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Richard L. Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Harry Cassin Managing 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
Dec162009

Another Indictment In Panama Bribes Case

A Virginia man yesterday became the second person charged with bribing former Panamanian government officials in exchange for maritime contracts. John W. Warwick, 63, was indicted by a federal grand jury in Richmond for conspiracy to violate the Foreign Corrupt Practices Act. He allegedly plotted with others to pay foreign officials to obtain business for Ports Engineering Consultants Corporation (PECC). The company was a Panama affiliate of Overman Associates, a Virginia Beach engineering firm.

Last month in the same case, Charles Paul Edward Jumet, 53, pleaded guilty to a two-count criminal information. He admitted conspiring to violate the FCPA by making corrupt payments to government officials in Panama on behalf of PECC and giving a false statement to the FBI about how he paid some of the bribe money. He's scheduled to be sentenced on February 12, 2010. See our post here.

Warwick's indictment alleges that he, Jumet and others conspired to make corrupt payments totaling more than $200,000 to the former administrator and deputy administrator of the Panama Maritime Authority and to "a former, high-ranking elected executive official" of Panama. In December 1997, Panama awarded PECC a no-bid, 20-year contract to maintain lighthouses and buoys. Warwick was the company's former president.

If convicted, Warwick faces a maximum of five years in prison and a fine of the greater of $250,000 or twice the gain or loss. The indictment seeks forfeiture of the proceeds Warwick and Overman Associates received from PECC's Panama contracts.

As the DOJ says, an indictment is merely an accusation and the defendants are presumed innocent until and unless proven guilty at trial beyond a reasonable doubt.

View the Justice Department's December 16, 2009 release here.

Download a copy of the December 15, 2009 indictment in U.S. v. Warwick here.

Tuesday
Dec152009

SFO Gives Self-Reporting Guidance

This is a guest post from D.C. lawyers Drew Harker and Keith Korenchuk.

__________________

Dear FCPA Blog,

The director of the U.K.'s Serious Fraud Office, Richard Alderman, recently clarified some of the SFO's positions on its new approach to overseas corruption in a December 7, 2009 open letter to our partner, Marcus Asner. A full copy of the letter can be downloaded here. Here's a summary:

Mr. Alderman’s letter answered five questions about the SFO’s enforcement policy.

1. What criteria will the SFO apply when deciding whether to treat a self-reported matter criminally or civilly?

  • The seriousness of the wrongdoing;
  • Whether the matter is an isolated incident or whether the company has uncovered other examples of this type of misconduct;
  • Whether the wrongdoing is systematic and part of the company’s established practice;
  • Whether the affected group within the company was warned that its processes were inadequate;
  • Whether the company reported the matter to the SFO within a reasonable time of discovering the incident; and
  • Whether the report provided to the SFO is detailed and complete.

2. What scope of investigation will satisfy the SFO and avoid the need for additional, SFO-directed investigation?

The SFO’s strong preference is that all investigative work on the facts surrounding the wrongdoing be carried out by the company’s professional advisors and not by the SFO itself. The SFO expects self-reporting companies to present the SFO with reports that allow the SFO (1) to determine whether the company has fully investigated the issues; and (2) to discuss remediation measures with the company. Mr. Alderman recognized that the cost of investigations can become unwieldy and suggested a rule of reason will apply, noting: “we are anxious not to put disproportionate cost on the corporates.”

3. Under what circumstances would monitors be appointed?

The SFO is taking a nuanced approach to monitoring. Mr. Alderman stated that the SFO’s goal with monitorships will be to balance assuring the public that the company is genuinely committed to anti-corruption measures while not imposing disproportionate burdens on the company. Specifically, Mr. Alderman noted the SFO will not appoint a monitor in cases where a company’s board proves that it is committed to enforcing an anti-corruption corporate culture.

In cases involving more serious violations of anti-corruption laws, the SFO will implement some “light touch,” on-going monitoring. In those cases, the SFO will expect a company to propose monitors in the first instance. Mr. Alderman further stated that the SFO will not impose a specific monitor against the wishes of a company’s board. Finally, the SFO will work with its international counterparts in assigning monitors in cases where the conduct at issue involves other jurisdictions.

