Chamber of Commerce Blasts FCPA-Related Civil Litigation

A prior post (here) discussed the rise in claims and so-called investigations by plaintiff firms representating investors as soon as FCPA scrutiny is disclosed or soon after FCPA enforcement actions are resolved.

When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted. However, these types of FCPA violations are rare – the more typical situation is where, because of respondeat superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.

I do not find myself in complete agreement with the U.S. Chamber as to all of its FCPA reform proposals (see here for those proposals), but I agree with the Chamber sponsored Congressional testimony last month on the issue of FCPA-related litigation.

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Last month John Beisner (a partner at Skadden - see here) testified on behalf of the U.S. Chamber Institute for Legal Reform before the Subcommittee on the Constitution of the Committee on the Judiciary United States House of Representatives. The hearing, held on May 24th was titled "Can We Sue Our Way to Prosperity?: Litigation's Effect on America's Global Competitiveness."

In his prepared statement (here) Beisner "highlighted four specific areas in which we are still seeing substantial litigation abuse" including "private lawsuits that piggyback on government investigations."

As to this issue, the bulk of Beisner's remarks focused on the FCPA and he stated as follows.

"More recently, the piggyback-litigation phenomenon has been most noticeable with respect to Foreign Corrupt Practices Act (“FCPA”) enforcement proceedings brought by the Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). These piggyback cases tend to fall into two categories: (1) shareholder class actions alleging that a company did not adequately disclose its FCPA exposure; and (2) derivative actions against officers and directors alleging that they failed to prevent a company from bribing foreign officials."

"Follow-on FCPA cases target companies at a difficult time. Companies going through DOJ or SEC FCPA enforcement proceedings often spend tens of millions of dollars, if not more, on attorneys and forensic accountants – on top of potentially multimillion-dollar criminal and civil fines and disgorgement – in order to determine whether their employees (often at a relatively low level) acted improperly. Enforcement proceedings also interrupt normal business operations, as companies make employees and documents available to lawyers, and take action against truly culpable employees. The investigations themselves are disclosable events and are almost always “bad news,” resulting in negative publicity. Shareholder suits against companies involved in enforcement proceedings threaten to further delay the companies’ ability to return to normal operations and to further damage shareholder value. These suits serve no purpose but to take money from current shareholders and transfer it to former (or other) shareholders – with a hefty slice cut out for the plaintiffs’ lawyers."

"Derivative shareholder suits are equally problematic in this arena. These suits tend to target senior officers and directors, not the employees who actually paid any bribes or condoned others paying them. The reason is simple enough: directors and officers are backed by the deep pockets of the company’s D&O insurer; culpable employees have little money to pay in private civil damages, especially if they themselves have been the target of an individual enforcement proceeding."

"Often, lawyers filing shareholder class actions against companies under investigation or derivative actions against directors and officers of a company under investigation do not even wait until the government investigation is complete. Such tactics are particularly egregious, because they necessarily involve the company and senior management in defending against a private civil suit – and in making strategic judgments regarding such defense – when their focus should be on resolving the government’s investigation. Both the DOJ and the SEC have developed leniency policies for companies that actively assist in government investigations. These policies acknowledge that U.S. government resources are limited, and that cooperating companies can materially assist the government in enforcing the law and protecting shareholders. As part of cooperating with the government, companies in FCPA investigations frequently investigate their own potential wrongdoing and self-report misconduct to the government. When companies and their senior officers and directors face personal civil liability in addition to any exposure to the DOJ and SEC, their judgments regarding what issues to investigate and what results to report to the DOJ and SEC necessarily will be affected, possibly to the detriment of the integrity of the government’s investigation."

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For additional reading on the rise in FCPA related civil litigation (see here from Jeffrey Johnston and Erika Tristan of Vinson & Elkins and here from Sean Griffin of Steptoe & Johnson).

Still Yet Another Noisy Exit

Perhaps it is a new trend.

Perhaps it is because the media now covers anything and everything FCPA related.

In any event, it is noticeable.

There has been still yet another "noisy exist."

Including the below example, I count five in the last few months. See here, here and here for the prior posts.

In October 2009, Stephen Lowe was hired by Allison Transmission ("Allison") as its Managing Director, China, Japan & Korea Operations. [Allison (here) is an Indiana based designer, manufacturer and supplier of automatic transmissions for medium- and heavy-duty commercial vehicles and military vehicles. In 2007 (see here) The Carlyle Group and Onex Corporation acquired Allison Transmission from General Motors Corporation for US$5.575 billion.]

Lowe alleges in this complaint recently filed in Marion County (Indiana) Superior Court that Allison fired him in July 2010 because he "refused to engage in violations of the FCPA." Lowe's complaint implicates both Allison's Vice President of International Sales and Marketing ("Vice President") and Allison's Commercial Director of Asia Strategy ("Commercial Director").

