The FCPA Blog

Smith and Wesson, the most prominent company implicated in the Shot-Show prosecutions, disclosed last week that it's being investigated by the DOJ and SEC for FCPA violations. The company said it has already spent $3.2 million in connection with the case.

The disclosure was fairly typical -- some reasons for the government's investigation, the uncertain outcome for the company, and no details about how Smith and Wesson tries to comply with the FCPA. That's too bad.

We'd like to hear more about compliance. But for now, companies and their lawyers think that information doesn't belong in SEC disclosure material. They're partly right. Once an employee pleads guilty to an FCPA offense (the usual outcome of an indictment), the company becomes strictly liable under respondeat superior. It has no defense, so information about its compliance program becomes largely irrelevant.

There's also an assumption that because a compliance program didn't prevent an FCPA offense, the program is worthless. That's wrong. Overseas bribery can happen in any company, even one with an "effective" compliance program.

Here's an idea. Instead of holding companies strictly liable for their employees' FCPA offenses, let them assert a good-faith defense. When accused of an FCPA violation, encourage companies to talk about the strengths of their compliance programs and how they tried to keep their employees on the right side of the law. Give them a chance to redeem their corporate citizenship without being pressured into a deal with the DOJ and SEC. That, in turn, will give them a powerful reason to have a robust compliance program and to disclose details about it, even before they're in trouble.

Investors, customers, suppliers, NGOs, lawmakers, and the general public want to know what companies are doing to avoid overseas corruption. We think Smith and Wesson had good intentions. In its disclosure the company said: "We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad." 

Still, we'd like to know more about what S&W and other companies do to comply with the FCPA. Fixing respondeat superior will encourage them to tell us.

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Here's Smith and Wesson's full FCPA disclosure from its latest annual report:

Foreign Corrupt Practices Act (FCPA)

On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from the law enforcement and military equipment industries, one of whom was our Vice President−Sales, International & U.S. Law Enforcement. We were not charged in the indictment. We also were served with a Grand Jury subpoena for the production of documents. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the DOJ in this matter and have undertaken a comprehensive review of company policies and procedures, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome. There could be additional indictments of our company, our officers, or our employees. If the DOJ determines that we violated FCPA laws, or if our employee is convicted of FCPA violations, we may face sanctions, including significant civil and criminal penalties. In addition, we could be prevented from bidding on domestic military and government contracts, and could risk debarment by the U.S. Department of State. We also face increased legal expenses and could see an increase in the cost of doing international business. We could also see private civil litigation arising as a result of the outcome of the investigation. In addition, responding to the investigation may divert the time and attention of our management from normal business operations. Regardless of the outcome of the investigation, the publicity surrounding the investigation and the potential risks associated with the investigation could negatively impact the perception of our company by investors, customers, and others.

SEC Investigation

Subsequent to the end of fiscal 2010, we received a letter from the staff of the SEC giving notice that the SEC is conducting a non−public, fact−finding inquiry to determine whether there have been any violations of the federal securities laws. It appears this civil inquiry was triggered in part by the DOJ investigation into potential FCPA violations. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the SEC in this matter, the SEC may determine that we have violated federal securities laws. We cannot predict when this inquiry will be completed or its outcome. If the SEC determines that we have violated federal securities laws, we may face injunctive relief, disgorgement of ill−gotten gains, and sanctions, including fines and penalties, or may be forced to take corrective actions that could increase our costs or otherwise adversely affect our business,
results of operations, and liquidity. We also face increased legal expenses and could see an increase in the cost of doing business. We could also see private civil litigation arising as a result of the outcome of this inquiry. In addition, responding to the inquiry may divert the time and attention of our management from normal business operations. Regardless of the outcome of the inquiry, the publicity surrounding the inquiry and the potential risks associated with the inquiry could negatively impact the perception of our company by
investors, customers, and others.

Parker Drilling is one of the dozen or so oil and gas-related companies dragged into FCPA compliance problems by Panalpina, the Swiss logistics firm that allegedly bribed overseas customs and licensing officials on behalf of its clients. Among those investigated by the DOJ and SEC in addition to Parker are Schlumberger, Shell, Tidewater, Nabors Industries, Transocean, GlobalSantaFe Corp., ENSCO, Cameron, Noble Corp., and Pride International.

