The FCPA Blog

Tidewater Inc., one of about a dozen oil-and-gas-services companies dragged into FCPA compliance problems a few years ago by Swiss logistics giant Panalpina, said in its latest annual report that it expects a settlement soon with the SEC and possibly the DOJ.

The company said its SEC settlement would require a total payment of about $11.4 million, consisting of $8.4 million in disgorgement and prejudgment interest, and a contingent civil penalty of $3 million. The disgorgement would be payable right away, while the contingent civil penalty would be due within 18 months, but only to the extent Tidewater has not paid a penalty to the DOJ for the same FCPA offenses.

So whatever Tidewater pays to the DOJ in penalties will be deducted from the SEC's penalties (that's why it's a contingent civil penalty). That doesn't mean Tidewater won't pay more than $3 million in penalties to the DOJ. But it does mean it might pay the SEC $3 million less, depending on how things work out with the DOJ.

Why the special deal?

Usually the DOJ and SEC walk hand-in-hand in FCPA settlements with issuers. For some reason -- maybe the DOJ's limited FCPA bandwidth these days because of the shot-show prosecutions, or the backlog caused by this summer's time-consuming OECD review -- the SEC has taken the lead with Tidewater while the DOJ, according to the company's disclosure, isn't yet ready to settle. But to help Tidewater out, the SEC is giving the company a way to budget for a settlement, reserve the money, and partly limit its financial exposure.

The process of making financial arrangements for FCPA-related settlements among defendants, the DOJ, and SEC is usually completely opaque. This time, however, we're glimpsing the work in progress. The only similar deal we've seen involved ABB in 2004. The company was hit with an SEC disgorgement and interest payment of about $6 million and a civil penalty of $10.5 million. That civil penalty, however, was to be "deemed paid" by amounts ABB later paid in criminal fines to the DOJ (it eventually paid about $5.2 million in criminal fines).

Back to today's news, Panalpina itself has reserved about $110 million for an expected FCPA settlement with the DOJ and SEC, and a separate antitrust resolution. In April it said the settlements should happen "in the near future."

The DOJ and SEC since 2007 have been investigating whether Pananlpina, on behalf of several customers including Tidewater, paid bribes in Nigeria for customs clearance and licensing. About a dozen leading oil and gas-related companies received letters from the DOJ and SEC asking them to "detail their relationship with Panalpina." Shell, Schlumberger, Nabors Industries, Transocean, GlobalSantaFe Corp., Noble Corp. and Pride International were also involved.

Pride said in February this year it has set aside $56.2 million for an expected FCPA settlement with the DOJ and SEC. The Houston-based oil rig operator first disclosed potential FCPA compliance issues in 2006.

Tidewater said its tolling agreement with the SEC expired on June 15 this year. It hasn't said if the settlement deadline was extended.

The company's disclosure was reported yesterday by Main Justice.

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Here's the complete FCPA discussion in Tidewater Inc.'s Form 10-K for the year ended March 31, 2010:

Foreign Corrupt Practices Internal Investigation

The company has previously reported that special counsel engaged by the company’s Audit Committee had completed an internal investigation into certain FCPA matters and reported its findings to the Audit Committee. The substantive areas of the internal investigation have been reported publicly by the company in prior filings.

Special counsel has reported to the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) the results of the investigation, and has engaged in a series of cooperative discussions with the two federal agencies as to the potential legal ramifications of those findings. The following reflects the status of those discussions:

Securities and Exchange Commission

The company has reached an agreement in principle with the staff of the SEC to resolve its previously disclosed investigation of possible violations of the FCPA. Under the proposed resolution, the company would consent to the filing in federal district court of a complaint (“Complaint”) by the SEC, without admitting or denying the allegations in the Complaint, and to the imposition by the court of a final judgment against the company, including a permanent injunction against us. The Complaint would allege civil violations of the FCPA’s anti-bribery and accounting provisions with respect to certain previously discussed conduct involving tax authorities in Azerbaijan, and the FCPA’s accounting provisions with respect to amounts paid by a subsidiary of the company to a third party customs broker to procure certain permits necessary for the company’s vessels to operate in Nigeria. The final judgment would not take effect until it is confirmed by the court, and would permanently enjoin the company from future violations of those provisions.

The agreement in principle would require the company to pay a total of approximately $11.4 million, consisting of the sum of $8.4 million (principally representing disgorgement of profits and prejudgment interest) payable at the time of settlement and a contingent civil penalty of $3.0 million. The contingent civil penalty would be payable to the SEC in 18 months, to the extent that the company had not agreed to pay fines or penalties of at least that amount to another government authority (or authorities) in connection with the matters covered by the internal investigation. The financial charge associated with the proposed settlement with the SEC was recorded in the fourth quarter of fiscal 2010 and is included in general and administrative expenses.