4. What position will the SFO take on attorney-client privilege?

Mr. Alderman acknowledged that the concept of the waiver of attorney client privilege differs under U.K. and U.S. law. The SFO will not expect companies to provide documents reflecting legal advice the company received on how to conduct the investigation, the types of remediation to be discussed with the SFO or issues relating to conducting negotiations with the SFO. However, the SFO does expect to be provided a full factual report on the investigation, including any relevant interview notes from the investigation. Mr. Alderman stated that the SFO expects companies to waive any privilege with respect to these materials. The SFO is primarily interested in factual reports and suggests that legal advisors seeking to protect the companies’ privileges could separate the fact issues from legal advice when preparing the materials to share with the SFO.

As has been discussed following the issuance of the U.S. Justice Department's Filip Memo, even a requirement that lawyer-discovered facts be disclosed raises genuine concerns about preservation of the attorney-client privilege. The SFO appears to go even a step further, suggesting it will require the production of actual interview notes.

5. Will the SFO ever close a voluntary disclosure case without any actions?

In limited cases, the SFO could terminate its involvement in a matter (1) if special circumstances apply and the company offers to pay suitable remediation; or (2) if after the company self-reported to the SFO at an early stage of the investigation, the ultimate report on the investigation provided to the SFO does not support the initial suspicions of corruption. Mr. Alderman stated that due to the strong public interest in publicly announcing these settlements, it expects that these instances will be comparatively rare. Mr. Alderman did not explain what special circumstances would lead to SFO’s terminating its investigation, but he noted that the SFO has done this in “a few cases at present.”

________________

Monday
Dec142009

U.K. Bans Kenyans For Corruption

Britain has banned 20 Kenyans from entering the country. According to reports last week from the BBC and others, the names of those banned haven't been made public but they may include senior civil servants, politicians and businessmen. Britain's High Commissioner (ambassador) to Kenya, Rob Macaire, said the ban was necessary because Kenya has never convicted a senior official of corruption.

In November, the U.S. ambassador to Kenya, Michael Ranneberger, confirmed on his Twitter page that the U.S. government had denied a visa to Kenya's attorney general Amos Wako. It was the first time an American official had revealed a visa determination under Presidential Proclamation 7750, the executive order giving the State Department the power to exclude foreign kleptocrats, their families and friends. See our post here.

In July 2007, the U.K.'s Serious Fraud Office opened a criminal investigation into contracts between the Kenyan government and a U.K. business known as Anglo Leasing Finance. The contracts for passport controls and border security systems were awarded to phantom overseas companies at inflated prices that topped $100 million. Kenya refused to cooperate and in February this year the SFO ended its investigation, saying without support from the Kenyan government the case couldn't be prosecuted.

Attorney General Wako has denied being involved in corruption and blamed the lack of cooperation with the SFO on Kenya's judicial system. 

Kenya's former top anti-corruption officer, John Githongo, began investigating Anglo Leasing Finance after his appointment in 2002. He delivered his report to President Mwai Kibaki in November 2005. (A copy, later leaked to the public, can be downloaded here.) He received death threats and fled to England. From there, Githongo publicly blew the whistle on many of Kenya's top politicians. President Kibaki was forced to fire three ministers -- though he reappointed two of them a year and half later.

Sunday
Dec132009

MAN Group Fined €150.6 Million For Bribery

German truck maker MAN Group said on Friday that two subsidiaries will pay fines of €75.3 million each to German authorities to resolve corruption charges first disclosed in May this year (here). The fines were imposed against MAN Nutzfahrzeuge AG (the commercial vehicles division) and MAN Turbo AG (the compressors / turbines division) by the public prosecutors' office in the Munich District Court. The company announced at the same time a €20 million settlement with German authorities for unpaid taxes. MAN's releases about the settlements are here and here.

The company separately disclosed (here) that two executive board members of MAN Turbo had resigned "to clear the way for new management." Dr. Gerhard Reiff had been on the board since 2005 and Dr. Stephan Funke since 2007.

MAN's internal investigation uncovered suspicious payments of €51.6 million relating to around 80 transactions. The payments were found in a number of countries and most were through agents and other intermediaries. The company said it has fired 20 employees and is considering suing them for damages. It didn't disclose the countries involved or who may have received illegal payments in the form of "so-called referral commissions." The internal investigation involved "around 70 lawyers, auditors and tax experts . . . working since mid-May to analyze the suspicious payments made in the last ten years at all of MAN’s subgroups."

