Harry Cassin Publisher and Editor

Andy Spalding Senior Editor

Jessica Tillipman Senior Editor

Richard L. Cassin Editor at Large

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


China: The Year In Graft

A prominent Chinese scholar who heads an anti-corruption think tank has said the latest enforcement figures show that after a 20-year campaign, the government is losing the battle against graft.

Professor Ren Jianming, the vice director of the Anti-Corruption and Governance Research Center at Beijing's Tsinghua University, told the Singapore Straits Times: "What it really shows is that all the measures might have slowed the spread of corruption, but not effectively stopped it. The reality is that corruption is deepening."

More than 100,000 officials were punished for corruption in China last year, and 4.44 billion yuan ($650 million) was recovered, according to two anti-graft watchdogs at their annual press briefing last week.

The Ministry of Supervision and the ruling Chinese Communist Party's (CCP) Central Commission for Discipline Inspection released yearly enforcement reports. They said the number of officials arrested and punished for graft involving more than 1 million yuan ($146,500) rose by 19 percent in the first 11 months of 2009 compared to the same period in 2008. At least 15 corrupt governor- and ministerial-level officials were punished, the most in 30 years.

The case is typically lurid: "It was that usual cocktail of sex and financial wrongdoing . . . ."

China has five anti-graft agencies, all linked to either the party or the state. Professor Ren said: "What's most needed now is an independent body to investigate corruption."

CCP leaders have said many times in recent years that corruption is the biggest threat to the party's rule. The Straits Times said, "Public anger has sometimes erupted into protests, such as the one in 2008 by more than 500 residents in south-western Yunan province against two officials who took 1 million yuan ($146,000) worth of bribes."

Last year, around 35 bosses of state-owned enterprises were arrested for corruption. The latest was Zhang Chunjiang, 51, the vice-chairman of China Mobile. He was also a former CCP secretary and once held a government post equivalent to a vice-minister. The accounts of his case are typically lurid: "He wined and dined lavishly," the Straits Times said, "kept a string of mistresses and falsified 20 billion yuan ($2.9 billion) worth of accounts. It was that usual cocktail of sex and financial wrongdoing . . . ."

The CCP said the 2,231 cadres expelled from the party last year made up just 0.029 percent of its 76 million members. Professor Ren said that figure is meaningless. "The vast majority of party members are ordinary people," he said. "Unlike those in leadership positions, they don't even have the opportunity to be corrupt."

Three executives from state-owned enterprises were sentenced to death last year for graft and two were executed:

  • Li Peiying, former president of the Capital Airports Holding Company, was executed in August after he was found guilty of bribery and corruption involving 26.61 million yuan ($2.66 million).
  • Last month, Yang Yanming, a former senior trader with a Chinese securities company, was executed for embezzling and misappropriating public funds amounting to 94.52 million yuan ($13.8 million).
  • In July, Chen Tonghai, the former boss of China Petrochemical Corporation, was sentenced to death and given a two-year stay of execution. He was convicted of taking about 200 million yuan ($29 million) in bribes.

See our post here.

In 2009, four of 11 FCPA enforcement actions against organizations involved bribery in China.


Non-Public Issuer Discloses Investigation

In what may be the first case of its kind, a U.S. company that has no securities traded on an exchange but files periodic reports with the Securities and Exchange Commission has disclosed an internal investigation into possible Foreign Corrupt Practices Act violations.

In a December 30, 2009 SEC filing (here), Tampa-based PBSJ Corporation said it will miss the filing deadline for its Annual Report on Form 10-K for the year ended September 30, 2009 "due to an internal investigation being conducted by the Audit Committee of the Board of Directors." The company said the purpose of the internal investigation "is to determine whether any laws have been violated, including the Foreign Corrupt Practices Act, in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries."

The FCPA's antibribery provisions apply to "domestic concerns," which include all U.S. companies; the books and records and internal controls provisions apply only to "issuers" -- corporations that have issued securities that have been registered in the United States or who are required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a) and our post here.

