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Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Elizabeth K. Spahn Editor Emeritus

Cody Worthington Contributing Editor

Julie DiMauro Contributing Editor

Thomas Fox Contributing Editor

Marc Alain Bohn Contributing Editor

Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

Bill Steinman Contributing Editor

Aarti Maharaj Contributing Editor


FCPA Blog Daily News

Wednesday
Sep012010

When Money Talks, Do Individuals Walk?

Corporations can't be jailed for violating the FCPA. Their main punishment is financial -- criminal fines and, for issuers, civil penalties and disgorgement of profits.

Under the federal sentencing guidelines, corporate punishment depends in part on how much money was involved in the crime. For the FCPA, that means how much was paid in bribes and how much revenue and profit were generated by the bribes.

For example, the DOJ's Lanny Breuer has said Siemens got off cheap. Its $450 million criminal fine was "a far cry from the advisory range of $1.35 billion to $2.7 billion called for in the Sentencing Guidelines." Siemens, he said, received a penalty that was 67 to 84 percent less than what it otherwise could have faced had it not cooperated and taken dramatic corrective action.

Siemens also agreed to pay $350 million to the SEC in disgorgement. So the U.S. portion of its financial penalty was $800 million, still the largest FCPA settlement on record.

With so much money at stake, you'd expect FCPA units at the DOJ and SEC to be growing, and they are. Our question, though, is whether those agencies still want to prosecute individuals who violate the FCPA when they can instead deal with cooperating companies?

The DOJ says individuals are still a target. It cites the shot-show prosecutions -- 22 individuals indicted for FCPA violations -- and last year's mass FCPA indictment of eight CCI executives, six at one time.

But no one from Siemens, which Mr. Breuer himself called "arguably the most egregious example of systemic foreign corruption ever prosecuted" by the DOJ, has been indicted in the U.S. Even if that's because of jurisdictional problems, the Siemens executives walked on the FCPA violations. It's the same with the brass from U.K.-based BAE. The company paid $400 million to settle an FCPA case last year. But no one from BAE has faced U.S. charges. Again, Daimler AG paid $185 million in penalties this year, and so far no one from that company has been charged here.

The pattern is broken, but only slightly, by the biggest enforcement action of them all. From the four companies that made up the TSKJ consortium -- Technip, Saipem, KBR, and JGC -- just one U.S. executive and two Britons have been charged. Meanwhile, three of the four TSKJ companies have paid $1.28 billon to settle with the DOJ and SEC.

None of this proves that FCPA-related mega settlements are replacing individual prosecutions. But the pattern that's emerging suggests it.

Coming up: A look at individual and corporate enforcement numbers and the story they tell.

Tuesday
Aug312010

Squeal And Grow Rich

SEC headquarters in Washington, D.C.  Blowing the whistle to the SEC on FCPA violations by public companies can make you rich. Really rich. Rewards can be ten to thirty percent of amounts recovered. Based on the size of modern FCPA recoveries, that could be tens or even hundreds of millions of dollars.

Congress created the reward program as part of the 848-page Dodd-Frank financial reform law (here). The SEC hasn't issued final regulations for the program -- it has 270 days from Dodd-Frank's enactment on July 21 to do that. In the meantime, a whistleblower can still earn a reward.

Here's how:

► File complaints online. Use the right form. The one for reporting bribery (that is, violations of the FCPA's antibribery provisions) is here. Complaints can also be filed in letters to the SEC Complaint Center, 100 F Street NE, Washington, D.C. 20549-0213. Or by fax to 703-813-6965

► Include plenty of detail. There's no bright line. But the more detail, the SEC says, the more chance of an eventual reward. Only information that's original can be the basis for a reward -- not duplicate information already known to the SEC or that's come from an earlier whistleblower. So include attachments with the online form that support your complaint. Up to 5 megabytes is allowed. That should be enough for copies of emails, payment records, receipts, agreements, calendars, travel records, and the like.

► File alone or with someone else. A whistleblower, the law says, can be one person, or two or more complainants acting together.

► File in your name, or anonymously through a lawyer who won't disclose your name. But before any rewards are paid, the SEC has to know the whistleblower's identity. And when the case becomes a matter of public record -- i.e., after an enforcement action -- the whistleblower's name might be revealed.

► Follow the rules that cover the filing of whistleblower complaints. The law requires it. So check the SEC's site often to keep current.

► After you file, wait. Lawyers in the Division of Enforcement will evaluate the claim. But by law, the SEC generally can't disclose anything until there's an enforcement action. That's "to preserve the integrity of the investigative process as well as to protect persons against whom unfounded charges may be made." Not all complaints result in enforcement actions. So you may never hear back.

