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September 24, 2008 |
The SEC’s Market Manipulation Investigation Is Expanding: What Hedge Funds, Broker/Dealers and Other Large Institutional Investors Should Know

On Friday, September 19, 2008, the Securities and Exchange Commission announced a "sweeping expansion" of its ongoing investigation of possible manipulation of the price of equity securities of financial institutions,[1] to determine whether certain market participants engaged in illegal activity to enhance the value of short positions.  SEC Chairman Christopher Cox stated that the investigation will look into the activity of investors with significant short positions in equity markets and positions in credit default swaps.  This expansion, according to Chairman Cox, supplements ongoing SEC investigations concerning the origination and securitization of sub prime mortgage loans, the involvement of credit rating agencies and insurers in the securitization process, and the sale of mortgage-backed investments to investors. On September 23, many newspapers reported that the Federal Bureau of Investigation has opened preliminary investigations of activity at four major businesses which either received government assistance or filed for bankruptcy protection and was continuing investigations about mortgage related issues at twenty six other companies nationwide. Coming in the midst of market turmoil, the Commission’s September 19 announcement stated that it had approved a formal order of private investigation authorizing its Division of Enforcement to subpoena documents and require witnesses to testify.  It also announced that FINRA and NYSE Regulation examiners would be onsite at broker/dealers to review short-selling activity.  On September 22, the Commission issued orders under Section 21(a)(1) of the Securities Exchange Act of 1934 requiring written statements from market participants regarding market positions, compliance with existing short sale rules, and details of all information shared or received about specified financial institutions.  The Commission’s use of this tool – one that has not been broadly used for several years — represents a significant escalation of its enforcement efforts in this area.  Letters requesting these sworn statements have already been issued with relatively short return dates. Market participants who receive requests for sworn written statements, trading information and other data should consider the following points:   1.  Preserve Documents and Data.    Recipients of the SEC’s Section 21(a)(1) order are being asked to preserve all documents pertaining to the specified financial institutions.  Penalties for failing to preserve documents and data requested by a government agency such as the SEC can be severe.  Prompt steps should be taken to preserve requested documents and data.  The failure to preserve and produce documents and data can damage an institution’s credibility with the government even if it does not result in civil or criminal government action. Document demands by the SEC, self regulatory organizations or other government agencies may appear burdensome and create difficult compliance issues particularly in the age of electronic documents.   Many of those burdens can be alleviated through dialogue with the Commission Staff.  Thus, recipients of subpoenas or orders requiring written statements should preserve the requested documents and data first and then negotiate the scope and schedule of production or relief from the need to continue burdensome preservation requirements that may otherwise adversely affect business operations. 2. Be Precise and Accurate in Responses.  Section 21(a)(1) responses are statements that are made under oath "by a senior officer, managing partner or director" of the recipient and are subject to the criminal penalties for perjury and for making false statements to the federal government.   The Commission may share the responses with the Congress or other agencies of government.  The responses may also have to be provided in private civil litigation and be admissible as evidence and could become public.  It is therefore essential that information provided is accurate and complete.   Reponses to questions posed by the government should not be the based on guesswork or speculation but instead on a careful analysis of the recipient’s records and data and after gathering the relevant facts from all relevant sources.  If additional time is needed to respond, then consider requesting an extension of the due date from the SEC and working out a reasonable timetable within which the information may be supplied.  If there are limits on the ability to provide information or other qualifications, they should be clearly noted in the response.  3. Obtain Legal Assistance. Recipients of subpoenas or orders requiring statements regarding the facts and circumstances of the investigation should obtain the assistance of counsel.  A Section 21(a)(1) order calls for, in effect, a "mini" internal inquiry.  Counsel can assist in gathering the data and documents needed to respond, preserve appropriate evidentiary privileges and the rights of the recipients, negotiate the contours and timing of the response with the SEC staff, and can advise the recipient on the legal issues presented and possible legal exposure.  Due care and precision in one’s initial responses can help avoid later difficulties.  Public outcry in times of economic stress sometimes leads to claims of illegal behavior, when, in fact, no violation of law has occurred.  