Fox's Favorite Investigations

By Thomas Fox

Last week I picked my favorite FCPA enforcement actions for 2010. Here are my choices for the top ten investigations disclosed or making news this year:

1. Avon-What's the cost of non-compliance?

Investigative Cost, Revenue or Earnings Loss in 2009/2010
Investigative Cost (2009)	$35 Million
Investigative Cost (anticipated-2010)	$95 Million
Drop in Q1 Earnings	$74.8 Million
Loss in Revenue from China Operations	$10 Million
Total	$214.8 Million

2. Gun Sting Case-Organized Crime Fighting Techniques Come to FCPA Enforcement-Undercover criminal enforcement techniques such as wire taps, video tapes of the defendants and a cooperating defendant were used in a sting operation resulting in the arrest of 22 persons. An undercover FBI Agent posed as a corrupt official from a country later identified as Gabon seeking to purchase a wide array of arms.

3. HP-To Report or Not to Report-allegations of a payment of an approximately $10.9 million bribe to obtain a $47.3 million computer hardware contract in Russia. HP did not self-report and the DOJ/SEC announced investigations after the WSJ reported German authorities were investigating the transaction.

4. Team Inc.-No de minimis exception in the FCPA-Team disclosed that an internal investigation that it made improper payments over the past five years that did not exceed $50,000. Its 2009 and 2010 investigation costs-reportedly at $6.2 million.

5. ALSTOM-Arrests in the Board Room-Three members of the Board of ALSTOM in the UK were arrested on suspicion of bribery and corruption, conspiracy to pay bribes, money laundering and false accounting.

6. PBSJ- The Effect of an Ongoing FCPA Investigation in a Merger and Acquisition-PBSJ was required to accept a takeover offer of lease money rather than allow the purchaser to back out of the deal if the FCPA investigation goes south.

7. Schlumberger-Red Flags, Red Flags and More Red Flags-Investigation of allegations of possible bribery in Yemen by Schlumberger Ltd. regarding a contract with the government. The reported allegations stand out as classic Red Flags. (1) Agent proposed by customer at or near the time the contractual negotiations were nearing conclusion. (2) Agreed to pay the agent before contract was signed. (3) No written contract was executed for these services.

8. CB Richard Ellis-No business or industry is immune from the FCPA-CB Richard Ellis, global real estate firm, disclosed possible FCPA violations in China. Any company which does business overseas needs to have a full FCPA compliance program in place. 

9. Rino-Welcome to the (FCPA) Club. The first FCPA inquiry on a China-based issuer. 

10. SciClone-Hell hath no fury like an SEC Notice-SciClone received notice of a SEC investigation. Within one week, its stock dropped over 31% and five law firms announced that they were investigating the company for potential securities laws investigation. Within two weeks, seven different law firms had filed class actions suits against the company for securities violations.

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.

High-Velocity FCPA

There's been more FCPA action in the past month than in most prior years since enactment in 1977. What's the rest of 2010 going to bring? Photo by Patrick BourThe 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.

*   *   *

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.

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.