► Be patient. Your complaint is one of many. One law firm said a few weeks ago that it had "just in the last ten days filed several whistle-blower complaints with the SEC, pursuant to the new statute, involving major Wall Street firms, which filings appear to implicate hundreds of millions of dollars, if not more, of investor related fraud issues, including on behalf of former senior employee(s) of entities."

► Watch for retaliation. A whistleblower who thinks he or she has been discharged or discriminated against by an employer has two years to bring a claim in federal district court, and can recover actual and special (punitive) damages, plus attorney's fees.

Note: This post is only a summary. Refer to the SEC for complete guidance.

Monday
Aug302010

Siemens' Second Chance

During its billion-dollar internal investigation, Siemens discovered and documented 4,283 illegal payments related to 332 projects around the world. The total value of bribes paid was at least $1.4 billion, resulting in fines and penalties in the U.S. and Germany of about $1.6 billion.

That was 2008. What has Siemens done since then about compliance?

In FY2007, it had 173 compliance staff worldwide. By FY2009, the number had grown to 598. It has now given in-person compliance training to 1,400 senior managers, 80,000 employees with "sensitive functions," and 220 compliance officers. Another 140,000 employees have completed on-line compliance training (the company has about 400,000 employees). In FY2009, Siemens fired 244 employees for compliance breaches and disciplined another 473.

A few years ago, Siemens could have received a corporate death sentence. Its crimes were that bad. And its compliance program, if you could call it that, had been subverted. But instead of a death sentence, there was that rather painless settlement with U.S. and German authorities. Some complained that justice wasn't served.

A year before the settlement, however, new CEO Peter Löscher had said: Siemens endorses clean business. Period. I am not interested in deals that can only be had through corruption.

Compliance first, profit second, he said. People believed him. So the company got a second chance and made it count.

As Peter von Blomberg, the deputy chairman of Transparency International Germany, recently said: "The case of Siemens shows that companies can be successful without corruption. Even with a compliance monitor appointed by the U.S. authorities, a much larger compliance organization, and scrutiny of every transaction,  CEO Löscher just announced the best quarterly results ever."

That's why we like second chances.

*     *     *

We're grateful to i-Sight for its post about the recovery of Siemens, which included a company-prepared presentation about current compliance efforts.

Friday
Aug272010

Graft Buster Enters French Politics

Eva Joly, a Norwegian-born former French magistrate, is running for the French presidency under the Green Party banner.

She became famous across Europe for being a fearless anti-corruption campaigner, even taking on former minister Bernard Tapie and Crédit Lyonnais bank.

Her best-known case involved French oil giant Elf Aquitaine. She uncovered fraud leading to criminal convictions of Elf’s top two executives and to the resignation of Roland Dumas, president of France’s Constitutional Court. She received death threats during the eight-year investigation.

She moved from Norway to France at 18. After working her way through night law school and then practicing law, in 1990 she became an investigating magistrate in Paris.

She's also worked for the Icelandic government, helping it uncover white collar crime that contributed to the country's financial collapse.

Last year, Joly, 66, was elected as a French member of the European Parliament. Now she wants to run for president of France in the 2012 elections.

She told the France24 news site: “I am going into politics because I recognise the limitations of voluntary action … I have a strong desire to improve relations between the developed and developing world. I want to change power structures within society. I am desperate to see a more just and more united society.

*     *     *

Why say it? It's fashionable these days for critics -- we won't name them -- to say there's no evidence the FCPA has reduced bribery. But saying there's no evidence of crimes not committed isn't exactly, you know, conclusive of anything.

Then again, there's plenty of evidence of less bribery because of the FCPA at companies like Siemens, BAE, Daimler, KBR, ABB, Baker Hughes, Willbros, Chevron, and so on. For us, that's the evidence that counts.

*    *   *

In whose interests? Great post today from Kevin LaCroix at the D&O Diary -- Do Defendant Companies Financially Underperform Following Securities Lawsuit Settlements? 

Thursday
Aug262010

Promotional Expenses: Corrupt But Reasonable?

When Kyle Sheahen wrote in this space about how useless the FCPA's two affirmative defenses are, he kicked up a storm, especially about promotional expenses. Some readers agreed and others didn't (here and here). Here's Kyle's reply:

Dear FCPA Blog,

My thanks to everyone who responded with posts and comments. As Tom Fox thoughtfully said, the debate about promotional expenses is both useful and important, particularly because many corporations construct compliance programs in accordance with the language of the defense.  