The government sometimes finds that an initial belief that illegal conduct has occurred proves to be unfounded.  Care and accuracy in responding to investigative demands for information establishes the foundation of credibility upon which facts demonstrating legitimate activity can be based. ___________________   [1]   "SEC Expands Sweeping Investigation of Market Manipulation," September 19, 2008, available at www.sec.gov/news/press/2008/2008-214.htm. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn attorney with whom you work, John H. Sturc (202-955-8243, jsturc@gibsondunn.com), Barry R. Goldsmith (202-955-8580, bgoldsmith@gibsondunn.com) or K. Susan Grafton (202-887-3554, sgrafton@gibsondunn.com) in the firm’s Washington, D.C. office, or any of the following:    New York Jonathan C. Dickey (212-351-2399, jdickey@gibsondunn.com)Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com)Robert F. Serio – New York (212-351-3917, rserio@gibsondunn.com) James A. Walden (212-351-2300, jwalden@gibsondunn.com) Washington, D.C. Michael Bopp (202-955-8256, mbopp@gibsondunn.com) Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com)F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)  Los Angeles Thomas E. Holliday (213-229-7370, tholliday@gibsondunn.com)Marcellus A. McRae (213-229-7675, mmcrae@gibsondunn.com)James J. Moloney (949-451-4343, jmoloney@gibsondunn.com)Wayne W. Smith (949-451-4108, wsmith@gibsondunn.com)Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com)  © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 22, 2008 |
Recent Senate Hearing Targets Dividend Tax Avoidance by Large Financial Firms with Offshore Entities

A key Senate investigative body has issued its latest findings in its investigation of alleged abusive tax practices, which is now in its seventh year.  The investigation has examined alleged offshore tax havens, the way tax shelters are promoted, how assets are "hidden" offshore, and, most recently, dividend tax abuse.  While it is not clear where the investigation will focus next, it is highly likely that it will continue.   On September 11, 2008, the Senate Permanent Subcommittee on Investigations issued a report alleging that large financial firms have facilitated the avoidance of U.S. taxes by offshore entities on dividends paid by U.S. corporations.  The subcommittee, which is chaired by Carl M. Levin (D-Mich.), issued its report in connection with a hearing held September 11, 2008.  Representatives of several Wall Street firms testified at the hearing, during which the subcommittee discussed six case studies of alleged abuse of the tax system.  The subcommittee focused on two forms of transactions–equity swaps and stock loans–that allow non-U.S. entities to avoid withholding taxes on dividends paid from U.S. companies.  This most recent hearing is the latest in a series of subcommittee investigations into large U.S. financial firms that offer tax savings to their offshore clients.   Recent Inquiries Conducted by the Permanent Subcommittee on Investigations   The Senate Permanent Subcommittee on Investigations, which has the broadest investigative mission in the Senate, has a history of investigating offshore tax abuses that dates back twenty-five years.  Since 2001, the subcommittee has conducted six separate investigations into offshore tax havens.  The subcommittee typically uses case studies to illustrate different types of alleged tax abuses and customarily calls upon its corporate and individual investigative targets to testify.  The subcommittee has focused both on entities that engage in alleged tax abuses and those who promote them.  Earlier this year, the subcommittee’s staff issued a report criticizing firms for "using an armada of tax attorneys, accountants, bankers, brokers, corporate service providers, trust administrators, and others" to promote "tax havens to U.S. citizens as a means to avoid U.S. taxes."[1] Dividend Tax Abuse Investigation The subcommittee’s most recent report singled out for criticism two types of transactions that allow foreign investors to avoid a withholding tax on U.S.-issued dividends that can be as much as 30% of the amount of the dividend.[2]  The subcommittee asserted that it has found "substantial evidence that U.S. financial institutions knowingly developed, marketed, and implemented a wide range of transactions" aimed at avoiding withholding taxes on dividends paid by U.S. corporations. The first type of transaction is known as an "equity swap," whereby an offshore fund enters into a swap contract with a financial institution.  The financial institution is obligated to pay the total return on the swapped stock, including any gains and dividends paid.  But under a current IRS regulation, the total return swap payments are not subject to the withholding tax that would be due on dividend payments to foreign investors.  The second type of transaction highlighted by the subcommittee is a combination stock loan and swap arrangement between an offshore fund, an offshore subsidiary of a U.S. financial institution and the U.S. financial institution.  Under this transaction, the U.S. corporation makes a total return swap payment to its offshore subsidiary which in turn makes  a "substitute dividend" payment to the offshore fund.  The parties to the arrangement take the position that the substitute dividend payment is not subject to withholding. As Forbes noted after the hearing, the subcommittee’s main targets were the "investment banks that designed and marketed" these products, and "not the offshore investment vehicles that profited from them."