In its latest quarterly report, Houston-based Parker, which trades on the New York Stock Exchange under the symbol PKD, disclosed details of the investigation, including potential compliance problems in Nigeria and, unexpectedly, Kazakhstan. Some might argue the amount of Parker's disclosure goes beyond the technical requirements of the securities laws. If that's true, why so many words?

First, there's really no downside risk in disclosing more instead of less. We've been debating this point for years with securities lawyers, who often ask us why there's so much voluntary FCPA disclosure when it may not be legally required. We in turn ask what's to be gained by not disclosing an internal investigation?

Second, there are two men named Parker on the board of directors -- Robert L. Parker, the Chairman Emeritus who bought the company from his father in 1957, and Robert L. Parker Jr., who now leads the firm. So although it's a public company, Parker Drilling retains a family-owned aspect. With their name on the door, the Parkers are probably more sensitive than most professional managers to reputational risks. No doubt they want to put the FCPA troubles in the rear-view mirror as soon as possible. One strategy for doing that is to disclose everything -- dissipate the news by releasing it to the public and the press in one go. Don't leave shareholders, bankers, customers, and other stakeholders guessing.

Finally, a detailed disclosure can reduce the chances of future compliance problems. It educates everyone inside the company about FCPA risks, especially in challenging places where oil drillers often find themselves. We think Parker's disclosure reads in some ways like an FCPA compliance manual, full of real-life warnings about what can go wrong, the damage caused, and the way to fix things.

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Here's the full text of the FCPA disclosure from Parker Drilling Company's Form 10-Q dated May 7, 2010:

Customs Agent and Foreign Corrupt Practices Act (FCPA) Investigation
 
As previously disclosed, we received requests from the United States Department of Justice (DOJ) in July 2007 and the United States Securities and Exchange Commission (SEC) in January 2008 relating to our utilization of the services of a customs agent. The DOJ and the SEC are conducting parallel investigations into possible violations of U.S. law by us, including the FCPA. In particular, the DOJ and the SEC are investigating our use of customs agents in certain countries in which we currently operate or formerly operated, including Kazakhstan and Nigeria. We are fully cooperating with the DOJ and SEC investigations and are conducting an internal investigation into potential customs and other issues in Kazakhstan and Nigeria. The internal investigation has identified issues relating to potential non-compliance with applicable laws and regulations, including the FCPA with respect to operations in Kazakhstan and Nigeria. At this point, we are unable to predict the duration, scope or result of the DOJ or the SEC investigation or whether either agency will commence any legal action.
 
Further, in connection with our internal investigation, we also have learned that an individual who may be considered a foreign official under the FCPA owns in trust a substantial stake in a foreign subcontractor with whom we do business through a joint venture relationship in Kazakhstan. We are currently engaged in efforts to evaluate and implement alternatives to restructure or end the relationship with the subcontractor. At this point, we are unable to predict the outcome of our restructuring efforts or whether termination will result, either of which could negatively impact some of our operations in Kazakhstan and potentially have a material adverse impact on our business, results of operations, financial condition and liquidity.
 
The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations, which they may seek to impose against corporations and individuals in appropriate circumstances including, but not limited to, injunctive relief, disgorgement, fines, penalties and modifications to business practices and compliance programs. These authorities have entered into agreements with, and obtained a range of sanctions against, several public corporations and individuals arising from allegations of improper payments and deficiencies in books and records and internal controls, whereby civil and criminal penalties were imposed. Recent civil and criminal settlements have included multi-million dollar fines, deferred prosecution agreements, guilty pleas, and other sanctions, including the requirement that the relevant corporation retain a monitor to oversee its compliance with the FCPA. In addition, corporations may have to end or modify existing business relationships. Any of these remedial measures, if applicable to us, could have a material adverse impact on our business, results of operations, financial condition and liquidity.
 
We have taken certain steps to enhance our anti-bribery compliance efforts, including retaining a full-time Chief Compliance Officer who reports to the Chief Executive Officer and Audit Committee, and implementing efforts for the adoption of revised FCPA policies, procedures, and controls; increased training and testing requirements; contractual provisions for our service providers that interface with foreign government officials; due diligence and continuing oversight procedures for the review and selection of such service providers; and a compliance awareness improvement initiative that includes issuance of periodic anti-bribery compliance alerts.
 