PBSJ Corporation is a "domestic concern" subject to the anti-bribery provisions. It has no publicly traded securities. But because it has so many shareholders -- about 4,000 mainly current and former employees  -- it must file periodic reports with the SEC. That makes it an "issuer" subject to the books and records and internal controls provisions.

The Company said it self-reported to the SEC and Justice Department "the circumstances surrounding this internal investigation. Should the SEC or DOJ decide to conduct its own investigation, the Company will cooperate fully."

PBSJ provides engineering and construction management for government agencies worldwide, usually for road-building projects. It has 80 offices and 3,900 employees.

The company has had other compliance problems and internal controls lapses. The Tampa Business Journal said in March 2005 PBSJ discovered "what eventually was determined to be a $36.6 million embezzlement scheme by the former CFO and two other workers. Discovery of the scheme triggered a series of events, including repayments to clients that had been overbilled in an effort to cover the missing funds and a restatement of financial information for several years."

The company was also investigated by the Federal Election Commission. The FEC said for years PBSJ hid  campaign contributions to political candidates. It also encouraged employees to contribute to campaigns, then secretly reimbursed them for their payments, which violates the law.


Speaking Out

George Terwilliger -- formerly of the DOJ and now in private practice -- had some wise words about decisions to launch internal investigations. His article in included this tightly packed and well-mannered exhortation:

Most corporate decision-makers do not have the experience necessary to anticipate the judgments and proclivities of enforcement officials. Understanding how prosecutors think and what factors are important to them is essential to deciding whether and to what extent to conduct an internal investigation. Animated discussion, in the confines of privilege, with professionals who understand what prosecutors expect and why, is essential to sound analysis of an investigation's results and good decisions based on its results. This kind of analysis also is best broadened -- within the confines of privilege -- to include in-house personnel with financial, public relations and investor-relations expertise, as the decisions made will significantly affect the portfolios of each.

Great advice, with a serious reminder about the attorney-client privilege. It protects the normal give-and-take that's essential for sound decision-making.

*   *   *

Who are we fighting for? Yemen's executive, judicial, and legislative accountability mechanisms are among the worst assessed in 2008. Although there are strong anti-corruption laws on the books, the anti-corruption agency is ineffective. Furthermore, political financing is generally unregulated, while civil society organizations are ineffective in fighting corruption. The media, which is subject to political interference, also receives poor ratings. Several journalists have been arrested, harassed, or imprisoned for their corruption-related investigative stories. Government control over private radio is among the most draconian in the world.

~ From a comment to Yemen's Grand Corruption on the Global Graft Report left by Jonathan Eyler-Werve at Global Integrity

*   *   *

Kosmos Energy, Exxon Mobil, and Ghana. A huge oil find, a struggle for control, corruption allegations, and a Chinese subplot. Here.

*   *   *

Words we like. From Justice Louis Brandeis, concurring in Charlotte Anna Whitney v. California, 274 U.S. 357 (1927) at 375:

Those who won our independence believed that the final end of the state was to make men free to develop their faculties, and that in its government the deliberative forces should prevail over the arbitrary. They valued liberty both as an end and as a means. They believed liberty to be the secret of happiness and courage to be the secret of liberty. They believed that freedom to think as you will and to speak as you think are means indispensable to the discovery and spread of political truth; that without free speech and assembly discussion would be futile; that with them, discussion affords ordinarily adequate protection against the dissemination of noxious doctrine; that the greatest menace to freedom is an inert people; that public discussion is a political duty; and that this should be a fundamental principle of the American government.


Ghana Investigating Energy Deals

A January 7 story in the Financial Times (here) said authorities in the U.S. and Ghana are investigating corruption allegations involving a privately held Texas oil company, Kosmos Energy. It controls a large share of the 1.8 billion barrel Jubilee field, one of Africa's biggest recent oil finds.

The paper said Ghanian prosecutors are preparing criminal charges against Kosmos' local partner, EO. It said EO was formed by two allies of John Kufuor, Ghana's president until last year. One of EO's founders was Houston-based businessman George Owusu, who was Kosmos’ representative in Accra. The other was Kwame Bawuah Edusei, later appointed Ghana's ambassador to the U.S.