[3]  Chairman Levin pointed to the companies’ internal emails, marketing documents, and promotional literature in alleging that the primary motivation behind these two products was purely tax avoidance.  Firm representatives testifying at the hearing were asked to defend their marketing literature that promoted tax savings and to explain the non-tax benefits of equity swaps and stock loans.  What Firms Should Know 1.  The Senate Permanent Subcommittee on Investigations is continuing its investigation of tax abuses that began seven years ago.  The subcommittee is extremely aggressive in conducting its investigations and is not afraid to use its unusually broad subpoena authority. 2.  This most recent phase of the subcommittee’s investigation was the end product of more than a dozen subpoenas and numerous interviews of bank executives, tax lawyers, and hedge fund managers.  In all, the subcommittee compiled its report after reviewing hundreds of thousands of documents gleaned from the financial firms being investigated.  3.  The subcommittee is pressuring the IRS and the Treasury Department to increase their enforcement actions and to revise notices and interpretations of the tax code in order to eliminate offshore dividend tax avoidance.  4.  Firms subject to the subcommittee’s investigative power can be expected to account for marketing literature, internal communications, and other documents that promote tax savings, as well as to explain the non-tax benefits of financial products offered to clients.  They also should anticipate being called as witnesses at a subcommittee hearing. 5.  Firms under investigation should have a clear understanding of the differences between Congressional and other government investigations and should adjust their defense strategies accordingly. One key difference involves the mechanisms used to enforce requests for documents, other information, and testimony. These must be understood in order to make informed decisions on how to respond to Congressional committees. _______________________   [1]   Senate Permanent Subcommittee on Investigations, Staff Report, "Tax Haven Banks and U.S. Tax Compliance," July 17, 2008, p. 17, available at http://hsgac.senate.gov/public/_files/071708PSIReport.pdf.   [2]   The September 11 report issued by the Subcommittee on Permanent Investigations, "Dividend Tax Abuse: How Offshore Entities Dodges Taxes on U.S. Stock Dividends," is available online at http://levin.senate.gov/newsroom/supporting/2008/091108DividendTaxAbuse.pdf.   [3]   Anita Raghavan, "The Tax-Dodge Derivative," Forbes.com, Sept. 11, 2008, available at http://www.forbes.com/businessinthebeltway/2008/09/11/senate-dividends-tax-biz-beltway-cx_ar_0911divtax.html.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the Gibson Dunn attorney with whom you work, or any of the following:   Michael Bopp (202-955-8256, mbopp@gibsondunn.com) Mel Levine (310-557-8098, mlevine@gibsondunn.com) Arthur D. Pasternak (202-955-8582, apasternak@gibsondunn.com) John H. Sturc (202-955-8243, jsturc@gibsondunn.com)F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 2, 2008 |
Department of Justice’s New Policy on the Investigation of Companies Warrants Reassessment of Corporate Responses to Criminal Investigations

In a speech delivered by Deputy Attorney General Mark Filip to the New York Stock Exchange on August 28, 2008, the Department of Justice announced sweeping changes to the factors federal prosecutors may consider in determining whether to bring criminal charges against business organizations. These changes, which were first previewed in a July 9, 2008 letter sent by Filip to the Senate Judiciary Committee leadership and are now in full effect, should have an immediate impact on the way in which corporations and other businesses deal with ongoing and future investigations by United States Attorneys Offices and other DOJ components. As explained in a recent Gibson Dunn client update, DOJ has been faced with increased Congressional pressure to ensure that corporations are not forced to forfeit the protections of both the attorney-client privilege and work product doctrine in order to receive full cooperation credit in a DOJ investigation. On June 26, 2008, Senator Arlen Specter re-introduced the Attorney-Client Privilege Protection Act of 2008, which was designed as a legislative solution to a DOJ internal policy many critics had argued placed businesses at an unfair disadvantage by allowing prosecutors to ask that businesses waive privilege during an investigation. Consistent with his July 9 letter, Filip described the following changes to DOJ policy, which for the first time have been promulgated in the United States Attorneys’ Manual, rather than in memorandum form: Cooperation will be measured the same as it is for individual defendants: to receive cooperation credit, businesses need only disclose pertinent facts; it is irrelevant whether the business produces privileged materials. Businesses will receive the same credit for disclosing facts that are contained in unprotected materials as they would for disclosing identical facts contained in privileged documents. Under the new policy, prosecutors may not request–or even consider the failure to provide–non-factual, or “Category II,” privileged information. Such information includes legal advice, which Filip noted “lies at the core of the attorney-client privilege.” There are only two narrow exceptions to this general edict: first, prosecutors may ask for disclosures of communications that bear on a proffered advice-of-counsel defense. This would be appropriate, for