Demand Letter
 
In April 2010, we received a demand letter from a law firm representing Ernest Maresca. The letter states that Mr. Maresca is one of our stockholders and that he believes that certain of our current and former officers and directors violated their fiduciary duties related to the issues described above under “Customs Agent and Foreign Corrupt Practices Act (FCPA) Investigation.” The letter requests that our Board of Directors take action against the individuals in question. In response to this letter, the Board has formed a special committee to evaluate the issues raised by the letter and determine a course of action for the Company.

By Thomas Fox

Thanks to the FCPA Blog for its post Avon: A Pound of Cure. As you said, Avon voluntarily disclosed to the DOJ and SEC its discovery of potential FCPA violations and the on-going internal investigations. I looked into the public record and found that Avon first learned of these allegations via an internal company whistleblower in June 2008. I also discovered that the company made such disclosures as early as October 2008 in an SEC filing and also in its 2008 and 2009 Annual Reports.

Avon's approach contrasts with Hewlett-Packard's, another company recently making FCPA news. HP apparently first learned of a bribery and corruption investigation when it was served with document requests by German authorities in December 2009 -- around the same time that three former and current HP employees were arrested by the same German authorities for allegedly paying bribes to make sales in Russia. As reported by the Wall Street Journal, HP did not report this investigation to the DOJ and SEC until April 2010 and still has not made any public record filing on this bribery and corruption investigation.

The Box Score on these timings appears to be:

One of the clear rules from the U.S. Federal Sentencing Guidelines is that self reporting may qualify a corporation for amnesty or reduced sanctions. I wondered if these differences in approaches in self reporting (or not as the case may be) could lead to higher penalties, monetary or otherwise to HP?

There are two other curious notes regarding HP.

In both its 2008 and 2009 Annual Reports, the company made the following statement: “In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to facilitate compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have a material adverse effect on our business.” Could this be the SEC-required admission of an on-going FCPA investigation?

And in October 2009, HP ordered (via fax transmission) its 155,000 channel operation partners to take an FCPA compliance training course, and pay to do so. Such training was required in a very short time frame or the channel operations partners risked losing their status with HP. Did HP order the training because an unreported and undisclosed FCPA investigation was ongoing?

I'd be interested to hear what others think.

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

Defense lawyer George Terwilliger: The DOJ will put indirect pressure on corporations to encourage compliance. At last week's annual meeting of the National Institute on White Collar Crime, Assistant Attorney General Lanny Breuer warned corporate executives and directors to expect tougher and more innovative Foreign Corrupt Practices Act enforcement. Here's an account from Sue Reisinger at Corporate Counsel.

Braeuer told his Miami Beach audience that recent DOJ enforcement actions "should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for fraud violations. We will not shy away from tough prosecutions and trials." His full remarks are here.

How to interpret AAG Breuer's remarks and recent DOJ enforcement practices?

We asked George Terwilliger, above, a Washington, D.C. lawyer in private practice who previously served in the DOJ for 15 years, including a stint as deputy attorney general. (We talked about his NLJ comment, "FCPA Internal Investigations -- Are They Worth It?" here.)

He said:

Dear FCPA Blog,

The Department’s enforcement policy on the FCPA continues to evolve, with a focus on bringing cases that hit “pressure points” designed to influence corporations to take actions that promote FCPA compliance. The Department’s increased attention to prosecuting individuals is in recognition of the fact that corporations don’t think and decide, the people who operate and lead them do. Punishing individual wrongdoers is designed to affect the course of corporate actions.

Of course, prosecuting corporations themselves remains important, as Assistant Attorney General Breuer noted, because corporations’ shareholders and directors—particularly independent board members—constitute another compliance pressure point. Corporate prosecutions negatively impact the value of the corporation’s stock, thereby adversely affecting shareholders, and expose directors to allegations that they failed to implement adequate compliance measures.

The Department’s focus on the quality of FCPA due diligence in mergers and acquisitions hits yet another pressure point, where companies have both the power to look into an acquisition target and an opportunity to address any FCPA issues they discover.

It remains to be seen whether, or to what extent, those persons or organizations financing foreign acquisitions and other transactions involving companies subject to the FCPA may themselves get scrutiny for their level of FCPA due diligence, especially when such investors take an equity position in a company or joint venture, but do not exercise any operational control.

Finally, Assistant Attorney General Breuer’s emphasis on the benefits of voluntary disclosure is a restatement of existing Department policy, but questions still remain about how to measure and quantify those benefits.  Such quantification is necessary for informed decision-making.

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.