My article attempts to identify the parameters of permissible conduct as defined by enforcement actions and DOJ opinions. But as another commenter said, determining what payments are “reasonable” for purposes of the defense remains an open question for individuals and corporations seeking to comply with the FCPA.

Further, while the promotional expenses defense is a useful (albeit flawed) compliance tool, it offers little protection for FCPA defendants facing an enforcement action. As I asked in my article, how would a defense permitting only “reasonable and bona fide” payments help FCPA defendants when the government must allege that the payments were made corruptly? Or as one commenter put it, “it is a non-sequitur to say that defenses ‘work’ – just not ‘at trial.’ Defenses that do not work ‘at trial’ are not defenses at all.”  

While the promotional expenses defense provides some inconclusive guidelines for compliance with the FCPA, it doesn't provide a meaningful defense to an enforcement action. That's the problem Congress should fix.

Thanks again for providing a forum for this debate and I welcome any further comments or emails.

All the best,
Kyle Sheahen
sheahen2010@lawnet.ucla.edu

Wednesday
Aug252010

Here's A Good Idea

Slovakia's Prime Minister Iveta RadičováSlovakia's new prime minister, Iveta Radičová, has ordered all proposed state contracts to be posted online to increase transparency and reduce corruption.

Radičová, 54, became prime minister last month as head of a four-party coalition. She's the first woman to lead the government.

Under the new tender rules, state contracts won't be effective until they're published online and the public has had a chance to comment. According to a story in the Slovak  Spectator, basic provisions of the contracts such as price, payment dates, the volume of supplied goods, conditions of termination, and sources of public funding will be disclosed.

“The proposal submitted by the government will significantly increase public control over the management of public funds and public property,” said Peter Wilfling, a local lawyer and open-government advocate.

The government is still working out some details, like how many sites will post the documents, how to consistently format the content, and how to avoid flooding the public with too much information. There will also be a mechanism to keep confidential and proprietary information off the sites.

Slovakia -- formed when the Slovaks and Czechs separated peacefully in 1993 -- is landlocked in central Europe. It joined NATO and the EU in 2004 and the euro zone last year. It has about five and a half million citizens. On the latest Corruption Perception Index, it ranked 56, tied with Latvia, Malaysia, Namibia, and Samoa.

Tuesday
Aug242010

A Shocking Confession

German police last Thursday raided a global pipeline-equipment supplier on suspicion of bribing foreign officials to win work.

The raid came two weeks after Eginhard Vietz, 69, the owner and managing director of Hanover-based Vietz GmbH, gave an interview to the German business newspaper Handelsblatt. Vietz told the paper his company and its competitors pay bribes in Africa, the Middle East, and Asia as a standard business practice.

Vietz GmbH supplies welding, bending, and testing gear for onshore and offshore oil and gas pipelines to customers world wide.

Mr. Vietz said his company regularly paid bribes "because there are certain countries where there is no other way to do it."

"Nobody is disadvantaged by what I am doing," he said, explaining he was only trying to keep his workers busy.

The Hanover prosecutor, Manfred Knothe, told the German Press Agency (DPA) that police raided the company's head office in Hanover and plants in Leipzig and Essen, seizing computers and files.

Knothe told DPA that "Vietz's description of the kickbacks had been so detailed that prosecutors had no choice but to investigate him on suspicion of corrupting others, an offence punishable by up to 5 years in prison."

Overseas bribery is sensitive in Germany. Since 2007, prosecutors have charged leading firms Siemens, Daimler, and MAN. Siemens and Daimler also faced FCPA enforcement actions in the U.S.

The Handelsblatt newspaper quoted Vietz as saying, "I don't feel I did anything wrong. You can't change the way the world is."

Last year, according to German press reports, Vietz accompanied Germany's economics minister on a trip to Abu Dhabi and Saudi Arabia. This year, he visited the United Arab Emirates as part of a delegation with state premier Christian Wulff, who's now Germany's president.

*   *    *

In the Handelsblatt interview, Eginhard Vietz said among other things that he'd paid bribes repeatedly. In countries such as Algeria, Egypt, and Nigeria, he said it's not easy to do business without bribery. "The same goes for Russia," Vietz said.

Asked about anti-corruption laws in the countries where he does business, he said China even has the death penalty for bribery. "Nevertheless, I have experienced myself that I could only win contracts through bribes. And I also have lost contracts because a competitor paid more."

Vietz said most of the people deciding who wins state contracts are poorly paid and easily bribed. "They're only human," he said. He usually bribes the senior management in purchasing departments -- the people who make the buying decisions. "They are mostly civil servants we are dealing with in these countries, mainly at state firms."