The report said the U.S. Justice Department "is also understood to be probing the relationship between EO and Kosmos, although the department on Thursday declined to confirm or deny this."

Kosmos' local partner, EO, reportedly holds a 3.5 percent stake in the offshore oil block found to be commercial in 2007. In October last year, Kosmos announced the sale of all its interests in Ghana, including the Jubilee field assets, to Exxon Mobil Corporation for $4 billion. EO's stake, the Financial Times said, could be worth more than $200 million.

The Financial Times said EO brought Kosmos into Ghana three years ago. In exchange, Kosmos gave EO the 3.5 percent interest and paid EO's "share of exploration and development costs, according to an agreement between the two companies obtained by the Financial Times."

Kosmos is mainly owned by private equity firms Warburg Pincus and Blackstone Capital Partners.

Ghanian sources have also said the government opposes Kosmos' sale to Exxon Mobil and is "considering cutting a deal with a leading Chinese oil company for the stake."

The charges in Ghana against EO, according to the Financial Times, would include causing a financial loss to the state, money laundering, and making false declarations to public agencies. Both EO and Kosmos have denied any wrongdoing.

Kosmos told the Financial Times that "Ghana now wants to secure a share of the profits by forcing Kosmos to sell itself at a knock-down price to GNPC, the state oil group, which could then sell it to the highest bidder."

The New York Times reported in October last year that Kosmos' sale to Exxon Mobil requires approval by Ghana’s government, which is itself interested in buying the assets. Ghanian sources have also said the government opposes Kosmos' sale to Exxon Mobil and is "considering cutting a deal with a leading Chinese oil company for the stake."

The Financial Times reported that Duke Amaniampong, a California-based lawyer working for the Ghanaian investigation, said Ghana’s attorney general had accumulated “enough evidence of criminal culpability to bring charges against the EO group and its directors." A website called Modern Ghana said Amaniampong was appointed to help Ghana's attorney general prosecute “Kufuor's men." It said he is a graduate of Santa Clara University law school and was admitted to the State Bar of California in 1996.

When production begins later this year from the Jubilee field -- expected to be 120,000 barrels a day -- Ghana will become an oil exporting country.


Some GR8 News 4 Us

We're saying thank you today for an unexpected New Year's gift from Jay Varkey. What did he give us? The perfectly named He's had the page for a while and gathered quite a few followers. But he thought of us.

In our world, his donation is roughly equivalent to the Louisiana Purchase with Alaska and Hawaii thrown in. We're overwhelmed. The only condition Jay placed on the gift: Put it to good use to promote the FCPA and related topics. We'll do our best.

Jay is based in Washington, D.C. as a Managing Consultant with Navigant. He conducts FCPA investigations in the U.S. and Europe and other compliance work in the Middle East and Asia. His colleague and our frequent rescuer, Cody Worthington, handled arrangements for the transfer -- the smoothest toss since Tinker to Evers to Chance.

To those already following the FCPA page on Twitter, hello and thank you. And we look forward to others joining the discussion here.

*     *     *

How powerful is Twitter in the world of compliance? The story is still being written. By coincidence, Rochelle Meddoff's article today for the Global Graft Report explores the world-changing potential of 140 characters. She writes about India's SMS / text messaging anti-corruption campaign. From the start, she says, it put enormous power in the hands of  . . .  everyone. In the same way that Twitter has. Her story is here.


Deducting Disgorgements

 A reader asked a question we hadn't seen before. Is an FCPA-related disgorgement tax deductible? We've talked about disgorgement (here) and taxes (here). But we've never put the two together in a post. So we began checking the cases but nothing came up. Then we dove into the Tax Code and the Treasury Regulations and landed on Subchapter A, Sec. 1.162-21. It deals with the deductibility of "fines and penalties." We're always expecting to find straight lines and right angles in tax land. But once again we were in a grey area.

The law says fines and penalties aren't deductible. But even the TaxAlmanac (here), with lots of examples of fines and penalties, didn't mention disgorgement. So we were left wondering.