Among other things, Lowe alleges that: (i) he witnessed the Commercial Director deliver a cash filled envelope to Beijing City Bus officials during dinner; (ii) he heard the Commercial Director describe how he purchased silver jewelry for Chinese government officials "in order to please the officials" (iii) the Commercial Director bragged about winning a Beijing City Bus Olympics contract by doing "whatever it took to please the officials" "including giving gifts, money and prostitutes" and (iv) the Commercial Director "deliberately lost" high-stakes card games to "key Beijing City Bus officials." [Brain teaser of the day - is deliberately losing a high-stakes card game to a "foreign official" providing the official with a "thing of value"?]

According to the complaint, Allison's Vice President knew, and approved of, certain of the Commercial Director's conduct. According to the complaint, "a month before Allison fired him" Lowe disclosed his concerns about the Commercial Director and the Vice President to Allison's Marketing Manager.

Lowe's complaint, filed by The Employment Law Group law firm, alleges various Indiana state law causes of action including retaliatory discharge, breach of contract, and breach of the implied covenant of good faith and fair dealing.

For additional coverage of Lowe's complaint, see here from the Indiana Business Journal.

Yet Another Noisy Exit

Rodolfo Michelon was the Director & Controller - Mexico of Sempra Global. Michelon was also the legal representative of various Sempra subsidiary companies located in Mexico and served as a member of the board of directors of the Mexican subsidiaries.

That is until March 10, when Michelon was terminated by Sempra.

In a lawsuit (here) recently filed in California state court, Michelon claims that his termination was wrongful for many reasons, including the following:

"Sempra regularly required Michelon to transfer funds, and account for illegitimate expenditures that boiled down to bribes of government officials - everything from fraudulent trusts ostensibly to purchase fire fighting equipment for Mexican governments, to paying off local fisherman to move their operations away from Sempra facilities, to demanding remediation of accounting that falsely stated Sepmpra's assets, to the outright wiring of huge amounts of money to 'consultants' throughout Mexico. As with his other attempts to ensure he was complying with his ethical requirements as a CPA, Michelon's repeated questioning and protests of the miscellaneous frauds and bribes was met with open hostility and threats of termination. The termination of the Controller employment was not only in retaliation for Michelon's complaints, but it was also meant to keep Michelon from reporting the frauds and bribes to governmental, law enforcement officials."

Sempra Global is described (here) as "the umbrella for Sempra Energy's businesses operating in competitive energy markets. Sempra Global companies acquire, develop and operate infrastructure assets related to the production and distribution of energy, including power plants, natural gas pipelines and liquefied natural gas (LNG) receipt terminals."

Various Sempra entities are publicly traded issuers (see here).

In this San Diego Union Tribune report Sempra officials "called Michelon a disgruntled ex-employee attempting to cash in by making 'outlandishly false claims and misrepresentations' after being let go in a routine reorganization." A Sempra spokesperson said that the “company first became aware of Mr. Michelon’s claims several months ago" and that “Sempra’s board of directors ordered an independent investigation, which found Mr. Michelon’s allegations to be completely without merit.”

Michelon's "noisy exit" is the fourth such exit publicly reported over the past three months that may implicate the FCPA. See here and here for the prior posts.

Innospec Checkup

"As of March 31, 2010, Innospec had $67.5 million in cash and cash equivalents, $22. million more than its total debt of $45.0 million." (see here for the prior post).

"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." (see here for the prior post).

As reported by the company earlier this week (see here):

"As of September 30, 2010, Innospec had $101.5 million in cash and cash equivalents, $53.5 million more than its total debt of $48 million."

As evident from the above, Innospec's cash coffers continue to grow and business is doing well. The company's President and CEO “We are pleased to report strong earnings growth as well as excellent cash generation for the third quarter of 2010. All three of our business segments again performed well, generating double-digit increases in operating income."

Why does any of this matter?

Because in March 2010, Innospec (see here) agreed to pay $40.2 million in combined DOJ/SEC/SFO fines and penalties for violating the Foreign Corrupt Practices Act and other laws.

However, it could have been worse.

The SEC release (see here) notes that Innospec, without admitting or denying the SEC's allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec's "sworn Statement of Financial Condition" all but $11,200,000 of that disgorgement was waived.

The release states that "[b]ased on its financial condition, Innospec offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7 million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning allegations of violations of the Cuban Assets Control Regulations."

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

Innospec's "Inability to Pay" is also noted in the DOJ's plea agreement (see here).

In other Innospec news, the company's most recent 10-Q filing (see here) suggests that the company expects its compliance monitor to cost $3.9 million (see pg. 22).

This prior post discussed the civil complaint, based on the DOJ and SEC's allegations, filed against Innospec by a competitor alleging violations of
the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act.

