painter and Ware are substantively similar, but involved two contracts to sell "night vision goggles (NVGs) and armored vehicles." The indictment alleges that Painter and Ware agreed to proceed with the deal and that they then proceeded between May - September 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Painter and Ware were also told by the Second FBI Agent that the "Minister of Defense was pleased with the NVGs" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Painter and Ware "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Painter and Ware then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Painter and Ware with, among other things, conspiracy to violate the FCPA and three substantive FCPA violations.

Israel Weisler and Michael Sacks

Weisler is described in the indictment as an "owner and Chief Executive Officer of Company A, a Kentucky company that was in the business of designing, manufacturing, and selling armor products, including body armor. Company A's business was located in Stearns, Kentucky." Sacks, a citizen of the United Kingdom, is described as a "co-owner and co-Chief Executive Officer of Company A."

That company is U.S. Cavalry Inc. (see here). Of note, according to the company's website, is that the company "set upon a quest to earn a General Services Administration Contract to ease the procurement process for our customers at GSA-authorized federal, military and state agencies. The GSA Contract allows these customers to ensure they pay a fair, predetermined price for the equipment they need."

The allegations against Weisler and Sacks are substantively similar, but involved two contracts to sell "body armor." The indictment alleges that Weisler and Sacks agreed to proceed with the deal and that they then proceeded between May - June 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Weisler and Sacks were also told by the Second FBI Agent that the "Minister of Defense was pleased with the body armor" sent and the "commission the Minister of Defense had received." The FBI agent then allegedly told Weisler and Sacks "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Weisler and Sacks then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Weisler and Sacks with, among other things, conspiracy to violate the FCPA and four substantive FCPA violations.

Yochanan Cohen

Cohen is described in the indictment as the "Chief Executive Officer of Company A, a company based in San Francisco, California, that was in the business of manufacturing security equipment, including body armor and hard armor ballistic plates."

That company is Highcom Security Inc. (see here). The company's website indicates that it is a certified General Services Administrator vendor.

The allegations against Cohen are substantively similar, but involved two contracts to sell "Level IV ballistic plates, which is a type of body armor." The indictment alleges that Cohen agreed to proceed with the deal and that he then proceeded between May - August 2009 to inflate the price quotations, wire the commission, and otherwise take action in furterance of the deal.

The indictment also alleges that on or about October 5, 2009, Cohen was also told by the Second FBI Agent that the "Minister of Defense was pleased with the ballistic plates" sent and the "commission the Minister of Defense had received." The FBI special agent then allegedly told Cohen "that the Minister of Defense had given his approval to proceed" with the second phase of the deal. According to the indictment, Cohen then executed the "corrupt purchase agreement."

Based on this core conduct, the indictment charges Cohen with, among other things, conspiracy to violate the FCPA and three substantive FCPA violations.

Tuesday, January 19, 2010

Historically Massive Sting Operation

Back in November, Assistant Attorney General Lanny Breuer, in a speech (see here) before an FCPA audience said that "[a]lthough many of these cases come to us through voluntary disclosures, which we certainly encourage and will appropriately reward, I want to be clear: the majority of our cases do not come from voluntary disclosures. They are the result of pro-active investigations ...."

Today, the DOJ announced (here) the indictment of 22 (no that is not a typo) "executives and employees of companies in the military and law enforcement products industry" for engaging in a scheme to bribe foreign officials to obtain and retain business.

Per the DOJ release, the 16 unsealed indictments "represent the largest single investigation and prosecution against individuals in the history of DOJ's enforcement of the FCPA."

Just how pro-active was this investigation?

According to the release, the "indictments allege that the defendants engaged in a scheme to pay bribes to the minister of defense for a country in Africa."

However, there was a catch.

There was "no actual involvement from any minister of defense."

Rather, the defendants "allegedly agreed to pay a 20 percent 'commission' to a sales agent who the defendants believed represented the minister of defense for a country in Africa in order to win a portion of a $15 million deal to outfit the country's presidential guard."

Just who was the sales agent?

An undercover FBI agent, according to the release.

The names of the indicted individuals as well as the indictments can be found here. Each of the indictments allege substantive FCPA violations, conspiracy to violate the FCPA, and conspiracy to engage in money laundering.

All but one of the individuals was arrested yesterday in Las Vegas. The other was recently arrested in Miami.

In the same November 2009 speech, Breuer noted that the FBI - FCPA specific squad was "growing in size and in expertise" and the release notes that the "investigation is the first large-scale use of undercover law enforcement techniques to uncover FCPA violations..."