That's when we punted the question to George Clarke, a tax lawyer in the District of Columbia. He said:

Whether a disgorgement payment made pursuant to a settlement with the SEC/DOJ is deductible turns on whether it is a "fine or similar penalty" under the internal revenue laws. Under those laws, a payment is a "fine or similar penalty" if the purpose of the payment is punitive. To determine the purpose of the payment, the taxpayer must look to the statute under which the SEC/DOJ brings its action as well as to the facts of the taxpayer's case, especially the specific language of the settlement agreement, the history of the enforcement action, and the context in which the payment was made. The taxpayer can to some extent influence deductibility by carefully considering these issues during settlement negotiations. 

As a very general matter, unless the language of the settlement agreement or the history and context of the settlement compels the conclusion that the disgorgement is intended to punish, a taxpayer should be able to effectively argue that the purpose of the payment was not to punish (i.e., that it was remedial, to encourage future compliance, or to compensate the government or other harmed parties). The IRS may try to analogize the disgorgement payment to a criminal forfeiture of assets (and the authorities thereunder) as a basis for an argument that such payments are non-deductible. But the purpose of criminal forfeiture is, in the main, different and more akin to a fine or similar penalty than is disgorgement worked by a settlement agreement in these situations.  

The lesson is that FCPA-related disgorgements -- which have reached hundreds of millions of dollars -- may be deductible. It depends chiefly on what the SEC intends and how the agreement describing the disgorgement is written to reflect that intent.


Why He Died

What led to the mysterious death of anti-corruption lawyer Sergei Magnitsky, left, in a Moscow pre-trial detention center? And what's happened since then? His client talks to the Global Graft Report here.


BAE Bribe Suit Tossed On Appeal

A federal appeals court last week affirmed the dismissal of a shareholder derivative suit against some current and former directors and executives of BAE Systems PLC. The suit was filed in 2007 by the City of Harper Woods (Michigan) Employees’ Retirement System. The complaint alleged payment of more than $2 billion in bribes and kickbacks to Prince Bandar Bin Sultan of Saudi Arabia. The alleged purpose was to secure for BAE the $80 billion Al-Yamamah contract from the Saudi Arabian Ministry of Defense for the sale of jet fighters and trainers. The suit claimed the defendants breached their fiduciary duties and wasted corporate assets.

The trial court applied English law to the case. It found that the Harper Woods pension fund -- which owned 3,500 of BAE's American Depository Receipts -- had no standing to act as plaintiff. BAE is a publicly owned corporation incorporated in England and Wales. It operates in the United States through its subsidiary BAE Systems, Inc. See City of Harper Woods Employees’ Ret. Sys. v. Oliver, 577 F. Supp. 2d 124 (D.D.C. 2008).

The United States Court of Appeals for the District of Columbia agreed. It said that under the 1843 English case of Foss v. Harbottle, 2 Hare 461, 67 E.R. 189, "the company, not a shareholder, is the proper plaintiff in a suit seeking redress for wrongs allegedly committed against the company." 

The Harper Woods pension fund had argued that even if English law would normally apply, the U.S. federal courts should make an exception and use U.S. law. That would promote the public policy of protecting shareholders and the company itself from law-breaking directors and executives. 

The D.C. appeals court refused to create the exception. It found that even if the defendants had paid bribes that broke the law, they hadn't acted beyond the scope of their legal authority. That gave them protection. It said:

In English law, an ultra vires act is an act “beyond the corporate capacity of a company.” Whether conduct is ultra vires thus depends upon whether a company is capable of performing the act, as set forth in the company’s memorandum of association. . . . [A]t least one English court has held that payment of a bribe is not an ultra vires act where the company’s memorandum authorizes it to provide compensation in return for services rendered in the conduct of its business. See Arab Monetary Fund, [1993] 1 Lloyd’s Rep. at 569.

The decision is a big win for BAE (and all U.K. companies threatened with shareholder litigation in the U.S.). But it's another setback for plaintiffs who bring claims based on allegations that, if true, would violate the Foreign Corrupt Practices Act.