example, when a corporation asserts that it relied on the advice of counsel in engaging in the conduct under investigation. Second, DOJ may request communications between a corporation and counsel that were made in furtherance of criminal activity–the so-called crime fraud exception–as such communications fall outside of the attorney-client privilege. Further, in evaluating cooperation credit, it is now irrelevant (1) whether a corporation advanced legal fees to any of its employees, (2) whether a corporation has entered into a joint defense agreement, or (3) whether a corporation has terminated or otherwise disciplined any of its employees. Although the DOJ may consider company action against employees in assessing the strength of the corporation’s compliance program, or the sufficiency of its internal controls, it no longer may do so when assessing the corporation’s cooperation. While these reforms broaden the protection of attorney-client privilege within internal DOJ policy, and allow corporations to receive full credit for cooperating without having to waive important privileges, careful analysis of the new language reveals potential risks that businesses will face in trying to cooperate with DOJ investigations.  First, the new language in the U.S. Attorneys’ Manual makes clear that a corporation may be required to disclose facts unearthed during an internal investigation, even when that investigation was conducted by counsel. Although prosecutors may no longer ask for attorney notes or other work product resulting from an internal investigation, disclosure of relevant facts learned in an attorney-led investigation could result in a judicial finding of waiver of privilege in future civil litigation. Plaintiffs in such suits likely would argue that by disclosing facts learned during interviews of employees by the corporation’s lawyers–interviews that are traditionally protected as attorney-client communications–the corporation has waived privilege or work-product protection for any other aspect of those interviews or for the same subject matters covered by the witness statements. This risk should be carefully evaluated before such information is released for the sake of earning cooperation credit. Second, it should be noted that although entering into a joint-defense agreement is not per se uncooperative conduct, some acts by the corporation as part of a joint defense may count against its credit for cooperation. For example, DOJ may penalize a corporation for sharing with third parties information it acquired from the government. Also, joint-defense agreements may hinder the ability of a corporation to disclose otherwise relevant facts–the critical factor for whether the business has been cooperative. As the new policy explains, corporations seeking full credit for cooperation should fashion joint-defense agreements that are flexible enough to account for such requirements. Finally, it is important to remember that these new internal policies do not have the force of law. Traditionally, even the placement of a policy in the U.S. Attorneys’ Manual does not create enforceable rights, and those aggrieved may only appeal to higher levels within DOJ. The new policy also is subject to further changes by future administrations. Both Filip’s remarks and the new language in the U.S. Attorneys’ Manual stress the basic but important point that cooperation with DOJ is not legally required, and lack of cooperation may not be considered as evidence of wrongdoing, nor will it necessarily make a difference in the government’s decision whether to indict. It remains to be seen whether these changes will mollify Congressional concern over the use of privileged information, or whether a legislative response will be pursued despite DOJ’s unilateral reforms. The new policy, as it appears in the U.S. Attorneys’ Manual, can be found at: http://www.usdoj.gov/opa/documents/corp-charging-guidelines.pdf The White Collar Defense and Investigations Practice Group of Gibson, Dunn & Crutcher LLP successfully defends corporations, senior corporate executives, and public officials in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies in almost every business sector. The Group has members in every domestic office of the Firm and draws on more than 75 attorneys with deep government experience, including numerous former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission. Members of the Group are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C.F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)John H. Sturc (202-955-8243, jsturc@gibsondunn.com)David P. Burns (202-887-3786, dburns@gibsondunn.com)  David Debold (202-955-8551, ddebold@gibsondunn.com) New YorkJim Walden (212-351-2300, jwalden@gibsondunn.com)Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los AngelesThomas E. Holliday (213-229-7370, tholliday@gibsondunn.com)Marcellus A. McRae (213-229-7675, mmcrae@gibsondunn.com)Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com)Michael M. Farhang (213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (213-229-7605, dfuchs@gibsondunn.com) San FranciscoGary R. Spratling (415-393-8222, gspratling@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 1, 2008 |
Go Directly to Jail: Sentencing of Individual Criminal Defendants in Foreign Corrupt Practices Act Cases

Washington, D.C. partner F. Joseph Warin and associate Patrick F. Speice are the authors of “Go Directly to Jail: Sentencing of Individual Criminal Defendants in Foreign Corrupt Practices Act Cases” [PDF] published in the September issue of Bloomberg Law Reports.

