On Point

Two recent Q&A interviews in Law360 with leading white-collar practitioners caught my eye.

George Terwilliger (here) is a partner in the Washington D.C. office of White & Case and global head of the firm's White Collar Practice Group. Terwilliger is a former U.S. Attorney, Deputy Attorney General and Acting Attorney General.

In a recent interview with Law360, Terwilliger was asked "what aspects of law in your practice area are in need of reform, and why?"

Terwilliger responsed as follows: "I represent many companies who get caught up in the ever-widening net of federal criminal offenses arising from ordinary business activity that runs afoul of government regulatory requirements or dictates. In many such cases, and as in most cases, there is room for reasonable disagreement on the application of relevant legal standards to the salient facts. But because of the collateral consequences of drawn-out investigations and/or of conviction after trial, few if any companies have the opportunity to adjudicate such reasonable disputes before a judge or jury. Consequently, prosecutors, who are entirely appropriately zealous advocates for their side of the case, also become judge and jury in determining an appropriate resolution of the matter. In a system where rule of law is determined by adversarial process, this state of affairs results in an imbalance that is not healthy for the cause of justice."

Stephen Jonas (here) is a partner in the Boston office of WilmerHale and chairman of the firm's Investigations and Criminal Litigation Practice Group. He is also a former state prosecutor.

In a recent interview with Law360, Jonas was similarly asked "what aspects of law in your practice are in need of reform, and why?"

Jonas responded, in pertinent part as follows. "One area greatly in need of reform, in my view, is the investigation of alleged health care fraud. This is an area in which the government regularly secures enormous settlements, starting in the tens of millions of dollars, and now exponentially expanding to the billions of dollars. Virtually every pharmaceutical company has now been subjected to one or more of these investigations and the results are predictable — enormous monetary contributions to the federal government. I find it hard to believe that wrongdoing is so rampant in this industry that every company has at least several hundred million dollars worth of it. The more likely answer is that these settlements often have far more to do with the leverage the government enjoys than the merits of what the company did or didn’t do. In order to stay in business, pharmaceutical and medical device companies must be able to sell products that can be paid for by Medicaid and Medicare. But a conviction for a health care offense would result in exclusion of the companies from federal health insurance and essentially a death sentence for their business. So they cannot afford to fight even the most debatable of charges. One of the results is that novel legal theories and sketchy evidence will never be tested in a court of law and negotiated settlements (under threat of exclusion) serve as “precedent” for the next case. That is a system badly in need of reform."

One statement is generic, the other relates to health fraud, but both are directly on point when it comes to Foreign Corrupt Practices Act enforcement. (See here for my recent Facade of FCPA Enforcement piece in which I make several similar arguments in terms of FCPA enforcement).

With the pharma industry sweep currently in full force, Jonas's comments, I suspect, will be even more "on point" in the coming months as numerous pharma and other health care related companies are expected to reach, what will no doubt be, multi-million FCPA settlements that will likely be resolved via resolution vehicles subject to little or no judicial scrutiny. The government will bring in millions, the news will dominate the headlines for a few days, and then the question will be asked - did the conduct at issue even violate the FCPA?

Richard Cassin at the FCPA Blog recently highlighted a "corporate investigations list" (see here). It listed 72 companies "known to be the subject of an ongoing and unresolved FCPA-related investigation."

Similar to Jonas, I find it hard to believe that wrongdoing is so rampant that seemingly every major company has at some time run become the subject of FCPA scrutiny or run afoul of the FCPA.

There is a much bigger picture relevant to this new era of FCPA enforcement and it is this new era that is in need of urgent reform.

My own two cents, which I will elaborate on in the future, is that the answer to the problem of enforcement agencies enforcing (in many cases) the FCPA contrary to the intent of Congress and based on dubious legal theories is largely not to amend the FCPA - this will solve very little. The more fundamental question remains - how to rein in the enforcement agencies and to force judicial scrutiny of FCPA enforcement actions?

An Immaterial Disclosure?

The securities laws generally require issuers to disclose material facts and events to investors.

What is material?

Technically, there is SEC guidance on the issue (see here).

The issue basically boils down to whether the information would affect the judgment of a reasonable investor in making an investment decision.

As Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) explained at the recent World Bribery and Corruption Compliance Forum (here) the concept of materiality itself has two "sub-concepts": (i) quantitative materiality (something that impacts a company's financial statements) - Desmet conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a "complicated gray area" to use Desmet's words. He said that all bribes can be considered qualitatively material because they may "automatically trigger a books and records violation." Because of this, Desmet said that it is "prudent" for any issuer to approach the SEC with any "suspicion" of bribes "as soon as" the company learns of the improper payment.

It is against this backdrop that issuers frequently disclose immaterial payments which may implicate the FCPA.

Case in point, Sensata Technologies Holding N.V. ("Sensata") (here), a global industrial technology company that began trading on the New York Exchange in March 2010 (see here).

The company had this to say in its October 22nd 10-Q filing (here):

"An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether
any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was
immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The
Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company 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. The Company is unable to estimate the potential penalties, if any, that might be assessed and, accordingly, no provision has been made in the accompanying condensed consolidated financial statements."