MAN is Germany's second largest truck, bus and diesel-engine manufacturer behind Daimler AG. It reported revenue in 2008 of €14.9 billion and has 51,000 employees worldwide.

The company said it launched a compliance initiative in July. It said it will disclose to prosecutors any future suspected bribery cases and cooperate with them, establish a revamped compliance office on January 1, 2010 reporting directly to the executive board, provide hands-on compliance training to all employees in sales, purchasing, and marketing jobs, use an IT system designed to reveal any suspicious payments, abolish "referral commissions," and impose due diligence requirements on all agents. MAN said it will also continue talks with various anti-corruption NGOs about joint projects.

The company is listed on the German DAX and its largest shareholder is Volkswagen. MAN AG's ADRs trade on the over-the-counter pink sheets under the symbol MAGOY.PK. It hasn't disclosed any investigations by the U.S. Justice Department or SEC.

Friday
Dec112009

SEC Charges Ex-Pride VP

The Securities and Exchange Commission accused Bobby Benton, a former vice president of offshore drill rig operator Pride International, of violating the Foreign Corrupt Practices Act. He allegedly bribed Mexican officials in 2004 and altered the company's accounts to hide the payments. The SEC's December 10 civil complaint (below) was filed in federal court in Houston.

The SEC accused Benton of authorizing a third party to pay off Mexican customs officials and concealing bribes to Mexican and Venezuelan officials between 2003 and 2005. Benton allegedly deleted references in the audits to about $384,000 in payments made by “the manager of the Venezuelan branch of a French subsidiary of Pride” to third-party companies. The SEC said the alleged bribes went to a Venezuelan state-owned oil company official to extend three drilling contracts.

Pride disclosed in SEC filings including its latest quarterly report (here) an internal investigation into the company's Latin America operations that began in February 2006. It said possible FCPA violations were found, including payments of less than $1 million to government officials in Venezuela and Mexico. 

Benton is accused of authorizing a $10,000 bribe in 2004 to ensure a Mexican customs official would overlook deficiencies in a Pride supply boat. He's also accused of redacting references to another $15,000 bribe paid by an agent of Pride's Mexican subsidiary to keep a Mexican customs official from delaying a drilling rig for customs violations, according to the complaint.

The SEC is seeking a civil penalty and disgorgement from Benton, as well as an injunction against future violations.

Pride's internal investigation also found evidence of illegal payments of less than $2.5 million from 2001 through 2006 directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, India, Nigeria, Libya, Angola and the Republic of the Congo. The payments related to clearing rigs and equipment through customs, resolving customs disputes, immigration, tax, licensing and merchant marine issues. 

The company self-disclosed the results of its investigation. It said it is in talks with the DOJ and SEC "regarding a potential negotiated resolution of these matters, which could be settled during 2009 and which . . . could involve a significant payment by us." It said a settlement is likely to "include both criminal and civil sanctions." The DOJ hasn't yet announced any enforcement actions involving Benton or the company.

View the Securities and Exchange Commission's December 14, 2009 Litigation Release No. 21335 in SEC v. Bobby Benton here.

Download the civil complaint in SEC v. Bobby Benton, Civil Action No. 4:09-CV-03963 (S.D. Texas, December 11, 2009) here.

Thursday
Dec102009

The Real Price Of Petty Graft

Corruption may have been a cause of the night club fire last week in the Russian city of Perm that killed 113 people. Alexander Fridman, an entertainment producer there, told the Christian Science Monitor, “Fire inspectors found violations of the regulations a year ago, yet they didn’t come back to check whether corrections were made. Why was that? There were hundreds of people gathering at that club every night, yet they never closed it down. The basic lesson is that fire inspectors should not take bribes.”

Russia's red tape is terrible. The country ranked 182 out of 183 on the World Bank's 2010 Doing Business Index in the category of "Dealing with Construction Permits." It takes an average of 704 days to obtain the permits needed to build a warehouse in Russia; the OECD average is 157 days. Such extreme bureaucratic delays mean petty corruption is the only way to keep things moving.

The Christian Science Monitor said, "Amid Russia’s decaying infrastructure and often jury-rigged new construction, the potential for accidents [such as the nightclub fire] abound because laws are not enforced, experts say." A professor at Moscow's Institute of Architecture said most public buildings are hazards. “As long as we have this practice of paying bribes rather than making the needed improvements," he said, "nothing will change."