Point taken, as the DOJ release notes that "approximately 150 FBI agents executed 14 search warrants" in locations across the country in its investigation.

The DOJ also release suggests that this massive alleged bribery scheme is also being investigated on both sides of the Atlantic as the "United Kingdom's City of London Police executed seven search warrants in connection with their own investigations into companies involved in the foreign bribery conduct that formed the basis for the indictments."

Stay tuned for more specifics in this massive case - which I will refer to as "Africa Sting."

Sunday, January 17, 2010

A Look Back at 2009

For my review and analysis of the 2009 FCPA enforcement year, as well as the road ahead, please see here.

Friday, January 15, 2010

14 Days Later ...

A recent post (here) discussed a December 30, 2009 SEC filing by The PBSJ Corporation (a global engineering and architectural firm headquartered in Florida) which disclosed that the company was unable to file its Annual Report due to an FCPA internal investigation "in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries."

I noted that while it is increasingly common for a company to disclose such FCPA issues, it is rather unusual for the FCPA disclosure to prevent the company from otherwise meeting its disclosure requirements under the securities laws.

Well, 14 days have passed and PBSJ filed its annual report (here). As to the FCPA internal investigation, here is what the filing says:

"As previously reported on our Form 8-K filed December 30, 2009, an internal investigation is currently being conducted by the Audit Committee of our Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with certain projects undertaken by PBS&J International, Inc., one of our subsidiaries with revenue of $4.3 million in fiscal year 2008 and $3.9 million in fiscal year 2009, in certain foreign countries (the “International Operations”). Initial results of the investigation suggest that FCPA violations may have occurred. However, the investigation does not suggest that any violation extends beyond the International Operations or that members of our executive management were involved in illegal conduct. We have voluntarily disclosed the possible violations, the investigation, and the initial findings to the Department of Justice and to the Securities and Exchange Commission, and will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. We are unable to estimate the potential penalties that might be assessed for these FCPA violations and accordingly, no provision has been made in the accompanying financial statements."

The events at PBSJ over the last two weeks are intriguing and its a head-scratching question why so many companies, like PBSJ, voluntarily disclose initial results of a yet to be completed internal investigation which merely suggest that the FCPA may have been violated.

For a recent non-FCPA, yet related, NY Times article on disclosure issues, see here.

Thursday, January 14, 2010

"Game-Changing" Day at the SEC

In August 2009, Robert Khuzami, the SEC's Director of the Division of Enforcement, announced that the SEC will be creating five "national specialized units dedicated to particular highly specialized and complex areas of securities law" - including an FCPA unit. (see here).

Khuzami also announced that the SEC was working on other initiatives of interest to FCPA followers including creation of "a public policy statement that will set forth standards to evaluate cooperation by individuals in enforcement actions" as well as "recommend[ation] to the Commission that the SEC enter into Deferred Prosecution Agreements, in which the [Division of Enforcement] agree[s] in the appropriate case to forego an enforcement action against an individual or entity subject to certain terms, including full cooperation, a waiver of statutes of limitations, and compliance with certain undertakings."

Yesterday, there were developments on each of these issues.

First, the SEC (see here) announced that Cheryl J. Scarboro will lead the FCPA unit. As indicated in the release, Scarboro is an SEC veteran having served as Associate Director, Assistant Director, Deputy Assistant Director, and Staff Attorney in the Division of Enforcement. For many years, Scarboro has been a primary SEC voice on FCPA issues and an active participant at many FCPA conferences.

Second, the SEC (see here) announced a series of measures "to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency's investigations and enforcement actions."

"New cooperation tools" not previously available to the SEC, will now include, among other things:

* "Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony."

* "Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution."

and

* "Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings."

The SEC release notes that "similar cooperation tools have been regularly and successfully used by the Justice Department in its criminal investigations and prosecutions."

More details about these measures can be found in a revised and newly issued version of the SEC's enforcement manual beginning at pg. 119 (see here).

The SEC news conference announcing these appointments and initiatives is available on the SEC's website.

While not FCPA specific, these measures as applied to FCPA enforcement are likely to lead to even less judicial scrutiny (not that there is much judicial scrutiny at present) as to SEC interpretations of the FCPA and as to whether factual evidence actually exists to support each element of an FCPA charge.

In fact, as set forth in the manual (p. 130) "[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses" is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

For those anxious to see FCPA enforcement actions contested in an open, transparent, and adversary proceeding, yesterday's announcements will be a blow as I expect FCPA enforcement to become even more opaque in the future.

Stay tuned as much is surely to be written about these new measures in the coming weeks and months.