The payments are usually funded by inflating commissions to sales agents, he said, with the money then transferred to accounts in Switzerland and then passed on as bribes. The amounts are usually between 5% and 10% of the total contract value. He said those amounts are added to the prices he charges the customers, so his margins aren't reduced. He said he's always careful in structuring the payments to comply with German tax laws.

U.S. companies, he said, claim to be particularly clean but are actually the worst. The SEC, he said, uses its authority to prosecute foreign competitors, while U.S. companies make themselves world leaders with government protection. Asked for an example, he said three years ago in Moscow, while bidding for a big contract, he knew he was 40% below the offer of his American competitors. "Suddenly, the American ambassador spoke to the customer. I did not get the job."

Handelsblatt pointed out that since Siemens stopped paying bribes, it hasn't lost work or shed jobs because of compliance. Vietz replied, "I can't speak for Siemens. Maybe a large corporation has other possibilities. But I doubt that anyone can build large plants in countries such as Nigeria without making specific contributions."

*     *     *

Special thanks to a reader for sending the link to the August 10, 2010 Handelsblatt interview with Eginhard Vietz. It can be viewed here.

Monday
Aug232010

A House Divided

The battle at China North East Petroleum is about the FCPA and whether the company bribed Chinese officials. The escalating fight led to the loud exit two weeks ago of an American director who chaired the board's audit committee. He wanted to find out what the company's been up to, but was blocked.

Only a few months back, China North East Petroleum looked like the stuff of dreams. In March, its stock --  trading on the NYSE AMEX under the symbol NEP -- had climbed to $11 a share. A five-year investment in the company, reported the Motley Fool, would have returned 1,070.7%. And the future seemed just as bright.

In early April, TheStreet.com listed the China-based oil producer as one of the most undervalued public companies in the world. "If you believe that China is hungry for energy and the next crisis could be related to the global oil production surplus going into a deficit," it said, "this is a practical way to capitalize. It's hard to say since we're waiting on a report that could send the share price skyrocketing."

Then the dream died. By mid May the stock had fallen by 50%. And before the end of the month, AMEX halted its trading because the company failed to file annual and quarterly reports. Today the stock is still not trading and faces delisting. Meanwhile, a half dozen U.S. plaintiff firms have filed class action suits that alleged some present and former officers and directors violated federal securities laws by issuing false and misleading financial information to investors.

What happened? On April 20, the company disclosed material weaknesses in its internal controls. It said financial statements for the past few years weren't reliable and that it had been misstating net income and the value of its oil reserves. It later said senior officers at the company might have embezzled funds.

And there could be more. Last month, audit committee head Robert Bruce told his fellow directors the company needed an internal investigation to make sure it hasn't violated the FCPA's antibribery provisions.

Bruce, based in Maine and head of Oakmont Advisory Group, said, "I strongly believe that substantial additional investigation is required in order for the Company and/or the members of the board to be confident that . . . the Company has not made payments to government officials as proscribed by the U.S. Foreign Corrupt Practices Act."

When the board chairman -- a former diplomat and investment banker from Australia who sits in NEP's New York office -- refused, Bruce resigned.

We heard about the story from a reader who said: "This is a very fascinating and rare behind the scenes look at a high stakes internal dispute about FCPA compliance. I’m guessing that the inherent tension could be an emerging trend which may be why it’s playing out so publicly."

*     *     *

The letters between Robert Bruce and NEP's board are reproduced below. Those letters and the company's other SEC disclosure can be viewed here.

_________________________________


July 22, 2010
 
CONFIDENTIAL
 
Members of the Board of Directors
China North East Petroleum Holdings, Ltd
445 Park Avenue, 10th Floor
New York, NY 10022
 
Dear Mr. Wang, Mr. Li, Mr. Hu and Mr. Rule,
 
I am writing to express my strong concern that the Company faces a number of new and evolving financial reporting and accounting questions that require additional investigation, as I recommend below.
 
I have welcomed the Company's efforts to investigate and respond to accounting and internal control problems discovered during the preparation of the Company's 2009 year-end financial statements and associated 10-K filing.  However, I believe that the Company must take additional steps to investigate questions raised by the John Lees Associates (“JLA”) report dated July 10, 2010 (the “JLA Report” or the “Report”), including: a) whether the Company's previously filed financial reports and associated financial statements are materially correct under U.S. Generally Accepted Accounting Principles (“US GAAP”), and b) whether the Company has made payments to government officials as proscribed by the U.S. Foreign Corrupt Practices Act (“FCPA”).
 