Since the disclosure, Sensata's shares have climbed approximately 1.5%.

However, this has not stopped the new breed "FCPA" plaintiff lawyers from acting.

Yesterday, the Shareholders Foundation announced (here) an investigation on behalf of investors of Sensata concerning "whether certain officer and directors of Sensata [...] breached their fiduciary duties and are liable for possibly violating the U.S. Foreign Corrupt Practices Act (“FCPA”)."

SciClone - An FCPA Feeding Frenzy

On August 9, 2010 SciClone Pharmaceuticals made an FCPA-related disclosure.

This post discusses what has happened since.

August 10th

Shares of SciClone plunged, at one point down 40% from the previous day's close, closing down 31.9%. (This is clearly in stark contrast to the recent situation involving Schlumberger discussed in yesterday's post - here).

Levi & Korsinsky LLP announce that it is investigating SciClone on behalf of shareholders for possible violations of state and federal securities laws.

The Law Offices of Howard G. Smith announce that it is investigation SciClone on behalf of shareholders for possible violations of federal securities laws.

The law firm of Kahn Swick & Foti, LLC announces the commencement of an investigation into SciClone to determine whether it has violated federal securities laws.

Roy Jacobs & Associates announce that it is investigating SciClone for potentially violating the federal securities laws.

August 11

Pomerantz Haudek Grossman & Gross LLP announce that it is investigating claims on behalf of investors of SciClone to determine whether it has violated federal securities laws.

The law firm of Statman, Harris & Eyrich, LLC announce that it is investigating SciClone for potential violations of state and federal law.

Goldfarb Branham, LLP announce that it is investigating SciClone for shareholders who purchased stock of the company and preparing a possible derivative lawsuit against company executives.

Finkelstein Thompson LLP announce that it is investigating potential shareholder claims concerning SciClone.

August 12

Robbins Umeda LLP announce that it commenced an investigation into possible breaches of fiduciary duty and other violations of the law by certain officers and directors at SciClone.

August 13

The law firm of Kahn Swick & Foti announce that the firm has filed the first securities fraud class action lawsuit against SciClone in the United States District Court for the Northern District of California, on behalf of purchasers of the common stock of the Company between May 11, 2009 and August 10, 2010.

August 19

Barroway Topaz Kessler Meltzer & Check, LLP announce that a class action lawsuit was filed in the United States District Court for the Northern District of California on behalf of purchasers of the securities of SciClone.

Brower Piven, A Professional Corporation, announce that a class action lawsuit has been commenced in the United States District Court for the Northern District of California on behalf of purchasers of the common stock of SciClone.

August 20

Kendall Law Group announce an investigating of SciClone for shareholders.

Ryan & Maniskas, LLP announce that a class action lawsuit has been filed in the United States District Court for the Northern District of California on behalf of purchasers of SciClone.

August 28

Roy Jacobs & Associates (again) announce that it is investigating SciClone for potentially violating the federal securities laws.

September 7

The Shuman Law Firm announces that a class action lawsuit has been filed in the United States District Court for the Northern District of California on behalf of anyone who purchased or otherwise acquired SciClone common stock between May 11, 2009and August 10, 2010.

September 8

Kaplan Fox & Kilsheimer LLP announce that it has filed a class action suit against SciClone alleging violations of the Securities Exchange Act of 1934 on behalf of purchasers of SciClone's common stock during the period May 11, 2009 and August 9, 2010.

September 16

The law firm of Strauss & Troy announce that a class action lawsuit has been filed in the U.S. District Court for the Northern District of California against SciClone for potential violations of state and federal law.

September 23

The law firm of Lieff Cabraser Heimann & Bernstein, LLP announce that class action lawsuits have been brought on behalf of purchasers of the common stock of SciClone.

Given the above, you are probably wondering, geez, what did SciClone disclose - how extensive were the disclosed FCPA violations? Did the company's CEO or CFO resign? Is the company still in business?

Well, not exactly.

On August 9th, SciClone disclosed (see here) as follows:

"On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations."

During SciClone's August 9th earnings conference call Friedhelm Blobel (President and CEO) stated that SciClone "intends to cooperate fully with the SEC and DOJ in the conduct of their investigations, and has appointed a special committee of independent directors to oversee the Company's efforts." Blobel noted that "as far as timing is concerned, the lawyers tell us that these investigations typically are long lasting." In response to the question - is the investigation disrupting day-to-day operations or ongoing sales, Gary Titus (CFO) said that "it is business as usual for SciClone, and we continue to focus on all of the priorities that we have set for the Company ..."

That's right.

All of the above occured because the SEC initiated a formal investigation of SciClone and issued a subpoena to the company and because SciClone received a letter from the DOJ as to an industry-wide investigation suggesting possible improper conduct by the company.

You be the judge.

Are the above referenced investigations and lawsuits a rational and value added exercise for shareholders of SciClone or rather indicative of an FCPA feeding frenzy where everyone, it seems, is trying to get a slice of the pie?