Tuesday, January 12, 2010

Ready, Set, Go ...

The 2010 FCPA enforcement year has begun.

Yesterday, the SEC announced (here) resolution of an FCPA books and records and internal controls action against NATCO Group Inc. - a Houston based "worldwide leader in design, manufacture, and service" of oil and gas process equipment (see here).

The SEC complaint (here) alleges that TEST Automation & Controls, Inc., a wholly-owned subsidiary of NATCO Group, "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan." According to the complaint, "NATCO's system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments."

According to the complaint, TEST maintained a branch office in Kazakhstan and in June 2005 it won a contract which required it to hire both expatriates and local Kazakh workers. Pursuant to Kazakh law, TEST needed to obtain immigration documentation before an expatriate worker could enter the country. Thereafter, Kazakh immigration authorities claimed that TEST's expatriate workers were working without proper documentation and the authorities threatened to fine, jail, or deport the workers if TEST did not pay cash fines.

According to the complaint, TEST employees believed the threats to be genuine and, after consulting with U.S. TEST management who authorized the payments, paid the officials approximately $45,0000 using their personal funds for which the employees were reimbursed by TEST.

The complaint alleges that when reimbursing the employees for these payments, TEST inaccurately described the money as: (i) being an advance on a bonus; and (ii) visa fines.

The complaint further alleges that TEST used consultants in Kazakhstan to assist in obtaining immigration documentation for its expatriate employees and that "one of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas." According to the complaint, the consultant twice requested cash from TEST to help him obtain the visas and the complaint alleges that the consultant provided TEST with bogus invoices to support the payments.

Based on the above allegations, the SEC charged NATCO with FCPA books and records and internal control violations even though the complaint is completely silent as to any involvement or knowledge by NATCO in the conduct at issue. This action is thus the latest example of an issuer being strictly liable for a subsidiary's books and records violations (see here for a prior post).

Without admitting or denying the SEC's allegations, NATCO agreed to pay a $65,000 civil penalty. According to the SEC's findings in a related cease and desist order (here), during a routine internal audit review, NATCO discovered potential issues involving payments at TEST, conducted an internal investigation, and voluntarily disclosed the results to the SEC. The order also lists several other remedial measures NATCO implemented.

I've noted in prior posts that one of the effects of voluntary disclosure is that it sets into motion a whole series of events including, in many cases, a much broader review of the company's operations so that the company can answer the enforcement agencies' "where else may this have occurred" question.

On this issue, the SEC order states that NATCO "expanded its investigation to examine TEST's other worldwide operations, including Nigeria, Angola, and China, geographic locations with historic FCPA concerns." However, the SEC order notes that "NATCO's expanded internal investigation of TEST uncovered no wrongdoing."

According to the complaint, at all times relevant to the complaint, NATCO's stock was listed on the NYSE, but in November 2009 NATCO became a subsidiary of Cameron International Corporation (here) (an NYSE listed company) and NATCO's NYSE listing ended.

The NATCO enforcement action is "as garden variety" of an FCPA enforcement action as perhaps one will find. Not only does moving product into and out of a country expose a company to FCPA risk, but so too does moving employees into and out of a country.

The NATCO civil penalty also demonstrates that in certain cases, the smallest "cost" of an alleged FCPA violation are the fines or penalties, figures which are so dwarfed by investigative, remedial and resolution costs.

Saturday, January 9, 2010

PBSJ Corp. Unable to File Annual Report

The PBSJ Corporation is a global engineering and architectural firm headquartered in Florida.

In its recent SEC filings (here and here), the company announced that it was unable to file its Annual Report due to an FCPA internal investigation "in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries."

The filing indicates that:

"The Company is unable to determine at this time (i) whether the results of the internal investigation will indicate that its internal controls over financial reporting were not operating effectively, (ii) the impact, if any, such internal investigation may have on the Company’s annual report on internal control over financial reporting that the Company is required to include in the Form 10-K, or (iii) the effect, if any, such internal investigation may have on the Company’s financial statements to be included in the Form 10-K."

According to the filing:

"The Company has self-reported to the Securities and Exchange Commission (the “SEC”) and the Department of Justice (the “DOJ”) the circumstances surrounding this internal investigation. Should the SEC or DOJ decide to conduct its own investigation, the Company will cooperate fully."

PBS&J International, Inc.'s "previous international assignments have extended to nearly every corner of the world" and its "recent global pursuits have centered on prominent projects in the Middle East, North Africa, the Caribbean, Central and South America, Europe, and Australia" - according to the company's website (see here).