July 31, 2008 |
The Blame Game

New York partner Lee G. Dunst is the author of "The blame game," [PDF] published in the July 31, 2008 issue of Legal Week.  Reprinted with permission, © 2008, Legal Week.   

July 11, 2008 |
Justice Department Makes Concessions In Corporate Prosecution Tactics To Forestall Attorney-Client Privilege Legislation

Faced with continuing Congressional interest in legislation aimed at preventing federal prosecutors and other enforcement attorneys from seeking privileged information, the Justice Department has announced that it will again revise its policy regarding the investigation and prosecution of business organizations.  The DOJ’s proposals will restrict the ability of federal prosecutors to seek privileged information from companies, and will have an immediate impact on the ways in which businesses cooperate with government investigations.  The current Principles of Federal Prosecution of Business Organizations, outlined in the "McNulty Memo,"  have been the focus of Congressional and public criticism, and Pennsylvania Senator Arlen Specter has spear-headed legislation aimed at protecting the attorney-client and work product privileges and restraining the government’s hand in investigations.  Senator Specter re-introduced the legislation – the Attorney-Client Privilege Protection Act of 2008 – on June 26, 2008; it has already passed the House.  Apparently in response to that proposed legislation and continuing criticism, Attorney General Michael B. Mukasey announced during testimony before a Senate Judiciary Committee oversight hearing on July 9, 2008, that the DOJ would be updating the McNulty Memo.  Following that testimony, Deputy Attorney General Mark Filip sent a July 9th letter [PDF] to the Senate Judiciary Committee leadership identifying some of the changes that the DOJ anticipates making in the coming weeks, and requesting that legislation be held in abeyance while the changes are implemented.  Specifically, the Deputy Attorney General identified the following changes: Cooperation will be measured the same way for businesses as for individuals: by considering solely the extent to which the company has timely disclosed the relevant facts about the misconduct in question, and "not whether the corporation waived attorney-client privilege or work product protection in making its disclosures."  The Justice Department will not seek the disclosure of any non-factual attorney work product or core attorney-client communications as a condition for cooperation credit. Federal prosecutors will not consider, in evaluating cooperation, whether a corporation has (1) advanced attorneys’ fees to its employees; (2) entered into joint-defense or similar agreements; or (3) retained or sanctioned culpable employees. Whether these proposed changes will sufficiently placate critics and successfully avoid the proposed legislation remains to be seen.  Indeed, the initial response from Senator Specter suggests that the DOJ’s effort to head off legislation may have been a political miscalculation.  It is also important to note, however, that the proposed changes do not have the force of law, and apply only to Justice Department prosecutors, not civil enforcement attorneys from the Securities and Exchange Commission or other federal agencies, unlike Senator Specter’s proposed legislation. While these proposed changes – if implemented – will undoubtedly have a significant impact on how corporations respond to federal criminal investigations, corporations must remember that full and forthcoming factual disclosure will remain required to demonstrate cooperation, and thereby help to avoid the threat of indictment in situations where there is culpability by corporate employees.  The attorneys at Gibson, Dunn & Crutcher LLP will continue to follow these ongoing changes in the Department’s policies, as they have over the previous several years, so that businesses can make the best-informed decisions about how to respond to a Department of Justice investigation. The White Collar Defense and Investigations Practice Group of Gibson, Dunn & Crutcher LLP successfully defends corporations, senior corporate executives, and public officials in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies in almost every business sector. The Group has members in every domestic office of the Firm and draws on more than 75 attorneys with deep government experience, including numerous former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission. Members of the Group are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C.F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)John H. Sturc (202-955-8243, jsturc@gibsondunn.com)David P. Burns (202-887-3786, dburns@gibsondunn.com) David Debold (202-955-8551, ddebold@gibsondunn.com) New YorkJim Walden (212-351-2300, jwalden@gibsondunn.com) Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los AngelesThomas E. Holliday (213-229-7370, tholliday@gibsondunn.com)Marcellus A. McRae (213-229-7675, mmcrae@gibsondunn.com)Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com) Michael M. Farhang (213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (213-229-7605, dfuchs@gibsondunn.com) San FranciscoGary R. Spratling (415-393-8222, gspratling@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 7, 2008 |