Has this all gotten a bit out-of-hand?

*****

Yesterday, SciClone (see here) announced "continued topline growth and strong cash position in the Third Quarter of 2010."

"We May Not Have Conducted Our Business In Compliance With The FCPA"

Those are the words used by Dutch-based Lyondellbasell Industries N.V. (see here) in its August 25th SEC filing (see here).

Lyondellbasell's disclosure is not exactly "new" news as it was first disclosed in a March 2010 court filing in connection with the company's bankruptcy proceeding, but the news is new to me, and perhaps to you as well.

The FCPA disclosure reads as follows:

"We have identified an agreement related to a project in Kazakhstan under which a payment was made in late 2008 that raises compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”). We have engaged outside counsel to investigate these activities, under the oversight of a special committee established by the Supervisory Board, and to evaluate internal controls and compliance policies and procedures. We made a voluntary disclosure of these matters to the U.S. Department of Justice in late 2009 and are cooperating fully with that agency. We cannot predict the ultimate outcome of this matter at this time or whether we will discover other matters raising compliance issues, including under other statutes. In this respect, we may not have conducted our business in compliance with the FCPA and may not have had policies and procedures in place adequate to ensure compliance. We cannot reasonably estimate any potential penalty that may arise from these matters. We are in the process of adopting and implementing more stringent policies and procedures designed to ensure compliance. We cannot predict the ultimate outcome of this matter at this time since our investigations are ongoing. Violations of these laws could result in criminal and civil liabilities and other forms of relief that could be material to us."

According to this Bloomberg report, "a review of international holdings by a management team installed after the bankruptcy triggered the disclosure."

Citing a company spokesperson and unnamed sources, the Bloomberg article states that "the company’s review involves a petrochemical complex in western Kazakhstan where LyondellBasell was a partner until earlier this year" and that "a LyondellBasell payment of $7 million made about two years ago to an individual affiliated with a Kazakh company, SAT & Co., is at the center of the internal investigation" which is being conducted by Cadwalader Wickersham & Taft LLP .

According to a company spokesperson, "the characterization of the $7 million payment was not accurate."

As noted in the SEC filing, since emerging from bankruptcy on April 30, 2010, there has been a limited market for the company's securities. "LyondellBasell Industries N.V.’s class A ordinary shares and class B ordinary shares have been quoted on Pink OTC Market’s electronic quotation and trading system under the symbols “LALLF” and “LALBF,” respectively, since emergence. We have applied for listing of our class A ordinary shares and our class B ordinary shares on the New York Stock Exchange (“NYSE”)."

In The Blink Of An Eye ... Along Comes A Securities Fraud Suit

In last week's roundup (see here) it was noted that on Monday August 9th, SciClone Pharmaceuticals Inc. disclosed in an 10-Q filing as follows:

"On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations."

As indicated in the prior post, news of the FCPA inquiry sent SciClone's shares, at one point, down 41% to a 52 week low.

As indicated in this press release on Friday, August 13th, Kahn Swick & Foti, LLC and Former Louisiana Attorney General Charles C. Foti, Jr. filed a securities fraud class action lawsuit against SciClone in the United States District Court for the Northern District of California, on behalf of purchasers of the common stock of the Company between May 11, 2009 and August 10, 2010.

As noted in the law firm release,

"The Complaint alleges that throughout the Class Period, defendants were engaged in illegal and improper sales and marketing activities in China and abroad regarding its products. This ultimately caused the Company to become the focus of a joint investigation by the Securities and Exchange Commission ("SEC") and the Department of Justice ("DOJ") for possible violations of the Foreign Corrupt Practices Act ("FCPA"). It was only at the end of the Class Period, however, that investors ultimately learned the truth about the Company's operations after it was reported that the SEC and DOJ were investigating the Company for violations of the FCPA. At that time, shares of the Company declined almost 40% in the single trading day, on abnormally large trading volume."

This has got to set a record for the least amount of time between disclosure of an FCPA inquiry and collateral civil litigation .... less than 100 hours!

As Nathan Vardi at Forbes correctly notes (see here) plaintiff lawyers have indeed "joined the bribery racket." (In April, Vardi penned a provocative feature article - "The Bribery Racket." See here for my prior post which links to the article).

Six Months For The Greens ... Plus The Friday Roundup

In September 2009, Gerald and Patricia Green were found guilty by a federal jury of substantive FCPA violations, conspiracy to violate the FCPA, and other charges. According to the DOJ release (see here) the Los Angeles-area film executives were found guilty of engaging in "sophisticated bribery scheme that enabled the defendants to obtain a series of Thai government contracts, including valuable contracts to manage and operate Thailand’s yearly film festival."

As noted in the DOJ release:

"The conspiracy and FCPA charges each carry a maximum penalty of five years in prison, and each of the money laundering counts carries a maximum penalty of up to 20years in prison. The false subscription of a U.S. income tax return carries a maximum penalty of three years in prison and a fine of not more than $100,000."