While it is increasingly common for a company to disclose such FCPA issues (see here for prior posts on voluntary disclosure), it is rather unusual for the FCPA disclosure to prevent the company from otherwise meeting its disclosure requirements under the securities laws.

For local media coverage of PBSJ's disclosure (see here).

Wednesday, January 6, 2010

Team of Plenty

Voluntary disclosure (i.e. picking up the phone and calling the DOJ and/or SEC (if applicable) to schedule a meeting, during which a company's lawyers disclose conduct that could potentially implicate the FCPA, even though the enforcement agencies, in many cases, would never find out about the conduct) is a tough issue.

In a November 2009 speech to an FCPA audience (see here), Assistant Attorney General Lanny Breuer acknowledged that the decision of whether to make a voluntary disclosure is "sometimes a difficult question" [...] a question I grappled with as a defense lawyer."

The Gibson Dunn Year End FCPA Report (the subject of yesterday's post see here) has this to say about voluntary disclosure:

"To be sure, a company that voluntary discloses a potential FCPA violation to DOJ and the SEC will be better situated than one that otherwise finds itself across the table from the government having not disclosed the conduct."

[...]

"On the other hand, there is substantial debate about just how "tangible" the benefits of voluntary disclosure truly are."

[...]

"Although some corporate defendants that self-reported misconduct have certainly received relatively lenient treatment, it is not clear that voluntary disclosure was the reason for any particular settlement term."

[...]

"Although it is certain that companies do receive some benefit for self-reporting FCPA violations, the real question is whether the company considering a voluntary disclosure is better off for having made the disclosure, which is not necessary one-and-the-same. Because voluntary disclosure makes the government aware of alleged improper conduct that it otherwise may have never discovered on its own, the likelihood of the government uncovering the misconduct through other means, such as a whistleblower, foreign government investigation, tip from a competitor or business partner, or industry-wide investigation, is a critical factor in determining whether to make a voluntary disclosure."

[...]

"Given the multitude of factors to consider when making a voluntary disclosure decision, it is often challenging to make such a significant decision with any degree of confidence that a particular course of action is the right one. This task is made even more difficult by the uncertainty of obtaining any particular benefits for disclosing."

As raised in a prior post (see here), a company's decision in deciding whether or not to voluntarily disclose conduct to the enforcement agencies that could potentially implicate the FCPA is made even more difficult given the potential conflict of interest FCPA counsel has in advising the company as to the important disclosure issue - particularly where the disclosure only involves a potential FCPA violation?

I raised this lurking "elephant in the room" question in connection with Dyncorp International's recent disclosure of potential FCPA issues.

One could raise the same question in connection with Team Inc.

In August 2009, Team (a Texas-based provider of specialty industrial services) disclosed (here) that an internal investigation conducted by FCPA counsel "found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises."

The release further noted that "[b]ased upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000. The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues. We have voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter."

In the prior post, I noted that a voluntary disclosure often sets into motion a series of events and the next thing the company knows it is paying for a team of lawyers (accompanied by forensic accountants and other specialists) even though the voluntary disclosure that got the whole process started involved conduct that may not actually violate the FCPA.

Fast forward to yesterday as Team disclosed (here) as follows:

"As previously reported, the Audit Committee is conducting an independent investigation regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) in cooperation with the U.S. Department of Justice and the Securities and Exchange Commission. While the investigation is ongoing, management continues to believe that any possible violations of the FCPA are limited in size and scope. The investigation is now expected to be completed during the first calendar quarter of 2010. The total professional costs associated with the investigation are now projected to be about $3.0 million."

A $3 million dollar internal investigation concerning non-material payments made by a branch office that represents less than one-half of one percent of the company's annual consolidated revenues?

Wow!

Double-wow because the payments may not even violate the FCPA because they were made to "employees of foreign government owned enterprises" (see here for several prior posts on the enforcement agenices untested and unchallenged interpretation of the "foreign official" element)!

Others have scratched their heads about this as well (see here and here).

Of course, the FCPA does not contain a de minimis exception and of course the FCPA contains books and records and internal control provisions applicable to issuers like Team. Thus, even if the payments were not material in terms of the company's overall financial condition, there still could be FCPA books and records and internal control exposure if they were misrecorded in the company's books and records or made in the absence of any internal controls.

But then again, the FCPA books and records and internal control provisions would be implicated if a Team employee took his Cousin Randy to the company's corporate suite for the ballgame but recorded the costs as "marketing expenses" on his reimbursement request causing the company to misrecord the payment. Yet, no one would suggest disclosing this potential FCPA violation!