In June 2009, for example, we described how Baker Hughes -- for the third time -- had beaten back a derivative suit brought after its 2007 settlement of Foreign Corrupt Practices Act violations. The plaintiff in that suit was another pension fund. It tried to sue in state court once and federal court twice, only to be bounced each time on procedural and jurisdictional grounds.

(There's no private right of action under the FCPA. So private litigants seeking relief have to resort to other causes of action -- such as common law fraud, RICO, securities law violations, or breach of fiduciary duties.)

In 2008, the Ninth Circuit in Glazer Capital Management v. Magistri put another obstacle in the path of plaintiffs. The court raised the "scienter" bar for FCPA-related claims against officers and directors under the federal securities laws. See our post More Hurdles For Private Litigants.

The U.K.'s Serious Fraud Office opened an investigation into BAE and the Al-Yamamah contract but closed the file in December 2006. It said threats from Saudi Arabia to end anti-terrorism cooperation could harm Britain's national security. The U.S. Justice Department has been conducting its own Foreign Corrupt Practices Act investigation but hasn't released any comments. BAE and Prince Bandar have denied breaking any laws.

In October 2009, the Serious Fraud Office recommended prosecution of BAE for other alleged corrupt payments. The SFO had separately investigated "sales of aircraft in South Africa and the Czech Republic, purchases of two frigates in Romania, and radar equipment for air traffic control in Tanzania." BAE is the U.K.'s biggest military contractor. It has 32,000 employees in the U.K. and about 105,000 worldwide.

A copy of the December 29, 2009 opinion in City of Harper Woods Employees' Retirement System derivatively on behalf of BAE Systems PLC. v. Richard (Dick) L. Oliver et al can be downloaded here


2009 FCPA Enforcement Index

[Updated December 31, 2009] In 2009, prosecutors kept their promise to pursue individuals who violated the Foreign Corrupt Practices Act. Thirty-three were named in enforcement actions brought by the DOJ or SEC -- the most for any year since enactment of the law in 1977. This year's list includes those indicted, arrested, convicted, sentenced, or civilly charged. Last year, we counted 24 individuals involved in similar enforcement actions, plus David Kay and Douglas Murphy, whose petition for certiorari to the U.S. Supreme Court was denied.

This year, 11 organizations (counting Halliburton and its one-time subsidiary KBR as one) were named in enforcement actions. Last year, our count was also 11. 

We're listing six new private lawsuits based on FCPA-related allegations; there were five in 2008. For more information about the securities class actions, we recommend Kevin LaCroix's D&O Diary (here). Mike Koehler has also covered Pride's suit here.

There were three FCPA-related trials, the most to occur in a year. The defendants were Frederic Bourke, William Jefferson, and Gerald and Patricia Green. As usual, no corporations contested FCPA charges in court.

The SEC expanded FCPA liability during the year. It filed a settled enforcement action against two officers of Nature's Sunshine Products Inc. -- Douglas Faggioli and Craig Huff. The complaint alleged that Faggioli and Huff, in their capacities as control persons, violated the books and records and internal controls provisions. It was the first time control-person liability was used in the FCPA context.

The dollar value of the corporate enforcement actions in 2009 -- including criminal penalties, civil fines, disgorgements and interest -- was just over $641 million, with Halliburton / KBR paying $579 million, the most for a U.S. company in an FCPA case. Last year's dollar value was about $890 million, swelled by Siemens' $800 million settlement, the largest ever.

The DOJ's Mark Mendelsohn said in November there are 130 FCPA cases open at the DOJ. They include industry-wide investigations of pharmaceutical companies, oil and gas services firms, and orthopedic device makers. 

A note on our count: Enforcement actions brought against a company and its affiliates by the DOJ, SEC or both are tabulated as a single case. So our numbers may be lower than those mentioned by the government, but they're consistent year-on-year.