Sentencing was originally set for December 17, 2009, was delayed several times, and, at one point, was removed from the calendar altogether (see here).

U.S. District Court Judge George Wu of the Central District of California reportedly wanted to learn more about other FCPA sentences as well as Mr. Green's health issues.

The DOJ requested a 10 year sentence for both Gerald and Patricia Green.

The DOJ stated that the "court must decline defendants' remarkable invitation to join the wholesale speculation of FCPA 'pundits' as to whether corporate settlements are 'shielding' to corporate executives from punishment."

In closing, the DOJ urged the court to "disregard defendants' efforts to obscure the landscape of FCPA sentencing, which generally reflects significant prison terms for convicted individuals."

According to this report, Judge Wu yesterday sentenced the Greens, before a packed courtroom, to six months in prison, followed by three years probation (six months of which must be served as home confinement).

According to the report, Judge Wu "also set a restitution figure of $250,000" but "if the Greens, who have had their accounts frozen and assets seized since being arrested in 2007, can prove that none of the $1.8 million they paid in bribes to Thai officials can be recovered, then they will only have to pay $3,000 in restitution."

Does the "landscape of FCPA sentencing" truly reflect "significant prison terms" as stated by the DOJ?

True, any prison term is significant for a defendant and his/her family and friends.

But with a top sentence of 60 months (Charles Jumet - see here), the 366 day sentence for Frederic Bourke in November 2009 (see here), the 15 month sentence for Jason Edward Steph and the 366 day sentence for Jim Bob Brown both in January 2010 (see here) and now the 6 month sentence for the Greens - is this yet another instance in which DOJ's FCPA rhetoric does not match reality?

*****

H-P news that does not involve its former CEO, what others are saying about the Giffen Gaffe, SciClone's stock drop, and Siemens $1 billion customer ... it's all here in the Friday roundup.

H-P Inquiry Escalates

According to a story in today's Wall Street Journal by David Crawford, the DOJ "has asked Hewlett-Packard Co. to provide a trove of internal records as part of an international investigation into allegations that H-P executives paid bribes in Russia, according to people familiar with the investigations."

According to the story, the DOJ request "came after German prosecutors complained H-P had refused to provide them with all of the records they requested" and after "H-P initially argued that the German request for bookkeeping records, some of which are five years old, imposed an 'undue hardship' on the company."

The article indicates that the DOJ "asked H-P to comply voluntarily with the request and hasn't subpoenaed the records" and that "H-P has yet to provide some records" but is "cooperating with the investigations." According to H-P, the investigation
"involves people that have largely left the company and matters that happened as much as seven years ago."

What Others Are Saying About Giffen

It's been one week since the Giffen Gaffe (see here).

Here is what others are saying about the enforcement action that began with charges that James Giffen made "more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions", yet ended with a misdemeanor tax violation against Giffen and an FCPA anti-bribery charge against a functionally defunct entity (The Mercator Corporation -in which Giffen was the principal shareholder, board chairman, and chief executive officer) focused merely on two snowmobiles.

Scott Horton, writing at Harper's Magazine (see here) noted that "[t]he outcome is a huge embarrassment to federal prosecutors, who had invested a decade in resources in the effort to convict Giffen of FCPA and related violations."

Horton, who has been following the case for years, highlighted how the "case has been the focus of political manipulation concerns for years" and closed with this paragraph:

"Kazakhs have long claimed that their government’s strategy of resolving the Giffen case by using the right levers with the American administration–a process that led them to hire former attorneys general and high-profile retired prosecutors, private investigators, and public-relations experts–would be successful. The outcome in the Giffen case appears to ratify that view. The notion of an independent, politically insulated criminal-justice administration in America has just taken another severe hit."

Steve LeVine, author of The Oil and The Glory page at Foreign Policy, noted (here) that the Giffen resolution is "a considerable comedown for the federal government" and that Giffen's lawyer "understood correctly that he could set up a collision between the Justice Department and the CIA in which the latter would probably prevail."

The FCPA and Stock Price

What affect, if any, does an FCPA disclosure or resolution have on a company's stock price?

It's an issue I've explored before (see here) and best I can tell the evidence is inconclusive and the answer is - it depends.

In the case of a company that does business almost exclusively in China disclosing an FCPA inquiry focused on China, the answer is that disclosure of the FCPA inquiry matters - and quite a bit.

On Monday, SciClone Pharmaceuticals Inc., a Delaware company based in California, disclosed in a 10-Q filing (here) as follows:

"On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations."

SciClone's business is focused primarily on China with 90+% of its revenue derived from China sales. Thus, it is not surprising that an FCPA inquiry focused on China had a material impact on the company's stock price.

As noted in this Reuters story, news of the FCPA inquiry sent SciClone's shares, at one point, down 41% to a 52 week low.

Siemens $1 Billion Customer

In December 2008, Siemens agreed to pay $800 million in combined U.S. fines and penalties to settle FCPA charges for a pattern of bribery the DOJ termed “unprecedented in scale and geographic scope.” According to the DOJ, for much of Siemens’ operations around the world, “bribery was nothing less than standard operating procedure.”