The story said 18,000 Russians die each year in fires, several times the rate in most developed countries. The U.S., with twice Russia's population, had 3,500 fire fatalities in 2008.

*   *   *

More on the indictment of Joel Esquenazi and Carlos Rodriguez (reported here). The two Florida residents were identified by the DOJ as the president and a former vice president respectively of "Company X." The company is Terra Telecommunications Corp., formed in Nevada on July 1, 1996 and domesticated in Florida in 2002. A copy of its Florida business registration can be downloaded here. Thanks to the U.S. readers who provided this information.

*   *   *

Women in Kabul marched against corruption. As reported by the LA Times and others, hundreds of women on Wednesday held a peaceful but noisy street protest. They want President Karzai to remove from his government anyone connected to corruption and the drug trade. "These women are being very brave," said the protest leader, her face hidden by a burka. "To be a woman in Afghanistan and an activist can mean death. We want justice for our loved ones!" The protest group called itself the Social Association of Afghan Justice Seekers. A spokesperson said "our people have gone into a nightmare of unbelieving" because of the disputed election and the fact that "the culture of impunity" still exists despite Karzai's vow to eliminate it.

Wednesday
Dec092009

CCI Judge Limits Discovery From Feds

A ruling this week in the Foreign Corrupt Practices Act prosecution of four former executives of Control Components Inc. (CCI) could have implications for defendants in other FCPA and white collar cases. The U.S. District Court in Santa Ana, California on Tuesday rejected the defendants' motion to obtain discovery of CCI's internal investigation through the Department of Justice.

Stuart Carson, Hong Rose Carson, Paul Cosgrove, and David Edmonds had argued that due to CCI's plea agreement with the DOJ, which required CCI to produce all records related to foreign bribery, the government had "constructive possession" of CCI's documents even though it took physical delivery of only a small portion. The volume of material was enormous -- 5.6 million documents, equating to 75 million pages. Because of the government's "constructive possession," the defendants argued, they could obtain all the material through the DOJ instead of CCI (thereby short-circuiting any objections to discovery CCI might have). But the court disagreed.

The defendants had relied on Judge Kaplan's decision in the KPMG case in the Southern District of New York. It tended to support the defendants' motion. But Judge James Selna rejected the motion and said the former CCI executives couldn't obtain discovery from CCI through the DOJ. His ruling took a narrower view of Judge Kaplan's order in the Stein case, which has been seen as an important help to white-collar defendants. Judge Selna said:

At the end of the day, Carson’s argument rests on the district court decision in United States v. Stein, 488 Supp. 2d 350 (S.D. N.Y. 2007). There are many reasons not to follow Stein’s lead. First, the terms of the Deferred Prosecution Agreement executed by KPMG in Stein were sweeping and open ended:

"8. KPMG agrees that its continuing cooperation with the Office's investigation shall include, but not be limited to, the following:

(a). Completely and truthfully disclosing all information in its possession to the Office and the IRS about which the Office and the IRS may inquire, including but not limited to all information about activities of KPMG, present and former partners, employees, and agents of KPMG . . ."

(Id. at 353; emphasis supplied; internal quotation marks deleted.) By no stretch of the imagination did CCI enter into an agreement allowing the Government to request anything in the possession of CCI. The KPMG agreement is devoid of the subject matter and comprehensive privilege strictures for which CCI bargained. (Plea Agreement, ¶¶ 6.) Even if Stein were taken at face value, it would not justify the blanket production of much of what Carson requests, including most specifically CCI’s Electronic Database.

Judge Selna also issued a separate order rejecting the defendants' motion to dismiss several counts of the indictment. The order included a nice discussion of the FCPA's statute of limitations and what the government needs to do to protect its tolling. That's the same issue that came up in the prosecution of Viktor Kozeny and his co-defendants.

The discovery ruling is a big win for the government. In April this year, the four former CCI executives had accused the Justice Department of playing "a game of hide and seek" with its evidence against them. They said the government had identified only 30 of the 236 illegal payments alleged in the indictment -- not enough for them to plan their defense. They wanted access through the DOJ of everything it had received as a result of CCI's self-reporting. Their discovery request included the electronic database collected during CCI's internal investigation and audit documents, among other things.