2008 Mid-Year FCPA Update

The frenetic pace of Foreign Corrupt Practices Act ("FCPA") enforcement set in 2007 has carried through the first half of 2008.  Mid-year prosecutions are up – substantially so – from last year’s record-setting totals.  And corporate disclosures and media reports of ongoing investigations evidence that this trend of continually increasing enforcement is here to stay for the near future.  This client update provides an overview of the FCPA and other foreign bribery enforcement activities during the first half of 2008, a discussion of the trends we see from that activity, and practical guidance to help companies avoid or limit liability under these laws.  A collection of Gibson Dunn’s publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on our FCPA website. FCPA Overview The FCPA’s anti-bribery provisions make it illegal to offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business.  The anti-bribery provisions apply to "issuers," "domestic concerns," and "any person" that violates the FCPA while in the territory of the United States.  The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, the approximately 1,500 foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of this statute.  The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Regulators have frequently invoked these latter two sections – collectively known as the accounting provisions – in recent years when they cannot establish the elements of an anti-bribery prosecution.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provision can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency.  2008 Mid-Year Figures The continuing explosion of FCPA prosecutions during the first half of 2008 is best captured in the following chart and graph, which each track the number of FCPA enforcement actions filed by the DOJ and SEC during the past five years.  In these first six months, there have been more FCPA prosecutions than in any other full year prior to 2007.  And although the careful reader will notice that year-to-date numbers are less than half of 2007’s record numbers, by this point last year the DOJ and SEC had filed 5 and 4 enforcement actions, respectively, substantially fewer than we have seen thus far in 2008.  2008(through June 30) 2007 2006 2005 2004 DOJ7 SEC9 DOJ18 SEC20 DOJ7 SEC8 DOJ7 SEC5 DOJ2 SEC3   2008 Mid-Year Enforcement Docket Westinghouse Air Brake Technologies Corp. On February 14, the DOJ and SEC announced settlements with Westinghouse Air Brake Technologies Corp. ("Wabtec") resolving allegations that Wabtec violated the anti-bribery and accounting provisions of the FCPA.  The SEC’s complaint and administrative order allege that Wabtec’s Indian subsidiary, Pioneer Friction Ltd., made $137,400 in improper payments to officials of the Indian Railway Board.  Pioneer allegedly made these payments to influence the Board to award it new contracts to supply brake blocks and to approve Pioneer’s pricing proposals for existing contracts.  Pursuant to the SEC settlement, Wabtec agreed to pay an $87,000 civil penalty, to disgorge $288,351 in profits plus prejudgment interest, and to retain an independent compliance monitor to review and make recommendations concerning the company’s FCPA compliance program for two years.  The DOJ’s non-prosecution agreement with Wabtec additionally alleges that Pioneer made improper payments to various railway regulatory boards to facilitate the scheduling of product inspections and the issuance of compliance certificates and to the Central Board of Excise and Customs to put an end to excessively frequent audits.  Although these payments totaled more than $40,000 over the course of one year, individual payments were as miniscule as $67 per product inspection and $31.50 per month to lower the frequency of Pioneer’s audits.  To resolve these allegations, Wabtec agreed to pay a $300,000 fine and conduct an internal review of its FCPA compliance program.  The Wabtec case, in particular the non-prosecution agreement, paints a sobering picture of the DOJ’s view of the facilitating payments exception to the FCPA, arguably to the point of reading the exception out of the statute.  Companies that permit facilitating payments as a matter of corporate policy should carefully consider this settlement.  Flowserve Corp. On February 21, Flowserve Corp. became the seventh company to settle with the DOJ and SEC for its conduct under the United Nations Oil-for-Food Program.  Although we have described the Oil-for-Food scheme in greater detail in prior updates, the essential allegations (as they concern the "Humanitarian" side of the Program) are that the Iraqi government imposed a 10% "after sales service fee" ("ASSF") as a condition of sales under the Program.  To fund these mandatory payments, contractors typically increased the value of their contracts by 10%, thereby receiving an additional 10% from the United Nations escrow account, and passed the increase on to the Iraqi government through third-party agents and Iraqi-controlled bank accounts.   