The Siemens enforcement action remains the largest FCPA settlement ever (even though Siemens itself was not charged with FCPA anti-bribery violations).

On the one year anniversary of the Siemens enforcement action, I ran a post - Siemens - The Year After (see here) which highlighted how the U.S. government continues to do substantial business with the company it charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”

This U.S. government business has helped Siemens outperform its competitors in a difficult recessionary environment and much of the company’s recent success is the direct result of government stimulus programs around the world.

Using Recovery.gov (a U.S. government website designed “to allow taxpayers to see precisely what entities receive Recovery money ..”), I highlighted how several Siemens’ business units have been awarded several dozen contracts funded by U.S. taxpayer stimulus dollars.

It is against this backdrop that Paul Glader's recent piece in the Wall Street Journal "Siemens Seeks More U.S Orders" caught my eye.

According to the article, Siemens Corp. (the U.S. division of Siemens) currently brings in about $1 billion a year from the U.S. government, a figure the division hopes to double by 2015.

Eric Spiegel, chief executive of Siemens Corp., is quoted in the article as saying: "[o]ne of the beauties of the federal-government spending is it didn't drop off during the recession."

To that, I'll add that one of the unfortunate beauties of engaging in bribery the U.S. government terms “unprecedented in scale and geographic scope" is no slow down in U.S. government contracts in the immediate aftermath of the enforcement action.

It's one of the FCPA greatest headscratchers - FCPA violaters are and remain some of the U.S. government's biggest suppliers and contracting partners.

As I've noted in numerous prior posts, efforts are underway to try to change this. See here, here and here.

*****

A good weekend to all.

Innospec Related News

In March, Innospec (a global chemical company) settled bribery enforcement actions on both sides of the Atlantic (see here).

This post discusses recent Innospec news - the SEC enforcement action against an Innospec agent (an individual who previously plead guilty to a DOJ enforcement action - see here) and a former Business Director at the company; a civil suit filed by an Innospec competitor in U.S. District Court in Richmond, Virginia; and how Innospec continues to grow its cash coffers despite receiving a pass on $50 million in fines and penalties in the March enforcement action based on inability to pay.

SEC Enforcement Action Against Turner and Naaman

Last week, the SEC added to Ousama Naaman's legal woes charging him (see here) with civil FCPA anti-bribery violations, knowingly circumventing or knowingly falsifying books and records, and aiding and abetting Innospec's FCPA books and records and internal control violations. According to the SEC release (see here) Naaman, Innospec's agent in Iraq, agreed to disgorge $810,076 plus prejudgment interest of $67,030 and pay a penalty of $438,038 that will be deemed satisfied by his criminal fine. The disgorgement amount represents commissions Naaman received from Innospec "for his role in funneling bribe payments." To my knowledge, the approximate $877,000 the SEC will recover from Naaman is the largest SEC recovery against an individual FCPA defendant.

In the same complaint, the SEC also charged David Turner, the Business Director of Innospec's TEL Group, with the same substantive charges as Naaman. According to the complaint, Turner (a U.K. citizen who left Innospec in June 2009) "actively participated" in Innospec's bribery and kickback schemes in Iraq and "actively participated" in Innospec's bribery scheme in Indonesia.

According to the complaint:

"Turner was aware of the kickback scheme in connection with the Oil for Food Program. At some point in late 2002 or early 2003 Innospec's internal auditors questioned Turner about the nature of the commission payments that were made to Naaman under the U.N. Oil for Food Program. Turner made false statements to the auditors and concealed the fact that the commission payments to Naaman included kickbacks to the Iraqi government in return for Oil for Food contracts. Turner also made false statements when he signed annual-certifications that were provided to auditors up until 2008 where Turner falsely stated that he had complied with Innospec's Code of Ethics incorporating the company's Foreign Corrupt Practices Act policy prohibiting kickbacks and bribery, and that he was unaware of any violations of the Code of Ethics by anyone at Innospec."

Even after the Oil for Food Program was terminated in late 2003, the complaint alleges that "Turner, along with senior officials at Innospec, directed and approved" additional bribe payments to Iraqi officials. In addition, the complaint alleges that "Turner and other Innospec officials directed and authorized payments, through Naaman, to fund lavish trips for Iraqi officials."

As to Indonesia, the complaint alleges that "Turner, along with senior officials at Innospec, authorized and directed the payment of bribes to Indonesian government officials from at least 2000 through 2005, in order to win contracts for Innospec for the sale of TEL to state owned oil and gas companies in Indonesia." According to the complaint, Turner and other Innospec officials and employees used various "euphemisms" in e-mail communications and in discussions to refer to the bribery scheme.

According to the complaint, Turner "obtained $40,000 in bonuses that were tied to the success of the TEL sales, which were procured through bribery."

According to the SEC release, Turner, without admitting or denying the SEC's allegations, consented to entry of a final judgment requiring him to disgorge $40,000. The release states that no civil penalty will be imposed on Turner "based on, among other things, Turner's extensive and ongoing cooperation in the investigation."