 Organizations (countries involved) / U.S. enforcement agencies / financial penalties including fines, disgorgement and interest:

AGCO Corporation (Iraq, U.N. oil for food program) / DOJ, SEC /$19.9 million

Avery Dennison Corporation  (China) / SEC / $518,000

Control Components Inc.  (China, Korea, Malaysia, United Arab Emirates) / DOJ / $18.2 million

Helmerich & Payne Inc. (Argentina, Venezuela) / DOJ, SEC / $1.375 million

ITT Corporation (China) / SEC / $1.7 million

Kellogg Brown & Root LLC and Halliburton (Nigeria) / DOJ, SEC / $579 million

Latin Node Inc. (Honduras, Yemen) / DOJ / $2 million

Nature's Sunshine Products Inc. (Brazil) / SEC / $600,000 

Novo Nordisk A/S (Iraq, oil for food program) / DOJ, SEC / $18 million

United Industrial Corporation (Egypt) / SEC / $337,679

UTStarcom, Inc. (China, Thailand) / DOJ / SEC /$3 million



Fernando Maya Basurto (ABB sales agent) Guilty plea, sentencing pending

Bobby Benton (Pride International) Charged in SEC civil complaint, trial pending

Frederic Bourke (entrepreneur, co-founder of Dooney & Bourke) Convicted, sentenced to a year and a day in prison and fined $1 million, free on bail pending appeal

Hong (Rose) Carson (Control Components Inc.) Indicted, trial pending

Stuart Carson (Control Components Inc.) Indicted, trial pending

Wojciech Chodan (KBR) Indicted, arrest in U.K. pending

Paul Cosgrove (Control Components Inc.) Indicted, trial pending

Mario Covino (Control Components Inc.) Guilty plea, sentencing pending

Juan Diaz (J.D. Locator Services) Guilty plea, sentencing pending

David Edmonds (Control Components Inc.) Indicted, trial pending

Joel Esquenazi (Terra Telecommunications Corp.) Indicted, trial pending

Douglas Faggioli (Nature's Sunshine Products), Civil enforcement action resolved, $25,000 civil penalty

Marguerite Grandison (Telecom Consulting Services Corp.) Indicted, trial pending

Gerald Green (movie producer), Convicted, sentencing pending

Patricia Green (movie producer), Convicted, sentencing pending

Craig D. Huff (Nature's Sunshine Products), Civil enforcement action resolved, $25,000 civil penalty

William Jefferson (former member, U.S. House of Representatives) Convicted, sentenced to 13 years in prison, free on bail pending appeal

Charles Paul Edward Jumet (Ports Engineering Consultants Corporation, Overman Associates) Indicted, trial pending

Han Yong Kim  (Control Components Inc.) Indicted, trial pending

Joseph T. Lukas (Nexus Technologies Inc.) Guilty plea, sentencing pending

Oscar H. Meza (Faro Technologies, Inc.) Civil enforcement action resolved, $56,707 civil penalty, disgorgement, prejudgment interest

Richard Morlok (Control Components Inc.) Guilty plea, sentencing pending

Ousama Naaman (intermediary for U.S. chemical company) Arrested in Frankfurt, Germany, extradition pending

Paul G. Novak (consultant, Wilbros Group), Guilty plea, sentencing pending

John Joseph O'Shea (ABB) Indicted, trial pending

Antonio Perez (Telecom Consulting Services Corp.) Guilty plea, sentencing pending

Flavio Ricotti (Control Components Inc.) Indicted, trial pending

Carlos Rodriguez (Terra Telecommunications Corp.) Indicted, trial pending

Shu Quan-Sheng (rocket scientist / AMAC International Inc) Sentenced to 51 months in prison

Leo Winston Smith (Pacific Consolidated Industries) Guilty plea, sentencing pending

Jeffrey Tesler (KBR agent) Indicted, extradition from U.K. pending

John W. Warwick (Ports Engineering Consultants Corporation, Overman Associates) Indicted, trial pending

Thomas Wurzel (United Industrial Corporation) Civil enforcement action resolved, $35,000 civil penalty


Private FCPA-related litigation:

Aluminium Bahrain BSC filed a $31 million civil suit against Sojitz Corp. and Sojitz Corporation of America.

FARO Technologies resolved securities class action litigation.

