If issuers make a facilitation payment in a jurisdiction where that payment is illegal, but they record it accurately, they're essentially creating evidence of a crime.
Entries in Dow Chemical (5)
Yesterday we posted our 2011 FCPA enforcement index. Today we look at corporate enforcement for all the years from 2006.
Parker Drilling's directors are facing a shareholder suit that was brought after the company's detailed disclosure earlier this month that it is being investigated by the Justice Department and Securities and Exchange Commission for compliance problems in Nigeria and Kazakhstan.
Courthouse News said the derivative suit was filed in Harris County Court in Texas.
The suit alleges breach of fiduciary duty, abuse of control, gross mismanagement and wasting corporate assets. It named Robert Parker Jr., Robert Parker, John Gibson, Roger Plank, Robert McKee, George Donnelly, Robert Goldman, Gary King, Rudolph Reinfrank and David Mannon.
As we've reported, Parker 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. Panalpina itself was hit with a shareholder derivative suit in federal court in Texas last year.
There's no private right of action under the FCPA. So private litigants have to resort to other causes of action -- such as common law fraud, RICO, securities law violations, or breach of fiduciary duties. But private litigants haven't done well with FCPA-related claims. BAE directors this year won dismissal of a bribe-related case, as did Dow Chemical's.
In 2008, the Ninth Circuit in Glazer Capital Management v. Magistri put an 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. Since then, plaintiffs have filed FCPA-based derivative claims in state court, including one in Texas a year ago against some of the officers and directors of Halliburton and its one-time subsidiary, KBR.
The FCPA-related news just keeps coming -- faster and faster. Even before last week's head-spinning mega bust, there was enough news from the past month to keep us busy till summer. The hard part has been keeping it all straight.
So let's take some quiet time to gather our thoughts about what's happened over the past 30 days:
1. Oh Crikey! In late December, the D.C. federal appeals court affirmed the dismissal of a shareholder derivative suit against some current and former directors and executives of U.K.-based BAE Systems PLC. The complaint alleged BAE's payment of more than $2 billion in bribes and kickbacks to Prince Bandar Bin Sultan of Saudi Arabia. The suit claimed the defendants breached their fiduciary duties and wasted corporate assets.
The U.S. federal courts applied English law to the case. A fossilized 1843 case they unearthed called Foss v. Harbottle, 2 Hare 461, 67 E.R. 189 said "the company, not a shareholder, is the proper plaintiff in a suit seeking redress for wrongs allegedly committed against the company."
The appeals court saw no reason to create an exception to promote the U.S. public policy of protecting shareholders and the company itself from law-breaking directors and executives. It gave the BAE directors even more comfort by noting that under English law, paying bribes isn't necessarily an ultra vires act “beyond the corporate capacity of a company.”
Our take: Even in civil courts, shouldn't directors of foreign companies that do business in and from the U.S. be held to the same standards as U.S.-company directors?
2. Others have said so what. But we thought this was a nifty piece of news: A U.S. company with no securities traded on an exchange but that files periodic reports with the Securities and Exchange Commission disclosed an internal investigation into possible Foreign Corrupt Practices Act violations and said it had self-disclosed to the SEC and DOJ.
Tampa-based 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 files periodic reports with the SEC. That makes it an "issuer" subject to the books and records and internal controls provisions. We think it's the first "issuer" without shares traded on an exchange to announce an FCPA investigation self-reported to the feds.
OK, it's not momentous. But we're amazed that apparently fresh FCPA enforcement scenarios are still popping up more than 30 years after the law's enactment.
3. Your money or your HR director. The SEC kicked off the FCPA-enforcement year with civil books and records and internal controls charges against Texas-based oil and gas services firm NATCO Group Inc. The company was hit with a $65,000 civil penalty because its subsidiary, TEST Automation & Controls, Inc., "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan."
Extorted is the important word.
Companies and expat employees regularly face demands for cash from foreign police, bureaucrats and regulators that are backed by threats. The case is a reminder that extorted payments may not violate the FCPA's antibribery provisions but can be the basis for accounting offenses if not accurately recorded.