Competitor Sues Innospec

The FCPA does not have a private right of action (although as I explored in this post it would be interesting if a court were faced with this issue today).

However, a company that settles an FCPA enforcement action increasingly faces collateral litigation, most often shareholder derivative claims. If a plaintiff does craft a direct cause of action against the company, it is usually a RICO claim.

As noted in this Richmond Times-Dispatch story, NewMarket Corp.'s civil case against Innospec does not fit the above mold, rather it alleges that Innospec's conduct, as set forth in the DOJ and SEC enforcement actions, violated the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act.

The article quotes NewMarket's principal financial officer as saying that the company learned of Innospec's actions after reading the documents released in connection with the March enforcement action. Among other things, the DOJ and SEC alleged that Innospec's bribe payments in Iraq ensured that a field test of a competitor's fuel additive failed. NewMarket claims that the competitor was a subsidiary company Ethyl Petroleum Additives Inc. which now goes by the name Afton Chemical Corp.

Innospec Continues to Be In the Money

In this prior post I highlighted how Innospec was ordered to pay $60,071,613 in disgorgement in the SEC's enforcement action, but because of Innospec's "sworn Statement of Financial Condition" all but $11,200,000 of that disgorgement was waived.

In other words, Innospec got a pass on approximately $50 million in March.

I then noted that Innospec's first quarter financial results were positive and that
"as of March 31, 2010, Innospec had $67.5 million in cash and cash equivalents, $22.5million more than its total debt of $45.0 million."

Innospec recently reported its second quarter financial results and it continues to be in the money. As noted in this company release:

"As of June 30, 2010, Innospec had $77.0 million in cash and cash equivalents, $30.0 million more than its total debt of $47.0 million."

The company's President and Chief Executive Officer stated that “Innospec’s second quarter operating results were very strong, with impressive double-digit increases in sales and operating income across all three business segments."

Smith & Wesson's Recent Disclosures

In January, Amaro Goncalves was one of the individuals indicted in the Africa Sting case.

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."

Company A is Smith & Wesson, a fact quickly acknowledged by the company in this press release.

I noted in January:

"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 that corporate enforcement actions or investigations often, but not always, precede or follow individual enforcement actions."

Indeed, the companies indirectly implicated in the Africa Sting by their employees alleged conduct did "lawyer up."

Because Smith & Wesson is a public company, the public is provided a better glimpse of how the Africa Sting case is affecting this company compared to the many other companies indirectly implicated - many of which are small, private businesses.

On June 30th, Smith & Wesson reported its Fourth Quarter and Full Year 2010 Financial Results Ended April 30, 2010 (see here). The company release contains this paragraph:

"Operating expenses of $89.1 million, or 21.9% of sales, for fiscal 2010 decreased versus operating expenses of $170.5 million, or 50.9% of sales, for fiscal 2009. Excluding the impact of the impairment charge recorded in the second quarter of fiscal 2009 and $9.7 million of operating expense at USR not contained in prior year results, operating expenses increased $7.1 million for the current fiscal year. This increase included $3.2 million in legal and consulting fees related to allegations against one of our employees under the Foreign Corrupt Practices Act (FCPA)."

If nothing more, Amaro Goncalves is probably not on the short-list for employee of the month because of his alleged conduct.

Yesterday, Smith & Wesson filed its annual report (see here). The report contained the following:

"Foreign Corrupt Practices Act (FCPA)

On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from the law enforcement and military equipment industries, one of whom was our Vice President−Sales, International & U.S. Law Enforcement. We were not charged in the indictment. We also were served with a Grand Jury subpoena for the production of documents. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the DOJ in this matter and have undertaken a comprehensive review of company policies and procedures, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, or if our employee is convicted of FCPA violations, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts, and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.

SEC Investigation

Subsequent to the end of fiscal 2010, we received a letter from the staff of the SEC giving notice that the SEC is conducting a non−public, fact−finding inquiry to determine whether there have been any violations of the federal securities laws. It appears this civil inquiry was triggered in part by the DOJ investigation into potential FCPA violations. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the SEC in this matter, the SEC may determine that we have violated federal securities laws. We cannot predict when this inquiry will be completed or its outcome. If the SEC determines that we have violated federal securities laws, we may face injunctive relief, disgorgement of ill−gotten gains, and sanctions, including fines and penalties, or may be forced to take corrective actions that could increase our costs or otherwise adversely affect our business, results of operations, and liquidity. We also face increased legal expenses and could see an increase in the cost of doing business. We could also see private civil litigation arising as a result of the outcome of this inquiry. In addition, responding to the inquiry may divert the time and attention of our management from normal business operations. Regardless of the outcome of the inquiry, the publicity surrounding the inquiry and the potential risks associated with the inquiry could negatively impact the perception of our company by investors, customers, and others."

Smith & Wesson's disclosure is hardly surprising. Anytime a company's employee is criminally indicted for an FCPA violation, it is reasonable to assume that the DOJ will wonder "who knew what and when" and will seek to discover whether the employee's alleged conduct is isolated or evidence of broader, more systemic conduct. When that employee is the "Vice President−Sales, International & U.S. Law Enforcement" it is virtually guaranteed that the DOJ will ask such questions.