Here is what Innospec had to say about this litigation in its recent filing:

"On July 23, 2010, NewMarket Corporation and its subsidiary, Afton Chemical Corporation (collectively, “NewMarket”), filed a civil complaint against the Company and its subsidiary, Alcor Chemie Vertriebs GmbH (“Alcor”), in the U.S. District Court for the Eastern District of Virginia. The complaint makes certain claims against the Company and Alcor with respect to alleged violations of provisions of the Robinson-Patman Act, the Virginia Antitrust Act and the Virginia Business Conspiracy Act as a result of alleged actions involving officials in Iraq and Indonesia pertaining to securing sales of the Company’s tetra ethyl lead (TEL) fuel additive, to the apparent detriment of the plaintiffs and their sales of a competing non-lead based fuel additive. The complaint seeks treble damages of an unspecified amount, plus attorneys’ fees, costs and expenses. The factual allegations underlying the complaint appear to relate to the same matters that were the subject of the Company’s recently-disclosed resolution with the DOJ, SEC, OFAC and SFO. On September 22, 2010, the Company filed a motion to dismiss. On October 4, 2010, NewMarket filed an amended complaint incorporating the Sherman Act and related claims in addition to its previous claims. The Company filed its response to the amended complaint and a separate motion to dismiss on October 29, 2010. The Company believes both the complaint and amended complaint are without merit and intends to defend them vigorously, but because of uncertainties associated with the ultimate outcome of these complaints and the costs to the Company of responding to them, we cannot assure you that the ultimate costs and damages, if any, that may be imposed upon us will not have a material adverse effect on our results of operations, financial position and cash flows. As at September 30, 2010 we had accrued $0.5 million in respect of probable future legal expenses and provided no additional accruals in respect of this matter."

Another Noisy Exit

Steven Jacobs was the President of Macau Operations for Las Vegas Sands Corp. ("LVSC"), a company with shares traded on the New York Stock Exchange (see here).

That is, until his termination on July 23, 2010.

In an October 20th complaint filed against LVSC in District Court, Clark County, Nevada (see here) alleging breach of contract and tort-based causes of action, Jacobs alleges, among other things, that LVSC's "notoriously bellicose" Chief Executive Officer and majority shareholder made several "outrageous demands" upon him including, but not limited to the following:

"demands that Jacobs use improper 'leverage' against senior government officials of Macau in order to obtain Strata-Title for the Four Seasons Apartments in Macau;"

"demands that Jacobs threaten to withhold Sands China business from prominent Chinese banks unless they agreed to use influence with newly-elected senior government officials of Macau in order to obtain Strata-Title for the Four Seasons Apartments and favorable treatment with regards to labor quotas and table limits;"

"demands that secret investigations be performed regarding the business and financial affairs of various high-ranking members of the Macau government so that any negative information obtained could be used to exert 'leverage' in order to thwart government regulations/initiatives viewed as adverse to LVSC's interests;" and

"demands that Sands China continue to use the legal services of a Macau attorney [...][an individual media is reporting as a member of a Chinese local government executive council] despite concerns that [the individual's] retention posed serious risks under the criminal provisions of the United States code commonly known as the Foreign Corrupt Practices Act ('FCPA')."

A LVSC spokesperson has been quoted as saying "While Las Vegas Sands normally does not comment on legal matters, we categorically deny these baseless and inflammatory allegations."

For other examples of recent noisy exists that may implicate the FCPA see this prior post.

Another Stumble For The DOJ In The Kozeny Affair

The DOJ continues to encounter problems in some of its signature FCPA prosecutions.

Earlier this month, it was the Giffen Gaffe (see here).

Last fall, U.S. District Court Judge Shira Scheindin (S.D.N.Y.) remarked at Fredrick Bourke's sentencing that "after years of supervising this case, it's still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both." (See here).

And then there is Victor Kozeny, indicted along with Bourke, and the alleged mastermind of the fraudulent investment scheme related to the privatization of state-owned businesses in the Republic of Azerbaijan.

In 2005, Kozeny was criminally charged (see here) with, among other charges, one count of engaging in a conspiracy to violate the FCPA and twelve counts of violating the FCPA.

To make a long story short, Kozeny remains the most famous FCPA fugitive living a comfortable life in the Bahamas. The DOJ's repeated efforts to extradite him from the Bahamas to the U.S. have failed. See here.

In the indictment, the DOJ asserted that "Peak House" a multi-million dollar property in Aspen, Colorado was the site of certain of Kozeny's criminal activity.

Peak House was sold in 2001 for approximately $22 million and the DOJ sought civil forfeiture of the funds it alleged were connected to Kozeny's criminal activity.

However, U.S. District Court Judge Harold Baer (S.D.N.Y.) recently concluded that the DOJ's attempt was barred by the statute of limitations.

This latest DOJ setback in the Kozeny affair would seem embarrassing for the DOJ given that Judge Baer criticized the DOJ's lack of diligence in even attempting to file a civil forfeiture suit in a timely fashion.

Judge Baer concludes his opinion (see here) by stating:

"It is unfortunate that this action, which appears to have some merit and involves a substantial amount of funds, must be dismissed on procedural grounds, but there is no question that the Government learned of the Peak House funds at the very latest by 2005 and sat on its hands until 2009."

Brian Whisler (here), a former federal prosecutor and current partner in
Baker & McKenzie's white collar practice and individual who brought this decision to my attention, noted that "this defeat on procedural grounds represents yet another bump in the road for DOJ in the Bourke/Kozeny matter and suggests that DOJ will likely persist in its pursuit of Kozeny now that a criminal conviction is legally required to effect forfeiture of the sale proceeds of Kozeny's Aspen home and other assets."