Halliburton and  KBR sued in a securities class action.

Panalpina World Transport (Holding) Ltd. sued by an investment fund.

Pride International Inc. sued in a securites class action.

Siemens AG sued in a securities class action.


If we've missed any names that should be included in the 2009 index, please let us know. If necessary because of late announcements from the government or suggestions from readers, we'll amend this post to keep it accurate and complete.

The 2008 FCPA Enforcement Index can be found here.

[Post updated on December 31, 2009]


UTStarcom Pays $3 million To Settle Asia Bribes

California-based telecoms equipment maker UTStarcom Inc. agreed today to pay the Justice Department $1.5 million in criminal fines and the SEC an additional $1.5 in penalties to resolve Foreign Corrupt Practices Act violations in China and Thailand.

Its employees, according to the DOJ's release, "arranged and paid for employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas and New York City." Although the trips were supposed to be for training at UTSI facilities, UTSI had no facilities in the destinations and conducted no training. The company's China subsidiary falsely recorded "training" expenses" when the purpose was actually " to obtain and retain lucrative telecommunications contracts."

The SEC's complaint, filed in the Northern District of California, alleged that UTStarcom spent nearly $7 million between 2002 and 2007 on "lavish gifts and all-expenses paid executive training programs in the U.S. for existing and potential foreign government customers in China and Thailand." The company also made improper payments to sham consultants in China and Mongolia while knowing that they would pay bribes to foreign government officials. As examples of the antibribery offenses, the SEC complaint alleged that:

On at least ten occasions between 2001 and 2005, UTSI provided or offered full time employment with UTSI in the U.S., including salaries and other benefits, to employees of government customers or their family members in China and Thailand. These offers were made for the purpose of obtaining or retaining business from the customers.

The complaint also said:

While UTSI's bid was under consideration, UTSI's general manager in Thailand spent nearly $10,000 on French wine as a gift to agents of the government customer, including rare bottles that cost more than $600 each. The manager also spent $13,000 for entertainment expenses for the same customer in an attempt to secure the contract.

The SEC charged the company with violating the antibribery, books and records, and internal controls provisions of the FCPA (Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934).

The DOJ said it gave UTStarcom a non-prosecution agreement because of the company's "voluntary disclosure, thorough self-investigation of the underlying conduct, the cooperation provided by the company to the Department, and the remedial efforts undertaken by the company."

The case began in 2005 when the U.S. Embassy in Mongolia sent the DOJ allegations that bribes were paid or offered on the company's behalf to a Mongolian government official. The company launched an internal investigation in 2006 into possible illegal payments in China and Thailand and self-disclosed to the DOJ and SEC. It later said violations may have occurred in Mongolia, Southeast Asia, India, and China. 

UTStarcom designs, manufactures and sells network equipment and handsets. It was founded in 1991 by Hongliang Lu, a Chinese-born, U.S.-educated entrepreneur. The company's manufacturing and most of its large customers are in China.

UTStarcom, Inc. trades on Nasdaq under the symbol UTSI.

View a copy of the Justice Department's December 31, 2009 release here.

Download a copy of the DOJ's December 31, 2009 non-prosecution agreement here.

View a copy of the SEC's Litigation Release No. 21357 and Auditing Enforcement Release No. 3093 (December 31, 2009) here.

Download a copy of the complaint in Securities and Exchange Commission v. UTStarcom, Inc., Case No. CV-09-6094 (JSW) (N.D. Cal. filed Dec. 31, 2009) here.


Are We Safer Yet?

In light of the Christmas Day attack on Northwest Flight 253 from Amsterdam to Detroit, let's go off topic with an item from the December edition of Foreign Policy magazine. The story is hard to believe but apparently true:

Since 2007, the U.S. State Department has been issuing high-tech "e-passports," which contain computer chips carrying biometric data to prevent forgery. Unfortunately, according to a March report from the Government Accountability Office (GAO), getting one of these supersecure passports under false pretenses isn't particularly difficult for anyone with even basic forgery skills.