It is unlikely that Smith & Wesson is the only company implicated in the Africa Sting case under investigation. However, as stated above, because Smith & Wesson is a public company, the public is provided a better glimpse of how the Africa Sting case is affecting this company compared to the many other companies implicated - many of which are small, private businesses. These companies are "domestic concerns" and thus subject to the FCPA, it's just that FCPA inquiries of non-public companies generate less attention that FCPA inquiries of public companies.

Nor is it surprising that Smith & Wesson disclosed the existence of an SEC investigation.

I noted in January:

"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."

Even if Smith & Wesson is never charged with violating the FCPA's antibribery provisions, it is likely that the company could face some exposure under the FCPA's books and records and internal control provisions.

The SEC's analysis would likely be as follows.

Goncalves, if the alleged conduct is true, no doubt, while a Smith & Wesson employee, made entries on the company's books and records that did not accurately or fairly represent the transactions at issue. That, in and of itself, would be an FCPA books and records violation. Further, the SEC will take the position that if Smith & Wesson had effective internal controls, Goncalves could not have engaged in the conduct he is alleged to have engaged in. If he did, this in and of itself, is evidence that Smith & Wesson lacked effective internal controls.

A bit simplistic, yes. But this is perhaps how the Smith & Wesson inquiry will play out.

A final point.

Smith & Wesson is a supplier to numerous government customers and military installations. 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. Add this issue to the list of issues to follow as the Smith & Wesson FCPA inquiry escalates. However, this sanction (to my knowledge) has never been used against an FCPA violator.

FCPA Enforcement and Credit Ratings

Fitch Ratings (see here) is a global rating agency that provides credit opinions, research and data to the world's credit markets.

It recently issued a report titled "U.S. Foreign Corrupt Practices Act - No Minor Matter."

The report contains some interesting and informative non-legal perspectives on FCPA enforcement which are excerpted below.

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"Aside from management distraction and reputational risk, additional compliance costs and fines [arising from FCPA violations] could have rating implications for those companies with modest FCF [free cash flow] and/or liquidity. It should also be noted that it can take years from the discovery of a violation to the time a plea agreement is reached. In the interim, corporate credit profiles, liquidity, and ratings may weaken. The fine that could be easily paid with cash on hand today might not be readily payable years down the road if a company’s credit profile has weakened and liquidity becomes constrained."

The report notes that many FCPA fines are "imposed on large investment grade corporations whose substantial cash balances easily afforded them the ability to absorb the payments with no or minimal increases in leverage."

However, the report notes, "there have also been violations by non-investment grade companies."

The report then discusses Willbros Group, Inc. "which borrowed from banks on a secured basis." The report notes that when the company became aware of its FCPA issues (see here for prior posts on Willbros) the issues resulted "in the restatement of its annual financial statements at December 2002 and 2003, as well as the first, second, and third fiscal quarters iof 2004 and 2003."

The report continues:

"In its 2005 10-K [Willbros] noted that it required an amendment on an indenture due to late filing and several amendments on its bank credit facility. In the July 1, 2005 Second Amendment and Waiver Agreement the credit facility was reduced from $150 million to $100 million."

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The report also discusses the fiscal consequences of "deferring the legal consequences" of an FCPA violation - as so often happens given the frequency in which non-prosecution and deferred prosecution agreements are used to resolve FCPA enforcement actions. Pursuant to these agreements, the non-prosecuted or deferred charges could go "live" if the company fails to adhere to its obligations under the agreement. "This means," according to the report, "that investors and analysts cannot take a deep breath or relax until" the time period in the NPA or DPA has expired.

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The report also discusses how FCPA issues can become a "sticking point in acquisitions/dispositions of businesses."

The report notes:

"Sellers may have contingent liabilities related to violations even after assets or businesses are sold. Prices could be less than expected and may hamper sellers who need to receive a certain level of cash or offload debt to deleverage or meet covenants. Additionally, buyers who have not done enough due diligence up front may find themselves with an unexpected obligation and higher litigation expenses in the future."

For a recent example of a company halting a planned acquisition because of an FCPA issue (see here).

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As to "management distraction" resulting from an FCPA inquiry, the report notes:

"Fines, penalties, widespread adverse publicity with potential damage to corporate reputations, having an independent compliance monitor, and building up the compliance organization can all pose an enormous distraction to management. More importantly, while many companies tend to have significant financial resources at the
start of an inquiry, it generally takes years before there is a conclusion. In that interim, it is possible that a corporation’s financial profile could weaken."

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The report contains an informative chart detailing "Fitch-Rate Issuers" that tracks the date the FCPA issue first went public.