The JLA Report has indicated that, in spite of a very large number and amount of unauthorized transfers of Company funds between certain Company directors (namely Mr. Hongjun Wang and Ms. Guizhi Ju) and the Company's Chinese subsidiaries, no evidence exists to indicate that funds were misappropriated, stolen or otherwise misused by Mr. Wang and Ms. Ju.  This is indeed a favorable result, and is consistent with contentions by Mr. Wang and Ms. Ju that they have not misused or stolen any of the Company funds that were transferred to them.  However, the JLA Report does not answer the two questions noted above. In fact, information contained in the JLA Report, essentially all of which was not known to me (and I presume to the other independent directors, Mr. Rule and Mr. Li) prior to completion of the Report, clearly raises important questions with respect to both the potential for material misstatements on a US GAAP basis and the ability of the Company to affirmatively attest to compliance with the FCPA (simply based on the massive internal control failures documented in the JLA Report).

Therefore, I formally recommend that the Company immediately take the following steps:

1.     Authorize the Audit Committee of the Board of Directors (the “Committee”) to undertake a thorough and independent review of the Company's prior financial statements, associated SEC filings, and cash payments to persons who may be deemed “government officials” under the FCPA, over the past five years;
            
2.     Authorize necessary funding for this Committee review process;
            
3.     Authorize the Committee to retain additional outside investigative and accounting resources, as required or beneficial in the Committee's sole judgment, including:
            
a.     A U.S. legal firm that has a strong SEC enforcement and FCPA practice;
                  
b.     A forensic accounting firm with a strong understanding of U.S. GAAP;
                  
c.     Other investigative resources, as necessary, to answer definitively the questions referred to above.

I recognize that these recommendations have significant ramifications for the Company.  Namely, a full and complete investigation will likely require at least three months to complete, and possibly as long as twelve months.  Additionally, the costs would be likely be very significant - I estimate that these efforts would require $2 million to $5 million, in addition to the amounts spent to date for the JLA Report and related legal costs. This investigative effort would require that the Company's financial statement and SEC reporting process would be further delayed, most likely until the investigations could be competed. This in turn would likely lead to the Company's delisting by NYSE AMEX and possible additional shareholder litigation.
 
However, failure by the Company to undertake what I believe are necessary additional investigative efforts as outlined above will, in my opinion, lead to an end result that is likely worse for shareholders, Company management and directors.  Absent these immediate additional investigative efforts, I would be unable to continue in my capacity as an independent director for the Company.
 
On a related note, I believe that the findings of the JLA Report require that the Company immediately initiate a self-reporting process with the Enforcement Division of the SEC. The Company cannot consider its prior communications with the SEC's Division of Corporate Finance to constitute any form of communication to the Enforcement Division. Given the internal control problems and the possible US GAAP issues with the Company's historical financials statements identified in the JLA Report, self-reporting will establish a record with the SEC of the Company's commitment to investigate and remediate historic issues, which the SEC would certainly take into account when considering sanctions for potential regulatory or legal violations that the Company may ultimately be found to have committed.

I would like to make clear that by recommending these additional investigative efforts, I am not implying or stating knowledge of any violations of FCPA, that Company funds have been misused, or that the Company's financial statements and prior SEC filings are materially misleading (other than findings with respect to each of these areas outlined in the JLA Report, and with respect to the previously announced restatement effort).  Rather, I believe that the information and findings contained in the JLA Report unambiguously indicates that neither the Company nor the directors can state with confidence that: a) the Company is free of FCPA violations, b) that Company funds have not been misused in periods prior to January 1, 2009, or c) that the Company's financial statements and prior SEC filings are free of material misstatements.
 
Unfortunately, the only way to arrive at an affirmative conclusion regarding these important questions is through the further in-depth investigation I have recommended above.  I therefore request that the board convene a meeting at the soonest possible opportunity to consider these recommendations.
 
Sincerely,
/s/ Robert C. Bruce
Robert C. Bruce

Director, and Chair of the Audit Committee

_________________________________________

August 5, 2010
 
Robert C. Bruce
Oakmont Advisory Group, LLC
477 Congress Street, Suite 1002
Portland, ME 04101
 
Re: The letter to the Board of Director
 
Dear Mr. Bruce,
 
As Chairman of the NEP Board of Directors, I would like to thank you for your letter dated July 22, 2010.  The Company very much appreciates the thought you devoted to the letter.  I also want to acknowledge the hard work you have expended on behalf of the Company and your commitment to improving the quality and productivity of its business. I would like to take this opportunity to respond briefly to the concerns and assertions in your letter.
 