A [Government Accountability Office] investigator managed to obtain four genuine U.S. passports using fake names and fraudulent documents. In one case, he used the Social Security number of a man who had died in 1965. In another, he used the Social Security number of a fictitious 5-year-old child created for a previous investigation, along with an ID showing that he was 53 years old. The investigator then used one of the fake passports to buy a plane ticket, obtain a boarding pass, and make it through a security checkpoint at a major U.S. airport. (When presented with the results of the GAO investigation, the State Department agreed that there was a "major vulnerability" in the passport issuance process and agreed to study the matter.)

From "The Top 10 Stories You Missed in 2009," Foreign Policy (December 2009) here.

*   *   *

Proceed to passport control. Here's an excerpt from our March 9, 2009 post:

The government [of Kenya] in 2002 had said it wanted to update the way it printed and tracked its passports. Everything would be new and high-tech. A French company was found for the job, at a price of €6 million. But the contract went instead to an unknown U.K. company called Anglo Leasing Finance, at a price of €30 million. There was no public tender and the story only leaked to the press because of a junior civil servant. [Government graft-buster John] Githongo grabbed the investigation. Two years later, he'd uncovered about twenty government contracts awarded to phantom overseas companies at inflated prices, signaling the presence of high-level corruption. And most of the tainted contracts related to Kenya's security apparatus -- passport controls, forensic labs, security vehicles and satellite services, among others.


The Embarrassment Of Corporate Criminal Liability

Federal corporate prosecutions are never fair fights. Mindless companies are stripped of their right against self-incrimination and pummelled by respondeat superior into accepting plea deals. The government then uses evidence coerced from them to prosecute their employees. For fans of the Fifth Amendment and the presumption of innocence, it isn't pretty.

In an essay cited on the White Collar Crime Prof Blog here and available from SSRN here, Northwestern's Albert Alschuler, left, (BA and LLB Harvard) exposes the increasingly illogical practices behind corporate enforcement. 

Corporate defendants must produce incriminating documents even when the act of producing these documents would tend to incriminate them. Moreover, to ensure that corporations will not benefit from the privilege, the Supreme Court requires corporate officers to produce these records even when the act of production would incriminate them personally. The exception to the privilege for corporations swallows the rule applicable to individuals, and the tail wags the dog.

All corporate prosecutions are a weird fiction, he says --  there's “no soul to damn, no body to kick,” quoting Baron Thurlow, an 18th century Lord Chancellor of England. So, Prof Alschuler writes:

Innocent shareholders pay the fines, and innocent employees, creditors, customers, and communities sometimes feel the pinch too. The embarrassment of corporate criminal liability is that it punishes the innocent along with the guilty.

Because corporations are "mindless," the goal of punishing them should be to encourage compliance by their employees. That's not happening, he says, because of respondeat superior. It allows companies to be convicted for acts by single errant employees. And it doesn't recognize any defense based on good-faith attempts by the corporate body to obey the law.

Why is respondeat superior allowed to continue? Prof Alschuler says:

Neither John Ashcroft nor any other Attorney General in the past century has sought a narrowing of the respondeat superior standard of corporate liability. Although half the states employ narrower standards, Congress seems very unlikely to follow their lead. An alliance of Ralph Nader, the Justice Department, and most Members of Congress could be expected to resist any effort to deny prosecutors an important “tool” in the fight against corporate crime. Like the rest of the federal criminal justice system, the respondeat superior standard transforms prosecutors into czars while the politicians stand and say “yes, yes, yes.” This standard serves its real purpose marvelously.

That real purpose, Prof Alschuler says, is the power of prosecutors to impose whatever sanctions they like for whatever conduct they wish to punish.

Not everyone agrees that corporate prosecutions are harmful or ineffective. Sara Sun Beale from Duke law school addresses Prof Alschuler directly in her upcoming article, "A Response to the Critics of Corporate Criminal Liability." It's scheduled to appear in the American Criminal Law Review and is available now on SSRN here.

So the debate continues.

Albert Alschuler's essay, " Two Ways to Think About the Punishment of Corporations" (October 19, 2009), appears in the American Criminal Law Review and on SSRN here.

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