CCI designs and manufactures service control valves for use in the nuclear, oil and gas, and power generation industries. It's owned by British-based IMI plc, which trades on the London Stock Exchange under the symbol IMI.L.

The four former executives were charged with two others in a nine-year conspiracy to win contracts by bribing officials at foreign state-owned companies. The indictment alleged bribery "in over thirty countries" with "approximately 236 payments" totaling "approximately $6.85 million" to secure a series of projects that "resulted in net profits to [their employer, CCI] of approximately $46.5 million." In addition to cash, the government said the bribes consisted of "overseas holidays," "extravagant vacations," "lavish sales events," and "expensive gifts."

Their trial was supposed to start on Tuesday this week. But Judge Selna moved the start all the way to November 2, 2010. He said both sides need extra time to prepare due "to the nature of the prosecution, the volume of discovery, the international issues, and the number of defendants . . . ."

A copy of Judge Selna's December 8, 2009 Order Granting in Part and Denying in Part Defendants’ Motion to Compel in US v. Carson et al can be downloaded here

A copy of Judge Selna's December 8, 2009 Order Denying Defendants’ Motion to Dismiss Counts 9-11 can be downloaded here

Tuesday
Dec082009

The Vulnerable Suffer First And Worst

December 9 is the U.N.'s International Anti-Corruption Day. The theme of this year's observance is "don't let corruption kill development." Secretary-General Ban Ki-moon said, "When public money is stolen for private gain, it means fewer resources to build schools, hospitals, roads and water treatment facilities. When foreign aid is diverted into private bank accounts, major infrastructure projects come to a halt. Corruption enables fake or substandard medicines to be dumped on the market, and hazardous waste to be dumped in landfill sites and in oceans. . . . Corruption steals elections. It undermines the rule of law. And it can jeopardize security. As we have seen over the last year, it can also have a serious impact on the international financial system."

*   *   *

Targeting the weak. Jennifer Hunt of McGill University published a paper in 2006 called, "How Corruption Hits People When They Are Down" (here). Based on research in Peru, she said victims of misfortune, particularly crime, are much more likely than non–victims to bribe public officials and be extorted by corrupt police and judges. When people are desperate, vulnerable, and most in need of public services, she said, corruption increases, compounding the victim's misfortune. Here's how she explained it:

For example, victims of crime will want to report the crime to the police, an act that may require a bribe to ensure police cooperation. An illness, accident or assault may lead the victim to use public hospitals, which could involve a bribe to jump a queue or see a doctor. If a household member dies, his or her death must be registered, for which a bribe might be extorted. Burglary, robbery, fraud, job loss, fire, natural disasters, the death of an earner and the bankruptcy of a shop involve the loss of possessions or income, which may impoverish the affected individual or household and lead them to apply for unemployment insurance or welfare. The desertion of the household head can lead to legal issues concerning alimony or child custody, while the creditors of a bankrupt shopkeeper may appeal to a judge. Involvement with the courts may be associated with bribery. . . .

Measuring petty corruption isn't easy. And pinpointing the impact of graft on victims of misfortune is even harder. But Hunt's thesis makes sense and her numbers, though limited, back her idea.

Monday
Dec072009

Five Indicted For Haiti Telco Bribes

The Justice Department announced on Monday the indictment of five people -- including two Florida executives, a Florida-based agent, and two former Haitian telco officials -- for their roles in a bribery scheme. The executives and agent were charged under the Foreign Corrupt Practices Act and other laws; the former Haitian telco officials were charged with money laundering.

The Foreign Corrupt Practices Act prohibits corrupt payments to foreign officials, including employees of state-owned businesses such as the Haitian telco. Foreign officials, however, can't be punished under the FCPA and in the past haven't been included in indictments involving FCPA offenses. In this case, the DOJ could bring money-laundering counts against the former Haitian officials because they also live in Florida and committed the alleged offenses while there. The charges against them will put other foreign bribe-takers on notice of the DOJ's ever more aggressive anti-corruption strategy.

The DOJ said the Florida executives are Joel Esquenazi, 53, of Miami, president of a Florida company identified in the indictment as privately-held "Company X," and Carlos Rodriguez, 53, the former executive vice president of the company. They were each charged with one count of conspiracy to violate the Foreign Corrupt Practices Act and to commit wire fraud, seven counts of FCPA violations, one count of conspiracy to commit money laundering and 12 counts of money laundering. Both are U.S. citizens.