The agreement in principle is contingent upon the parties’ agreement on the terms of the relevant documents, approval by the Securities and Exchange Commission, and confirmation by a federal district
court. There can be no assurance that this settlement will be finalized, or finalized on the terms set forth above. If the settlement is not finalized, the SEC may bring an enforcement action against the company. The company’s current tolling arrangements with the SEC extend through June 15, 2010.

Department of Justice

To date, the company has not reached any agreement with the DOJ regarding a negotiated resolution of the previously disclosed internal investigation. Based on discussions with the DOJ regarding the possible disposition of this matter, it appears likely that any negotiated disposition would involve charges and sanctions imposed by the DOJ, although the company is unable to predict at this time the nature and scope of such charges and sanctions and upon whom they would be imposed. The timeframe for resolution of these matters is also uncertain. Given these uncertainties, the company is unable at this time to estimate the range of any monetary exposure that might arise from such a settlement. As a result, no accrual for potential additional liabilities associated with a negotiated resolution with the DOJ has been recorded as of March 31, 2010. Any fines or penalties paid to the DOJ would reduce the balance of the SEC contingent penalty referenced above under the company’s agreement in principle with the SEC. Should additional information be obtained that any potential liability in connection with the resolution of these matters with the DOJ is probable and reasonably estimable, the company will record such liability at that time. While uncertain, ultimate resolution with the DOJ could have a material adverse effect on the company’s results of operations or cash flows. It is possible that if agreement is not reached, the DOJ may bring enforcement action against the company.

There hasn't been a new FCPA enforcement action from the DOJ since Daimler's on April 1 and only Dimon's from the SEC. That's strange. The first three months of this year were the busiest in FCPA history. But since then, hardly a peep.

With around 150 cases pending and pressure building to resolve long-standing actions involving Panalpina, Technip, ENI, ABB, Alcatel-Lucent, Pride International, Inc., Alcoa, the medical device makers, and pharmas, you have to ask: Where are the enforcement actions for April and May?

In a typical year, we'd expect a couple of actions a month; this year, we'd expect more. So what's happening?

Here are a few guesses:

• Changing horses. Mark Mendelsohn, head of the DOJ's FCPA unit, left government service in mid-April. His departure would be a natural time for those still there or newly arrived to take inventory -- to use the white board to plot their present location and itinerary for the coming year.

• Resources are stretched. With all the pending prosecutions, including the 22-defendant shot-show case, the DOJ's FCPA group has to be stretched. Maybe they're taking a couple of months to catch their breath, bring in reinforcements, and lift their eyes above the trenches to make sure they aren't about to make any big mistakes.

• A new strategy. Could the DOJ be assessing its overall enforcement approach? Looking, perhaps, at how decisions are made to prosecute corporations (which are defenseless because of respondeat superior)? Or whether financial penalties that punish innocent stakeholders make sense? Or if enforcement should zero in on individuals, or find new ways to spotlight foreign officials who demand bribes . . . ?

There's precedent for the current FCPA moratorium. In February and March 2008, the DOJ also came to a dead stop. The reason was never announced but it could have been the controversy over the unregulated appointment of compliance monitors. Former Attorney General John Ashcroft's $52 million gig with Zimmer in a domestic kickback case threw Washington into a spin. The storm blew over and the DOJ was back in the FCPA business after about two months.

Responding to our post Where The Money Is, Washington, D.C. lawyer Marc Alain Bohn suggested we include ABB in the settlement pipeline. He's right.

In December 2008, the Swiss engineering company said it reserved about $850 million for possible resolution of U.S. and European corruption charges.

A story from Dow Jones Deutschland said:

The provisions are for potential costs related to the previously disclosed investigations by the U.S. and European authorities into suspect payments and alleged anti-competitive practices, respectively. The provisions also include an amount for the anticipated impact of a pending tax dispute, asset write downs and restructuring charges relating to the weaker business environment.

The announcement of the $850 million reserve followed ABB's disclosure in an earnings release of this item:

On July 13, 2007, ABB disclosed to the U.S. Department of Justice and the U.S. Securities and Exchange Commission suspect payments made by employees of company subsidiaries in Asia, South America and Europe, in particular Italy. These suspect payments were discovered as a result of ABB's internal audit and compliance program. The payments may be in violation of the Foreign Companies (sic) Practices Act or other applicable laws. If ABB is found to have violated any of these laws, the company could be liable for penalties and other costs and the violations could otherwise negatively impact its business. ABB is cooperating on these issues with the relevant authorities and is continuing its internal investigations and compliance reviews.

ABB had a prior FCPA settlement with the DOJ and SEC that made our big-money list. In July 2004, the company and two subsidiaries disgorged $5.9 million and paid a $10.5 million criminal penalty for violations involving Nigeria, Angola and Kazakhstan. The SEC's July 6, 2005 litigation release is here.