Our take: Although technically correct, the SEC looked petty dinging Natco for $65K. A warning letter about the accounting lapses (with some sympathy for the extortion) would have been fine.
4. Directors 2, Plaintiffs 0. In dismissing a shareholder deriviative suit that alleged Dow Chemical's directors failed to prevent bribery in Kuwait, a Delaware chancery court said Dow's corporate compliance program was evidence the board had met its fiduciary duty of supervision.
Tucked in a footnote, the court's important message said: "Plaintiffs cannot simultaneously argue that the Dow board 'utterly failed' to meet its oversight duties yet had 'corporate governance procedures' in place without alleging that the board deliberately failed to monitor its ethics policy or its internal procedures."
Our take: Spot-on decisions like this are what make the Delaware chancery court so respected.
5, 6, 7 And that brings us to . . . last week's FCPA mega bust. Which was immediately followed by a one-count criminal information against "Individual 1" from the mega-bust indictments -- revealed to be Richard T. Bistrong. For a nice account of his first court appearance in D.C. on Friday, take a look at this dispatch from Christopher Matthews at Main Justice.
And let's not forget last week's indictment of the Thai official and her daughter who allegedly took bribes from Gerald and Patricia Green. Juthamas Siriwan, the ex-governor of the Tourism Authority of Thailand, becomes one of the few foreign officials charged in the U.S. for a corruption-related offense. As for the Greens, their sentencing on FCPA and related charges was postponed last week until March 11.
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Not long ago, it would have taken a year or more to rack up this much FCPA-type action. That makes us wonder what the rest of 2010 will look like. It's going to be a wild ride.
A Delaware chancery court this week cited Dow Chemical's corporate compliance program as a reason for dismissing a shareholder derivative suit against the company's current directors that alleged they failed to prevent overseas bribery.
The suit was first filed in February 2009. It was based partly on the decision by Kuwait's parliament to rescind the purchase of some of Dow's assets. Kuwait rejected the deal -- known as K-Dow -- because of “suspicions of profiteering and accepting all forms of commissions" by executives of the buyer, state-owned Kuwait Petrochemicals Industries Company.
Based on Kuwait's allegations, the plaintiffs in the Delaware case said Dow’s board "failed to detect and prevent bribery in connection with the K-Dow transaction." The chancery court rejected the claim. It said although "plaintiffs allege that bribery may have occurred, they do not allege that the board knew about, or had reason to suspect, bribery." On that basis, the allegations in the complaint concerning the K-Dow deal were dismissed, along with the rest of the complaint.
In a footnote that may have important consequences beyond this case, the court said Dow's compliance program was evidence that the board had met its fiduciary duty to prevent overseas bribery. It said there was enough evidence for purposes of the motion to dismiss to assume that bribery had occurred. But even if it had, that didn't prove the board was liable unless the plaintiffs could also show the board intentionally ignored the compliance program.
The court said,
Plaintiffs cannot meet their burden here for another reason. The Dow board has set up policies to prevent improper dealing with third parties. In particular, Dow’s Code of Ethics expressly prohibits any unethical payments to third parties. Moreover, plaintiffs’ own complaint once again belies their argument. Contained within Count II’s litany of alleged breaches of fiduciary duty plaintiffs implicitly acknowledge Dow’s “corporate governance procedures.”. . . Plaintiffs cannot simultaneously argue that the Dow board “utterly failed” to meet its oversight duties yet had “corporate governance procedures” in place without alleging that the board deliberately failed to monitor its ethics policy or its internal procedures.
The case is a powerful reason for directors and officers to insist on robust antibribery compliance programs that include regular reports back to the board.
A copy of the memorandum opinion by the Delaware chancery court in In Re The Dow Chemical Company Derivative Litigation, Consolidated Civil Action No. 4349-CC, decided January 11, 2010, can be downloaded here.
A copy of Dow's code of business conduct (in 20 languages) can be downloaded here.
We're grateful once again to Marc Bohn for his invaluable help with this post.