The FCPA Blog

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

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Dear FCPA Blog,

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

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

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

• The seriousness of the wrongdoing;

• Whether the matter is an isolated incident or whether the company has uncovered other examples of this type of misconduct;

• Whether the wrongdoing is systematic and part of the company’s established practice;

• Whether the affected group within the company was warned that its processes were inadequate;

• Whether the company reported the matter to the SFO within a reasonable time of discovering the incident; and

• Whether the report provided to the SFO is detailed and complete.

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

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

3. Under what circumstances would monitors be appointed?

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

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

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

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

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

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

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

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

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

• Between 2000 and 2006, a small group of unnamed former senior executives from headquarters and a Macedonian affiliate spent  €24 million through over twenty consultancy, lobbying, and other contracts that were probably phony.

• The contracts were used to create a pool of unaccounted cash.

• The purpose of the contracts and slush fund was to "obtain specific regulatory and other benefits from the government of Macedonia."

• The scheme worked. Magyar "generally received the benefits sought and then made expenditures under one or more of the suspect contracts."

• The lawyers hired by Magyar's audit committee, White and Case, couldn't track down who got the illicit cash. “[T]he Investigation did not uncover evidence showing receipt of payments by any Macedonian government officials or political party officials.”

• So the company can't say whether it violated the Foreign Corrupt Practices Act's antibribery provisions. But it did commit accounting offenses. "These contracts were not appropriately recorded in the books and records of the Company and its relevant subsidiaries.  . . . the Company has already reclassified . . . the accounting treatment relating to certain of these contracts to more accurately account for these expenditures."

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

Here are five reasons that come to mind:

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

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

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

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

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

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

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

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

Here's a dispatch from Cody Worthington:

Dear FCPA Blog,

I attended the opening day of ACI's 22nd National Conference on the Foreign Corrupt Practices Act in D.C. yesterday [November 17].

Among the many people there were representatives of the DOJ and SEC. Mark Mendelsohn [left, DOJ Deputy Chief, Fraud Section, Criminal Division] said a new industry-wide FCPA probe of the pharmaceutical companies was underway (which we heard about last week from Assistant Attorney General Lanny A. Breuer). He also said he was "cautiously optimistic" that prosecutions in 2009 would exceed 2008. He pointed out that right now according to his statistics they stand at 9. Last year's total was 17. He said the DOJ has 130 cases open at the moment. He further predicted a large increase in FCPA cases over the next several years due to the recent worldwide recession.

Lanny Breuer gave a luncheon speech. He said how much the DOJ will miss Mark Mendelsohn, who's exploring other opportunities, and how they were searching for a replacement to fill his big shoes. He called Mark "an exceptional public servant and a visionary steward of the FCPA program." He also mentioned the pharmaceutical probe and said other industry-wide investigations will be forthcoming. [Full remarks here.]

Anyway, good stuff and many other great speakers.

I believe there were about 500 people in attendance. A lot of what I call "The Legends of the FCPA" including: Dan Newcomb, Homer Moyer, Roger Whitten, Martin Weinstien, Richard Dean, Lucinda Low, William "Billy" Jacobson, Tim Dickinson, and others. If there is ever an FCPA Hall of Fame, they are in on the first ballot.

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On November 12, 2009, there was a lot of tough talk from the DOJ's Lanny Breuer (left). The new chief of the criminal division warned pharmaceutical companies and executives about their exposure under the Foreign Corrupt Practices Act. He said, "Our focus and resolve in the FCPA area will not abate, and we will be intensely focused on rooting out foreign bribery in your industry. That will mean investigation and, if warranted, prosecution of corporations to be sure, but also investigation and prosecution of senior executives."

He was speaking at an annual pharma compliance confab in Washington. A copy of his remarks can be downloaded here.

On September 3, 2009, the FCPA Blog said:

Will drug makers be the target of the next industry-wide Foreign Corrupt Practices Act investigation, following in the footsteps of the oil and gas services companies and orthopedic device makers? It's possible. Their sales practices are in the news a lot these days. And amid the healthcare debate, drug-company behavior anywhere invites attention in Washington and beyond.

Remember the orthopedic device makers? Like Pfizer this week and Eli Lilly earlier this year, they resolved enforcement actions based on illegal domestic sales practices. Soon after, most of them disclosed that the DOJ and SEC were looking into their overseas marketing methods for any FCPA offenses. Those investigations are ongoing. . . .

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Thanks to everyone who made the jump with us here to our new site. Some readers let us know what needed fixing, which was helpful. We're especially grateful for our webmaster's hard work and patience.

Millipore's announcement last week was unusual. The Massachusetts-based life science firm said in its 10-Q that the SEC won't bring an enforcement action for potential Foreign Corrupt Practices Act violations the company self-reported in 2006. "By its letter on May 14, 2009," Millipore said, "the Securities and Exchange Commission notified us that its investigation has been completed and it will not pursue any enforcement action on this matter."

Not many companies hear that sort of good news, so why did Millipore?

The company said it decided in January 2006 to consolidate the results of its 40 percent-owned India joint venture. It learned then through its own internal controls "that certain payment and commission practices at the India JV [raised] issues of compliance." There was an internal investigation, self-reporting to the SEC and DOJ, and "certain corrective actions." That's all we know.

But the key to the SEC's no-enforcement decision is probably Millipore's ownership of only 40 percent of the India JV. Under the FCPA's internal controls provisions, an issuer holding 50 percent or less of the voting power in another firm is required to use its influence in good faith -- to the extent reasonable under the circumstances -- to cause the other firm to devise and maintain a system of acceptable accounting controls. (Section 13(b)(6) of the Securities Exchange Act of 1934) That provision, part of the FCPA's 1988 Amendments, was meant "to recognize that it is unrealistic to expect a minority owner to exert a disproportionate degree of influence over the accounting practices of a subsidiary." (H.Rept. 100-576, at 917)

Section 13(b)(6) also says that an "issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied" with its internal controls obligations. Conclusively presumed to have complied. So the test is whether Millipore acted in good faith to cause the India JV to devise and maintain acceptable accounting controls. Not whether the JV did so or not.

Is it time to celebrate? Not quite. Although now cleared by the SEC on the internal controls side, what about antibribery aspects? Did any of Millipore's employees know about or help the India joint venture make questionable payments? If so, the Justice Department could still come calling. But if no one at Millipore knew anything (which seems likely, given the SEC's no-action), then the company couldn't have acted "knowingly" to help the JV make corrupt payments to foreign officials in violation of the FCPA.

The DOJ rarely tells companies formally that they're in the clear. For Millipore, the FCPA's five-year statute of limitations will be up in 2011, assuming the company didn't waive the time bar after it self-reported the India JV's potential compliance problems.

Millipore Corp. trades on the New York Stock Exchange under the symbol MIL.

Millipore's Form 10-Q filed August 12, 2009 for the period ending July 04, 2009 can be downloaded here.

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From U.S. v. Green. The AP reported here that the Los Angeles trial of Hollywood producers Gerald and Patricia Green has been delayed for at least a week. "A spokesman for the U.S. attorney's office in Los Angeles, said Tuesday that the delay was due to the availability of a prosecution witness. Jury selection is slated to begin Aug. 25." The Greens are charged with violating the FCPA and other laws by paying $1.8 million in bribes to Thai officials in exchange for $14 million in contracts. The movies they produced include Salvador, Rescue Dawn, and Diamonds.
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