ABB Ltd's shares trade on the New York Stock Exchange under the symbol ABB.

The Justice Department announced on Monday (November 23) the arrest of the former general manager of a Sugar Land, Texas-based ABB subsidiary for his alleged role in a conspiracy to bribe Mexican government officials. The bribes were allegedly intended to secure contracts with the Comisión Federal de Electricidad (CFE), a Mexican state-owned utility company. The DOJ also said a Mexican citizen who acted as a middleman pleaded guilty in the case and is cooperating in the investigation.

The DOJ charged John Joseph O'Shea, 57, of Pleasanton, California, in an 18-count indictment returned by a federal grand jury in Houston on November 16. He was charged with one count of conspiracy to violate the Foreign Corrupt Practices Act (18 U.S.C. § 371), 12 counts of violating the FCPA (15 U.S.C. § 78dd-2 et seq), four counts of international money laundering (18 U.S.C. § 1956), and one count of falsifying records in a federal investigation (18 U.S.C. § 1519).

Although not named in the DOJ release or charging documents, ABB has confirmed that O'Shea was its employee. Fortune carried this statement from the company: "The individual is a former employee of an ABB unit in Texas. He was terminated in the fall of 2004. ABB continues to cooperate with U.S. authorities."

O'Shea hired Fernando Maya Basurto, 47, of Mexico City, to act as the Texas unit's sales agent in Mexico. Under his contract, Basurto received a percentage of sales as his commission. In December 1997, CFE awarded the Texas business unit a contract, known as the SITRACEN contract, to upgrade the backbone of Mexico's electrical network system. The SITRACEN contract generated more than $44 million dollars in revenue for ABB's Texas business unit. In October 2003, CFE also awarded it a multi-year contract for maintenance and upgrades of the SITRACEN contract that generated more than $37 million in revenue.

According to the indictment, O'Shea and Basurto agreed to pay 10 percent of the revenues from the SITRACEN contract to officials at CFE. And for the Evergreen contract, O'Shea authorized more than $900,000 in bribes to CFE officials. He also took a kickback of 1 percent. The indictment alleges that O'Shea, Basurto and others covered up the bribery after ABB fired O'Shea. They fabricated documents that "purported to be evidence of a legitimate business relationship between the Texas business unit and the Mexican companies that provided the false invoices." The indictment described emails between Basurto and O'Shea in which they discussed creating fake correspondence and a phony contract.

ABB discovered the alleged bribery and fraud during an internal investigation. It self-disclosed the payments and related activities to the Justice Department and the Securities and Exchange Commission and helped with their investigations.

Basurto was first arrested in Dallas in April on a criminal complaint charging him with conspiracy to structure transactions and structuring transactions to evade currency reporting requirements. He was later indicted on the same charges on June 10, 2009. As part of his plea deal, the DOJ filed a superseding criminal information charging him with one count of conspiracy to violate the FCPA, to launder money, and to falsify records. The information said jurisdiction over Basurto was based on his being "an agent of a domestic concern, as that term is defined in the FCPA, 15 U.S.C. § 78dd-2(h)(1)."

He pleaded guilty on November 16 in Houston. He faces up to five years in prison and a fine of $250,000 or twice his gain or the victim's loss caused by his crimes. The Justice Department hasn't announced his sentencing date.

Basurto's indictment gave details of the bribes. It said, for example:

Basurto would maintain control over all of these funds [from the Texas business unit] and would, at CFE Official C's instruction, wire funds from these accounts to a Merrill Lynch brokerage account. CFE Official C would then cause some of these funds to be further transferred to the son-in-law of CFE Official N and to the brother of CFE Official C. Basurto would follow additional instructions from CFE Official C concerning the "Good Guys" funds, including giving CFE Official C approximately $20,000 in cash.

For O'Shea, the conspiracy and falsification of records counts each 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. Each of the 12 substantive FCPA counts 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 four international 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 gives notice of criminal forfeiture.

 The DOJ said German authorities assisted in the investigation. Payments allegely were made to the CFE officials through German banks and accounts there.

In July 2004, ABB and two subsidiaries disgorged $5.9 million and paid a $10.5 million penalty for FCPA violations involving Nigeria, Angola and Kazakhstan. In a 2007 earnings release, ABB said it disclosed to the DOJ and SEC "suspect payments made by employees of company subsidiaries in Asia, South America and Europe, in particular Italy. These suspect payments were discovered as a result of ABB's internal audit and compliance program." See our post here.

As the DOJ says, an indictment is merely an accusation, and O’Shea is presumed innocent until and unless proven guilty beyond a reasonable doubt.

View the DOJ's November 23, 2009 release here.

Download the November 16, 2009 criminal indictment in US v. John Joseph O'Shea here.

Download the November 16, 2009 superseding criminal information in US v. Fernando Maya Basurto here.