I appreciate that you “welcome the Company’s efforts to investigate and respond to the accounting and internal control problems” that recently have emerged.  I also appreciate your express acknowledgement that, after the painstaking forensic audit of John Lees Associates (“JLA”), “no evidence exists to indicate that funds were misappropriated, stolen or otherwise misused” by anyone. I assume you also appreciate the substantial and costly efforts of the Company in assembling the restated 10Qs for the first three quarters both of 2008 and 2009, as well as finishing the 10K for 2009 and the 10Qs for the first two quarters of the year.  Your input into these efforts was invaluable.
 
I also appreciate your express acknowledgment that, by suggesting certain action, you do not intend to imply or state “any knowledge of any violations” of the Foreign Corrupts Practices Act (“FCPA”).  As you know, in its meticulous forensic report, JLA did not identify a single violation of the anti-bribery provisions of the FCPA or identify a single transaction in which such a violation even may have occurred. Nor did JLA recommend any investigation into any prior transactions.
 
Regarding the “additional steps” to which you allude, we wish to make some brief comments.  As you know, the Board of Directors has now received a confidential memorandum from company counsel, the Crone Law Group, that recommends certain action and changes for the Board to consider regarding the FCPA.  The Board will duly consider the recommendations at its upcoming meeting.
 
I anticipate that the Board also will undertake, at the appropriate time, through the appropriate personnel, a review of the Company’s financial filings prior to 2009, although based at least on the JLA report, it seems unlikely the review would necessitate any material changes.  Nor does it appear that such an undertaking is urgent or at all time sensitive.  The Company is focused on the goal of completing the compliance plan that NYSE-AMEX has approved and thus ending the current trading halt of its stock. I believe this goal is in the best interests of our shareholders, and see no basis to jeopardize this goal with a review of the 2008 and 2007 filings at this time for the reasons stated.  Further, as you note, you are unaware that any of the filings in those years contain any “materially misleading” statements.
 
I also do not believe, however, as you apparently do, that taking action that results in the delisting of the Company from NYSE AMEX is in the best interests of our shareholders.  You suggest that rather than focus on completing the current compliance plan that NYSE AMEX has approved, the Company instead conduct an FCPA investigation, which you project could last as long as a full year and cost the Company as much as several millions of dollars,  notwithstanding  that a recent forensic audit did not find any basis to presume the likelihood  of a single FCPA violation. And, you admit that this action “would likely lead to the Company’s delisting by NYSE AMEX and possible additional shareholder litigation.” As you know, a delisting could destroy shareholder value.  Thus, the course of action you recommend that the Board pursue seems at odds with the prudent discharge of duties to the shareholders.
 
I look forward to discussing these matters further at the next board meeting

Very truly yours,

/s/ Edward Rule
Edward Rule
      
Chairman of the Board of Directors
China North East Petroleum

_______________________________________

 

August 8, 2010

Members of the Board of Directors
China North East Petroleum Holdings, Ltd
445 Park Avenue, 10th Floor
New York, NY 10022

Dear Mr. Wang, Mr. Li, Mr. Hu and Mr. Rule,

I am writing to tender my resignation as a member of the board of directors of China North East Petroleum Holdings, Ltd (the "Company" or "NEP"), effective immediately. I have reached this difficult decision as a result of a conclusion that there is a substantial disagreement between me and you regarding the appropriate action of the Company with respect to further investigation into the Company's prior period SEC filings, internal controls and cash activity.

As I noted in detail in my letter to you dated July 22, 2010, a copy of which I attach and incorporate as part of this letter, I strongly believe that substantial additional investigation is required in order for the Company and/or the members of the board to be confident that the Company's previously filed financial reports and associated financial statements are materially correct under U.S. Generally Accepted Accounting Principles ("US GAAP"), and that the Company has not made payments to government officials as proscribed by the U.S. Foreign Corrupt Practices Act ("FCPA"). In his capacity as Chairman of the board, Mr. Rule responded to my July 22nd letter on August 5, 2010, and presumably did so on behalf of the Company and other members of the board. In his August 5th letter, Mr. Rule makes it quite clear that he and the Company disagree with and will not support my recommendations.

With all due respect, as I detailed in my July 22nd letter to the board, I believe that the Company can best serve the interests of its shareholders by taking the steps that are necessary to regain confidence that it's previously filed financial statements, the pending restatements and related internal controls are in compliance with applicable securities laws and regulations.