The two Haitian foreign officials are Robert Antoine, 61, of Miami and Haiti, a former director of international relations at Haiti’s state-owned Telecommunications D’Haiti. He's charged with one count of conspiracy to commit money laundering. Jean Rene Duperval, 43, of Miramar, Florida and Haiti, is also a former director of international relations at Telecommunications D’Haiti. He's charged with one count of conspiracy to commit money laundering and 12 counts of money laundering.

The fifth person charged is Duperval's sister, Marguerite Grandison, 40, also of Miramar. She was the president of Telecom Consulting Services Corp., an intermediary for the alleged bribe payments. She's charged with one count of conspiracy to violate the FCPA and commit wire fraud, seven substantive FCPA violations, one count of conspiracy to commit money laundering and 12 counts of money laundering. She's a permanent resident of the U.S.

The Justice Department said the indictment was unsealed on Monday after Duperval's initial appearance in U.S. District Court in Miami. He was arrested in Haiti on December 5 by a special unit of the Haitian National Police. The DOJ didn't describe the legal means used to bring Duperval from Haiti to the U.S. to face the charges. Rodriguez and Grandison also appeared in court on Monday in Miami.  Arrest warrants have been issued for Antoine and Esquenazi, who apparently are at large.

According to the indictment, the defendants allegedly participated in a scheme to commit foreign bribery and money laundering from November 2001 through March 2005, when the Florida telco, Company X, paid more than $800,000 to shell companies for bribes to officials of Telecommunications D’Haiti.

The indictment alleges that Marguerite Grandison's company, Telecom Consulting Services Corp., executed a series of contracts with Telecommunications D’Haiti that allowed the Florida telco's customers to place telephone calls to Haiti. The alleged corrupt payments were authorized by Esquenaz and Rodriguez. The purpose of the bribes, according to the indictment, was to obtain preferred rates, reduce the number of minutes for which payment was owed, and give other discounts, as well as to defraud Haiti of revenue. The defendants allegedly concealed the bribes using shell companies and false records showing the payments were for "consulting services."

The FCPA conspiracy and wire fraud counts carry a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost. The substantive FCPA counts each carry a maximum penalty of five years in prison and a fine of the greater of $100,000 or twice the value gained or lost. The conspiracy to commit money laundering count carries a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the transaction. The money laundering counts each carry a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the transaction. The indictment also contains a criminal forfeiture count.

In April 2009, Antonio Perez, the former controller of Marguerite Grandison's company, Telecom Consulting Services Corp., pleaded guilty to conspiring to violate the FCPA and money laundering for his role in the payment of bribes to former officials of Telecommunications D’Haiti. In May 2009, Juan Diaz, the president of J.D. Locator Services, a shell intermediary company, pleaded guilty to one count of conspiracy to violate the FCPA and money laundering. He admitted receiving more than $1 million in bribe money from telecommunication companies.  He also admitted laundering the money for a former Haitian government official. Diaz is scheduled to be sentenced on January 29, 2010. Perez was scheduled to be sentenced on October 6, 2009. He has not been sentenced and no new sentencing date has been reported. See our post here.

Also in Apri this year, Latin Node Inc., a privately held Florida corporation in the telecommunications business, pleaded guilty to violating the Foreign Corrupt Practices Act in connection with improper payments in Honduras and Yemen. Latinode agreed to pay a $2 million fine and to cooperate with investigators in the U.S. and other countries.

As the Justice Department says, an indictment is merely an accusation, and defendants are presumed innocent until and unless proven guilty beyond a reasonable doubt.

Download the DOJ's December 7, 2009 release here.

Download a copy of the indictment in US v. Esquenazi et al here.

Sunday
Dec062009

Magyar's Magnum Opus

We liked it. All 1,162 words. Magyar Telekom's SEC disclosure last week about its internal investigation into fraudulent contracting practices could have been short and bland and very ordinary. A typical corporate blank wall. Instead it was abundant in length and detail  -- one of the most rewarding public disclosures about an internal investigation we've ever read. It appeared in the company's SEC Form 6-K, Report of Foreign Private Issuer, filed December 3, 2009 here. (Another disclosure we admired earlier this year came from Pride International Inc.; it contained 1,168 words.)