Download Basurto's plea agreement with the Justice Department here.

In July 2008, the government of Iraq launched a massive FCPA-related federal lawsuit in New York City. We first talked about it here. The complaint named 93 defendants in claims alleging bribery and fraud under the now-defunct United Nations oil-for-food program. Iraq sought more than $10 billion in damages, describing the U.N. program as "the largest financial fraud in human history." (Bernie Madoff hadn't yet reset the scale for measuring financial frauds.)

What's happening in the case today? After nearly a year, Iraq is still trying to serve some of the defendants. A claimant usually has 90 days to effect service of process; in this case, the court's been lenient by granting several extensions. Overseas service can be complicated. So Iraq asked the court to help by issuing letters rogatory (requests for assistance addressed to foreign courts). The non-binding letters are directed at courts in Austria, Jordan, Malaysia, South Africa, and the United Arab Emirates.

According to the federal court's most recent order, anyone not served by July 24, 2009 will be dropped from the suit. Until the deadline passes, none of the defendants have to file answers or raise their defenses.

The post-war Iraqi government alleged that kickbacks were paid to representatives of Saddam Hussein through illegal and undisclosed transportation and port fees, bogus after-sales service fees and overpricing of goods and services. Some of those named have already faced enforcement actions for violating the U.N. regulations or U.S. law, including the Foreign Corrupt Practices Act. Among them are ABB, AB Volvo, Flowserve, Akzo Nobel, Chevron, Siemens, Ingersoll-Rand, York International, Oscar Wyatt, El Paso and Textron.

There's no private right of action under the Foreign Corrupt Practices Act. So Iraq's claims are based on the Racketeer Influenced and Corrupt Organizations Act (RICO), common-law fraud, breach of fiduciary duty and illegal price discrimination.

Here's the full list (which may change after July 24) of everyone named as a defendant in the complaint:

AGCO Denmark A/S, AGCO S.A., Valtra do Brazil, Air Liquide Engineering, Akzo Nobel N.V., N.V. Organon ("Organon"), Intervet International B.V. (Intervet"), Mais Co. for Medical Products, Atlas Copsco CMT, AWB Ltd., B. Braun Medical France, B. Braun Melsungen A.G., B. Braun Medical Industries SDN BHD (Malaysia), Aesculap AG and KG, Aesculap Motric S.A., Aesculap Sugical Instruments SDN, Boston Scientific S.A., BNP Paribas USA, BNP Paribas (Suisse) SA, BNP Paribas Hong Kong, BNP Paribas Paris, BNP Paribas UK Holdings Limited, BNP Paribus London Branch, Buhler Ltd., David B. Chalmers, Jr, Chevron Corp., Daewoo International Corp., Daimler Chrysler AG, Dow Agrosciences, ABB AG, Eastman Kodak S.A., El Paso Corp. (successor to Coastal Corp.), Evapco (Austria), Evapco Europe S.R.L., Avio Flowserve Corp., Flowserve Corp., Flowserve Pompes (Formely Ingersoll-Dresser Pompes), Flowserve B.V.

And some more:

GlaxoSmithKline Walls House, Glaxo Smithkline Egypt SAE, ABB Automation, Glaxo Wellcome SA (South Africa) (PRY) Ltd., SmithKline Beecham International, ABG Allgemeine Baumaschinen-GesellschaftmbH, Dresser international, Ingersoll-Rand Italiana SPA, Thermo King Ireland Limited, Ingersoll-Rand Benelux N.V., Ingersoll-Rand World Trade Ltd., Cilag AG International, Janssen Pharmaceutical, ABB Elektric Sanayi AS, Kia Motors, Liebherr Export AG, Liebher France SA, Seono Pharma International, Merial, Novo Nordisk, Pauwels, Railtech International, ABB Industrie AC Machines, F. Hoffman La Roche, Roche Diagnostics GMBH, Rohm and Haas France S.A., Secalt S.A., Siemens S.A.A. of France, Siemens Sanayi ve Ticaret A.S. of Turkey, Osram Middle East FZE, Solar Turbines Europe,

And the final batch:

St. Jude Medical Export GMBH, ABB Industrie Champagne, Sulzer Buckhardt Engineering Works Ltd., Sulzer Pumpen Deutschland GMBH, Sulzer turbo Ltd., Textron Inc., David Brown Guinard Pumps S.A.S., David Brown Transmissions France S.A., Renault Trucks SAS, ABB Near East Trading Ltd., Renault Agriculture & Sonalika International, Renault V.I, Volvo Construction Equiptment AB, The Weir Group, Oscar S. Wyatt, Jr, Vitol S.A., Woodhouse International, York Air Conditioning and Refrigeration FZE, and ABB Solyvent-Ventec.

Download Iraq's June 27, 2008 complaint here.
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