The SEC’s complaint alleges that Flowserve violated the FCPA’s books-and-records and internal controls provisions through the incorporation into its ledger of $646,487 in inaccurately recorded ASSF payments made (and $173,758 in additional ASSF payments agreed to but not paid) by its French and Dutch subsidiaries, Flowserve Pompes SAS and Flowserve B.V.  To settle these allegations, Flowserve agreed to pay a $3 million civil penalty and to disgorge $3,574,225 in profits plus prejudgment interest.  Flowserve’s settlement with the DOJ was limited to the conduct of its French subsidiary, Flowserve Pompes, as the DOJ (in a fascinating move described in greater detail below) declined prosecution of Flowserve B.V. in recognition of a pending home state prosecution of that subsidiary in the Netherlands.  Flowserve entered into a deferred prosecution agreement with the DOJ, paying a $4 million criminal penalty, and consented to the filing of a criminal information charging Flowserve Pompes with conspiracy to commit wire fraud and to violate the books-and-records provision.  Assuming Flowserve’s successful compliance with the deferred prosecution agreement’s terms, the DOJ will defer prosecution of Flowserve Pompes for the agreement’s three-year term and ultimately dismiss the charges.    AB Volvo One month later, on March 20, AB Volvo became the eighth company to settle with the DOJ and SEC on Oil-for-Food charges.  Alleging essentially the same scheme as with Flowserve, the SEC’s complaint charges AB Volvo with violations of the books-and-records and internal controls provisions through the incorporation into its ledger of $6,309,695 in inaccurately recorded payments made (and $2,388,419 in additional payments agreed to but not paid) by its French and Swedish subsidiaries, Renault Trucks and Volvo CE.  To settle these allegations, AB Volvo agreed to pay a $4 million civil penalty and to disgorge $8,602,649 in profits plus prejudgment interest.  To resolve the DOJ’s investigation, AB Volvo entered into a deferred prosecution agreement and agreed to pay a $7 million criminal fine.  It also consented to the filing of criminal informations against its two implicated subsidiaries, each alleging a conspiracy to commit wire fraud and to violate the books-and-records provision.  As with the Flowserve settlement, assuming AB Volvo successfully completes the three-year term of its deferred prosecution agreement, the DOJ will dismiss the charges against Renault Trucks and Volvo CE.  It is a virtual certainty that AB Volvo’s will not be the last of the Oil-for-Food settlements – likely not even the last of 2008.  At least a dozen other companies have publicly disclosed ongoing Oil-for-Food investigations by the DOJ and SEC in their securities filings.  And in announcing this most recent settlement, then-Assistant Attorney General Alice Fisher noted that the DOJ "will continue its pursuit of companies that abused the U.N. Oil for Food program."  Martin Self On May 2, Martin Self pleaded guilty to a two-count criminal information charging him with violating the anti-bribery provision of the FCPA.  Mr. Self was the President and a part owner of Pacific Consolidated Industries ("PCI").  According to the plea agreement, Mr. Self caused PCI to execute a "marketing agreement" with a relative of a United Kingdom Ministry of Defence ("UK-MOD") official and subsequently caused the payment of approximately $70,350 to the relative pursuant to the agreement.  The problem, according to the charging documents, was that Mr. Self was not aware of any genuine services that the relative provided for PCI and, in fact, Mr. Self believed that the payments were truly for the benefit of the UK-MOD official, who was in a position to influence the award of equipment contracts to PCI.  Holding these beliefs, Mr. Self purposely failed to investigate and deliberately avoided becoming aware of the full nature of PCI’s relationship with the UK-MOD official’s relative.  Mr. Self is not scheduled to be sentenced until September 29, 2008, but the DOJ has publicly announced that he has agreed to serve eight months in prison as part of the plea deal.  This case is the second prosecution of a former PCI executive, the first being the 2007 indictment of Leo Winston Smith.  Mr. Smith has not settled the charges against him and is presently set to go to trial on October 7, 2008.  Additionally, the U.K. government prosecuted the U.K.-MOD official, who is now serving a two-year prison term.  Willbros Group, Inc., Lloyd Biggers, Carlos Galvez, Gerald Jansen, and Jason Steph On May 14, Willbros Group, Inc. and four of its former employees entered into a joint civil settlement with the SEC, and Willbros additionally settled criminal charges with the DOJ.  