As noted above, I believe our differing views on this critical question represent a fundamental disagreement that I have with the Company and the board relating to a matter of operation, policy or practice. Therefore, I believe I have no choice but to tender my resignation, effective immediately, and note that this letter, as well as my attached letter of July 22, 2010, should be filed as an exhibit as part of the Company's required report under Item 5.02 of SEC form 8-K.

Sincerely,
/s/ Robert C. Bruce
Robert C. Bruce

Friday
Aug202010

Nigeria's Crooked Blue Line

A new report from Human Rights Watch, Everyone's in on the Game, describes the enormous challenges police face every day in Nigeria. Despite that, many officers serve with honesty and full merit, it says.

But there's institutionalized corruption at every level. Innocent people are regularly detained and a fee demanded for their release. Rank-and-file police officers are often forced to pay their senior officers a share of the money they extort from the public. 

Human Rights Watch interviewed 145 Nigerians from 2008 until last month -- including market traders, commercial bus drivers and passengers, okada (commercial motorcycle) drivers, sex workers, criminal suspects, and victims of common crimes. It also talked with rank-and-file and senior police officers, federal government and anti-corruption officials, judges, prosecutors, lawyers, religious and civil society leaders, journalists, diplomats, and members of an armed vigilante group.

"People who are assigned to lucrative posts such as roadblocks or working traffic are given monetary targets that they must meet and then give back to their superiors," lead researcher Eric Guttschuss said. Police officers said punishment for failing to meet monetary targets was a transfer to a less lucrative post.

Guttschuss said, "I interviewed a father in Anambra State, whose only son, a 16-year-old boy, was arrested by the police. They detained him and tortured him over an extended period and then demanded money from the father in order for his release."

The father paid, but not everyone can afford to. "Unfortunately we also interviewed people who were unable to pay the money and who's loved ones were then found later to be in a hospital morgue, dead," he said.

*     *     *

Here's how Everyone's in on the Game begins:

Countless ordinary Nigerians attempting to make precarious ends meet as taxi drivers, market traders, and shopkeepers are accosted on a daily basis by armed police officers who demand bribes and commit human rights abuses against them as a means of extorting money. Those who fail to pay are frequently threatened with arrest and physical harm. Far too often these threats are carried out.

Meanwhile, victims of crime are obliged to pay the police from the moment they enter a police station to file a complaint until the day their case is brought before a court. In the shadows, high-level police officials embezzle staggering sums of public funds meant to cover basic police operations. Senior police officers also enforce a perverse system of “returns” in which rank-and-file officers are compelled to pay up the chain of command a share of the money they extort from the public.

Those charged with police oversight, discipline, and reform have for years failed to take effective action, thereby reinforcing impunity for police officers of all ranks who regularly perpetrate crimes against the citizens they are mandated to protect.

Thursday
Aug192010

Tillery's 'Extraction'

A report this week from Nigeria said FCPA fugitive James "Ken" Tillery has been seized by the FBI in Lagos and is being held by American authorities. But another report on Wednesday said the Nigerian high court had halted the extradition at least until the end of the month because due process wasn't followed.

Tillery, 51, was the managing director of Willbros in Nigeria. He was indicted in 2008 along with Willbros' consultant Paul G. Novak. They were charged with one count of conspiracy to violate the FCPA, two counts of violating the FCPA in connection with the authorization of specific corrupt payments to officials in Nigeria and Ecuador, and one count of conspiring to launder the bribe payments through companies controlled by Novak.

Novak, 43, pleaded guilty in November 2009 to paying $6 million in bribes to officials who worked in the Nigerian government, in government-owned companies, and in a political party there. He hasn't been sentenced.

Tillery has been at large since his indictment. If convicted of all charges, he faces up to 35 years in prison.

One report from Nigeria said the next hearing on Tillery's extradition will be on August 30.

In May 2008, Willbros Group Inc. and Willbros International Inc. entered into a deferred prosecution agreement and agreed to pay a $22 million criminal penalty for the illegal payments to government officials in Nigeria and Ecuador. 

In January this year, two former Willbros executives were jailed for bribery. Jim Bob Brown, 48, was sentenced in federal court in Houston to one year and one day in prison and fined $17,500; Jason Edward Steph, 40, was sentenced to 15 months and fined $2,000. Brown had pleaded guilty in 2006 and Steph in 2007.

An African press report said Tillery is "an American by birth, who had since naturalized as a Nigerian." It  said normal extradition procedures weren't followed and characterized Tillery's arrest as an "extraction" and a "forceful extradition."