Noteworthy examples include:

Accenture Ltd. (identified a potential FCPA issue in July 2003 - in its March 2010 SEC filing the company stated that there has been no new developments);

Bristol-Myers Squibb Company (the SEC notified the company in October 2004 of an inquiry of certain pharma subsidiaries in Germany - in its 2009 10-K the company stated that it is cooperating with the SEC);

Eli Lilly & Co (the SEC notified the company in 2003 that it was investigating whether certain Polish units has violated the FCPA - in its 2009 10-K the company stated that the DOJ and SEC had issued subpoenas relating to other countries).


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As to "credit implications," the report notes, among other things:

That, because the time from discovery of FCPA violations to resolution can take years, a company's credit profile could weaken - perhaps reflecting a weak economic cycle. When allegations of bribery separately arise, "for most corporations if the credit profile weakens, potential fines and/or legal contingencies would be among the items of concern in the Rating or Outlook."

The report then talks specifically about Avon and its FCPA issues (see here for a prior post).

The report notes:

"The cost of investigations and ongoing compliance can be sizeable, and each company’s liquidity and metrics over the medium term would need to be considered. Avon, with $10 billion in 2009 revenues, had $120 million in FCF. In April 2010 the company disclosed that the cost of the investigation would be in the $85 million - $95 million range, up from $35 million in 2009. The additional cost of widening the investigation represents a significant percentage of the company’s 2009 FCF. While the company has more than $1 billion in cash on hand, Fitch’s expectation of moderate FCF in the medium term was part of the rationale for the downgrade to ‘A-’ from ‘A’ on Feb. 2, 2010. Additional layers of investigatory or compliance-related expenses could hamper FCF for Avon and other companies that violate the FCPA. Continued relative weakness in FCF and/or increased leverage typically can provide the impetus for a downgrade or change in outlook for many corporations."

All in all, the Fitch Report is an interesting and informative read.

A couple of observations.

Some FCPA enforcement actions, per the enforcement agencies' allegations, involve conduct that goes "all the way to the top" - the Siemens enforcement action comes to mind. In this type of FCPA enforcement action, the company's credit ratings, and much else about the company's business, ought to be negatively impacted by the FCPA enforcement action.

However, enforcement actions like Siemens are clearly outliers.

The far more common FCPA enforcement action involves allegations of improper conduct by a single employee or a small group of employees - often in a foreign subsidiary. Even so, because of respondeat superior, the parent company issuer faces FCPA exposure. In such a situation - a common FCPA scenario - is it proper for company's credit rating to be negatively impacted by the enforcement action?

Add to this the fact that most FCPA enforcement actions are resolved through non-prosecution or deferred prosecution agreements. These agreements are privately negotiated, subject to no (or little) judicial scrutiny, and do not necessarily represent the triumph of one party's legal position over the other. In such a situation - again a very common FCPA scenario - is it proper for the company's credit rating to be negatively impacted by the enforcement action?

In my forthcoming piece "The Facade of FCPA Enforcement," I discuss why the facade of FCPA enforcement matters.

The Fitch Report has informed me of another reason why the facade of FCPA enforcement matters - and that is because FCPA enforcement actions can negatively impact a company's credit rating.

FCPA Collateral Effects and Those "Pesky" Shareholders

I previously posted (see here) that while there is little in terms of substantive FCPA case law - this much is clear - there is no private right of action under the FCPA - enforcement of the law is in the hands of the DOJ and the SEC.

That does not mean that aggrieved third parties, including a company's own shareholders, are without legal recourse should a company become subject to an FCPA enforcement action or merely disclose a potential FCPA issue.

Indeed, shareholder derivative litigation is often a collateral effect of FCPA disclosures or enforcement actions.

Case in point, the shareholder derivative complaint filed last week on behalf of Pride International, Inc. in Texas state court against certain members of its board of directors and certain of its executives officers seeking to remedy defendants' breach of fiduciary duties. (see here).

The breach?

According to the complaint, "[f]rom 2001 to 2006, Pride repeatedly violated the [FCPA] through its business operations in numerous countries." (see para. 1). "Certain current and former officers and directors of the company were aware of the violations and that the violations could, and eventually did, cause substantial harm to Pride and its shareholders, yet they knowingly failed to make a good faith effort to correct or prevent the misconduct." (see para. 1).

The complaint alleges at para 23 that "[t]he individual defendants were aware of the violations well before the company announced the FCPA Investigation to the company's shareholders and the public at large." "Nevertheless," according to the complaint, "the Individual Defendants took no action until an undisclosed employee of the company complained about the violations."

The complaint then details Pride's numerous public statements - beginning in March 2006 - regarding its potential FCPA issues and exposure. Certain of these disclosures and statements have been covered elsewhere (see here and here).

Beyond re-stating Pride's numerous public statements, the complaint is sparse on detail, including little specific factual evidence to support the allegation that the Director Defendants "knew or were reckless in not knowing of the Company's violations of the FCPA." (see para. 50).

Regardless of the complaint's ultimate fate, the Pride derivative suit is but the latest example of the collateral effects / sanctions a company will likely face when its business conduct is subject to FCPA scrutiny.

For those keeping track at home, such collateral effects / sanctions are yet another reason for companies to have effective, robust and well-communicated FCPA compliance policies and procedures which are periodically monitored and strengthened.