What did we learn about Hungary's Magyar? Among other things that:

  • Between 2000 and 2006, a small group of unnamed former senior executives from headquarters and a Macedonian affiliate spent  €24 million through over twenty consultancy, lobbying, and other contracts that were probably phony.
  • The contracts were used to create a pool of unaccounted cash.
  • The purpose of the contracts and slush fund was to "obtain specific regulatory and other benefits from the government of Macedonia."
  • The scheme worked. Magyar "generally received the benefits sought and then made expenditures under one or more of the suspect contracts."
  • The lawyers hired by Magyar's audit committee, White and Case, couldn't track down who got the illicit cash. “[T]he Investigation did not uncover evidence showing receipt of payments by any Macedonian government officials or political party officials.”
  • So the company can't say whether it violated the Foreign Corrupt Practices Act's antibribery provisions. But it did commit accounting offenses. "These contracts were not appropriately recorded in the books and records of the Company and its relevant subsidiaries.  . . . the Company has already reclassified . . . the accounting treatment relating to certain of these contracts to more accurately account for these expenditures."

So that's the news. But why, we wondered, did Magyar put an extra thousand words into its disclosure? Why didn't it stick to the usual script -- "An internal investigation has concluded that improper payments may have been made to influence the award of certain contracts. Remedial action has been taken. Discussions with authorities in the U.S. and other countries are ongoing." Why War and Peace when it could have gotten away with a Hallmark greeting card?

Here are five reasons that come to mind:

The internal report is good news. There's been a dark cloud over Magyar since it discovered the corruption during its 2005 audit and launched the investigation in 2006. But the disclosure brings sunny skies. Why not make the most of it? It cleared everyone now there and pinned the blame on people who are already gone. "Nothing in the Final Report implicates any current senior executive or Board member of the Company in connection with any wrongdoing."

Magyar's management team is young. Executive chairman and CEO Christopher Mattheisen is 47; CFO Thilo Kusch is 43; and COO Róbert Pataki is 37. They've got a lot of open road and ambitious regional plans ahead of them. The detailed disclosure should help them put Magyar's past practices in the rearview mirror.

The CEO is American. His Forbes Profile says Mattheisen "studied economics and finance at Indiana University of Bloomington and at Columbia University. He first came to Hungary in 1990 to start a strategic planning and business consulting company." Expat American CEOs are all "domestic concerns" and are usually savvy about the FCPA and its risks. The mega disclosure may reflect Mattheisen's heightened sensitivity. 

Magyar has a couple of important shareholders. German giant Deutsche Telekom owns 59.52% of the company and the public owns most of the rest. No doubt DT wanted a quick and clean end to Magyar's corruption mess, to avoid the risk of association with another German giant, Siemens. Its corruption made global headlines for most of 2007 and 2008. Then there's the Hungarian government. It still owns a golden share in Magyar (the company was formed from the privatized state phone system). With its EU integration in full swing, Hungary's leaders wouldn't want a lingering corruption scandal either.

Bang for the buck. The internal investigation was expensive -- $28 million last year alone. The detailed disclosure helps management justify the price tag.

*   *   *

What's next for Magyar? It said the U.S. Justice Department and SEC are still investigating the company, along with Macedonia's Inerior Ministry. The company said it can't "predict what the final outcome of those investigations may be or the impact, if any, they may have on [its] financial statements or results of operations." More ominously for the unnamed former senior executives, Magyar said the Hungarian National Bureau of Investigation has started "a criminal investigation into alleged misappropriation of funds  . . ."

Back in the U.S., the DOJ and SEC should be happy with the way management has handled the investigation, disclosure, and remedial steps. The approach has been aggressive -- maybe a bit too aggressive. The company said it faces a new problem  -- "the possible misuse of personal data of employees" duirng the internal investigation. Hungary's authorities are looking into it.

Magyar Telekom Plc's American Depositary Shares trade on the New York Stock Exchange under the symbol MTA.