The U.S. Justice Department hasn't publicly commented.

Thursday
Aug192010

Defending The Defense

By Thomas Fox

I want to thank Kyle Sheahen for his recent post and paper arguing that the promotional expenses defense under the FCPA is illusory. His work has stimulated a useful debate.

From a perspective different than previous commenters (here), I'd like to state the case for the value of the defense.

Generally, enforcement actions that discuss promotional expenses -- including those Kyle cited in his paper -- involve expenses that were neither bona fide nor reasonable as required by the FCPA. The cases include:

Lucent Technologies - $10 million in trips, primarily to vacation destinations in the U.S., including $34,000 for five days of sightseeing, wrapped onto a three day trip of business activity.

Ingersoll Rand - holiday excursion to Florence after visiting the company’s facilities in Vigante, Italy. The excursion to Florence included payment of $1000 in “pocket money”.

Metcalf & Eddy - first-class travel to the U.S. for foreign officials and per diem cash payments equivalent to 150% of estimated daily expenses.

Syncor -the SEC said payments for promotional expenses came “mostly came in the form of sponsorships for the doctors' attendance at educational seminars, including payments for registration fees, travel, lodging, and meals” but also included “gifts of computer equipment, software, office furniture, and medical supplies to doctors and their hospitals; sponsorships of social functions and fundraisers at the hospitals; funds provided to cover the cost of temporary employees at the hospitals; and payments made for outside testing when a particular hospital's laboratory equipment was not functioning properly.”

Titan Corporation - there's a reference to an authorization for a $20,000 payment for promotional travel expenses, with the notation that it was unclear if the payment was made. However this was in the context of at least $2 million paid in bribes to government officials. Even if the $20,000 was not paid, there were other  facts on which to base the enforcement action.

I would argue that none of the above enforcement actions involved promotional expenses which were either bona fide or reasonable. Based on the foregoing, I think companies subject to the FCPA have sufficient guidance on what constitutes a bona fide or reasonable promotional expense. I also believe the cases cited in the article can be used as solid teaching points on what is not bona fide or reasonable without having to try and ascertain the intent to corrupt.

Thomas Fox is an attorney in Houston, Texas, specializing in FCPA compliance, risk management and international transactions. His blog can be found here and he can be reached at tfox@tfoxlaw.com.

Wednesday
Aug182010

The Law Ain't Broke

On Monday, Kyle Sheahen told us how useless the FCPA's two affirmative defenses are. He suggested that Congress fix the local-law and promotional-expenses defenses.

But at least two readers, one from the private sector and another from the DOJ (apparently), dissented. Both believe the defenses work, just not at trial. Here's what they had to say.

From Compliance Officer, August 16:

While the promotional expenses defense might not be useful at trial, it is the underpinning for a lot of companies' compliance programs around gifts. Companies must give gifts when operating internationally; it is simply too much a part of a lot of cultures to avoid. When operating in the public sector, however, these gifts present FCPA issues.

Companies use the promotional expenses defense to justify their permissive gift-giving policies.

From a compliance perspective, the problem with the defense isn't its utility---or lack thereof---at trial, but rather that it permits gifts during the course of the contracting process. When I'm analyzing a gift, I look at the potential for corrupt intent, and the affirmative defense. During the contracting process, you're more squarely under the defense, but to my mind, the optics are worse when looking at potentially corrupt intent. It looks like you're giving the gift to get the contract.

But if the gift is just to "maintain the relationship" (a phrase I hear quite often), you're less covered by the defense, but there's less chance that you're trying to get a quid pro quo.

And from Federal Prosecutor, August 17:

One cannot deduce from the lack of successful uses of statutory defenses at trial the conclusion that those defenses are meaningless.

In practice, trials take place in but a small subset of cases brought, cases brought are but a small subset of investigations, investigations look at but a small subset of real-life situations, and only a small subset of real-life situations are going to raise these particular factual issues in the first place. The ability of these statutory defenses to steer behavior within acceptable limits and to ward off prosecution cannot be judged by how many trial defendants get off on them. There is no need for a legislative fix just to even the odds for trial defendants.

That the law ain't broke is best exemplified by the author's dismissive discussion of OECD's suppression of affirmative defenses based on extortion. This is a considered policy choice to flush out corruption by giving no quarter to businessmen who wittingly profit from it. Permitting a defense based on extortion would simply take the heat off of businessmen to comply with the law, to report corrupt officials squeezing them, and to blow the whistle on their competitors who take the easy way. The end result of such a defense -- more corruption. Admittedly, though, there may be more exciting trials for law students to follow.