Thursday
Dec032009

Sentencing Watch List

Let's update the list of individuals waiting to be sentenced for violating or conspiring to violate the Foreign Corrupt Practices Act. Since October, Frederic Bourke and William Jefferson have been sentenced and come off the list. Charles Jumet, Paul Novak, and Fernando Maya Basurto have entered guilty pleas are are added to it. Juan Diaz was to be sentenced on November 13 but the court reset his date. A reader also let us know that Si Chan Wooh, the former head of Schnitzer Steel's international subsidiary, who pleaded guilty in June 2007 to conspiracy to violate the FCPA, is scheduled to be sentenced next year in federal court in Oregon. So the list now stands at 18. 

Here they are:

Fernando Maya Basurto -- no date given.

Jim Bob Brown -- January 28, 2010

Joshua Cantor -- no date given.

Mario Covino -- January 25, 2010

Juan Diaz -- January 29, 2010

Thomas Farrell -- no date given.

Gerald and Patricia Green -- December 17, 2009

Charles Paul Edward Jumet -- February 12, 2010

Clayton Lewis -- no date given.

Joseph T. Lukas -- April 6, 2010

Richard Morlok -- January 25, 2010

Paul G. Novak -- February 19, 2010

Antonio Perez -- October 6, 2009. [No sentencing reported and no resetting of the sentencing date shown in the court docket.]

Si Chan Wooh -- April 26, 2010

 Leo Winston Smith -- December 18, 2009

Albert "Jack" Stanley -- February 24, 2010

Jason Edward Steph -- January 28, 2010

Let us know if we're still missing anyone or if other sentencing dates have changed.

*   *   *   

Words we like.  From Abraham Lincoln, October 1858:

It is the eternal struggle between these two principles — right and wrong — throughout the world. They are the two principles that have stood face to face from the beginning of time; and will ever continue to struggle. The one is the common right of humanity, and the other the divine right of kings. It is the same principle in whatever shape it develops itself. It is the same spirit that says, "You toil and work and earn bread, and I'll eat it." No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle.

Thursday
Dec032009

Kozeny Keeps Fighting

Viktor Kozeny, left, the promoter of a failed 1998 plot to take control of the Azeri state oil company during its privatization by bribing the country's leaders, has again asked a court in the Bahamas to block his extradition to the United States. The Czech-born fugitive appeared this week at a hearing to consider an appeal on behalf of U.S. authorities. They want to bring him back to face trial for conspiracy to violate the Foreign Corrupt Practices Act. The appellate judges didn't say when they'll decide the case.

Kozeny, 46, has lived in the Bahamas for about ten years. He was arrested there at the request of the U.S. government in October 2005 and held in prison until granted bail in April 2007. Although a judge ordered his extradition, his lawyers were able to convince another judge to block it (here). The U.S. then pushed the case to the court of appeals.

Kozeny was indicted for the Azeri bribery plot by a federal grand jury in Manhattan in May 2005. His co-defendant, Frederic Bourke, was convicted in July of conspiracy to violate the FCPA and lying to FBI agents. Bourke was sentenced to a year and a day in prison. Others involved in the Azeri scheme have pleaded guilty. Waiting to be sentenced are Thomas Farrell, a director of one of Kozeny's companies, Kozeny's Swiss lawyer Hans Bodmer, and Clayton Lewis, a partner in Omega Advisors, Inc., a hedge fund that invested and lost about $126 million in the Azeri privatization. Kozeny was also indicted in 2003 in a New York state criminal case for stealing $182 million from investors, including Omega, AIG, and Bourke.

Kozeny's lawyer, Clive Nicholls QC, told the appellate court this week that his client shouldn't be extradited. The lawyer said Kozeny committed no crime under Bahamas law, which doesn't reach bribery between third-country nationals. According to a report in the local Tribune (here), Nicholls also said Kozeny was "not a U.S. resident or national at the time the alleged offences were committed and therefore is not subject to the U.S. jurisdiction. He further submitted that when the alleged offences were committed, the Bahamas had not signed onto the Organisation for Economic Co-operation and Development (OECD) anti-bribery convention and also that the alleged offences occurred before the [Inter-American Convention Against Corruption (IACAC)] came into force."

In Kozeny's indictment, the United States said he was subject to the Foreign Corrupt Practices Act because he acted as an agent for U.S.-based investors, known as "domestic concerns" in the FCPA, including Kozeny's own investment vehicle (15 U.S.C. § 78dd-2(h)(1)(A)).

Kozeny is the best-known FCPA fugitive. Bloomberg's David Glovin visited him last year in the Bahamas and wrote a great account of their meeting (here).