According to the SEC’s complaint, Willbros, acting through various subsidiaries and employees, including the individual defendants: agreed to make more than $11 million in corrupt payments, at least $2,869,111 of which was actually paid, to senior Nigerian officials, the ruling Nigerian political party, and officials of a commercial joint venture operator to influence the award of several major pipeline contracts collectively worth more than $600 million; made at least $300,000 in corrupt payments to Nigerian revenue officials to lower tax assessments and judicial officials to obtain favorable treatment in litigation; agreed to make $405,000 in corrupt payments, at least $150,000 of which was actually paid, to officials of PetroEcuador, Ecuador’s state-owned oil and gas company, in order to obtain a $3.4 million pipeline modification contract; and paid $524,000 to commercial vendors in Bolivia to obtain dummy invoices that purported to increase Willbros’s subcontractor costs, thereby reducing its value-added tax ("VAT") liability to the Bolivian government by approximately $2.5 million. In summary, Willbros made approximately $3.8 million in corrupt payments, and agreed to make another $8 million in payments upon which it did not deliver, to influence the assessment of taxes, the judicial process, and the award of more than $630 million in pipeline contracts.  To settle the SEC’s complaint, which charged violations of the anti-bribery, books-and-records, and internal controls provisions of the FCPA in addition to violations of the antifraud provisions of § 10(b), Willbros agreed to disgorge $10.3 million in profits plus prejudgment interest.  Willbros additionally entered into a deferred prosecution agreement with the DOJ by which it agreed to pay a $22 million criminal penalty and consented to the filing of criminal informations against both it and its subsidiary, Willbros International, charging violations of the anti-bribery and books-and-records provisions.  Willbros will also retain an independent compliance monitor for the three-year term of the agreement.  Willbros’s combined $32.3 million settlement is thus far the largest of 2008, as well as the second largest in the FCPA’s thirty-one year history.  The SEC’s complaint also permanently enjoins the four Willbros employee defendants from future violations of the FCPA.  Additionally, Messrs. Galvez and Jansen agreed to pay civil penalties of $35,000 and $30,000, respectively.  Mr. Steph, who pleaded guilty to criminal FCPA violations arising from the same conduct in 2007, will have his civil penalty, if any, determined in conjunction with his sentencing for the criminal case later this year.  And in addition to these four Willbros defendants, a fifth, Jim Bob Brown, settled criminal and civil FCPA charges with the DOJ and SEC in 2006 and, like Mr. Steph, is awaiting sentencing.  One final noteworthy aspect of the Willbros settlement is that this case includes a criminal books-and-records prosecution unrelated to corrupt payments.  The allegations stemming from Willbros’s Bolivian tax fraud scheme are predicated on the company’s falsification of its accounts to avoid tax liability.  This potentially foreshadows a broad expansion of the DOJ’s FCPA enforcement practice.   AGA Medical Corp. On June 3, AGA Medical Corp. entered into a deferred prosecution agreement with the DOJ and consented to the filing of a two-count criminal information charging it with violating the anti-bribery provision of the FCPA as well as conspiring to violate the same.  According to the information, a high-ranking AGA officer authorized the company’s distributor to make corrupt payments to government-employed physicians in China to induce them to buy AGA products and Chinese patent officials to induce them to approve AGA patent applications.  AGA agreed to pay a $2 million criminal penalty and retain an independent compliance monitor for the three-year term of the agreement.   FARO Technologies, Inc. Exemplifying the perilous challenge of FCPA compliance in China, two days later, on June 5, the DOJ and SEC announced another China-based FCPA settlement, this one with FARO Technologies, Inc.  FARO consented to the filing of an administrative cease-and-desist order by the SEC and entered into a non-prosecution agreement with the DOJ alleging that FARO violated the anti-bribery, books-and-records, and internal controls provisions of the FCPA through the actions of its wholly owned Chinese subsidiary, FARO Shanghai Co., Ltd.  The settlement documents allege that FARO Shanghai’s country manager made $444,492 in corrupt payments, disguised as "referral fees," to various employees of Chinese state-owned or state-controlled businesses in order to obtain sales contracts.  FARO’s regional sales director for the Asia-Pacific region approved the payments, despite knowing that they were bribes and that they exposed FARO to liability, and despite explicit instruction from other FARO officers not to make such payments.  Pursuant to the non-prosecution agreement, FARO agreed to pay a $1.1 million criminal penalty and retain an independent compliance monitor for the two-year term of the agreement.  The SEC’s cease-and-desist order requires FARO to disgorge $1,850,943.32 in profits plus prejudgment interest. David Pinkerton Although not a 2008 enforcement action – David Pinkerton was indicted for his alleged role in an Azeri bribery scheme in 2005 – defense victories in FCPA cases must be celebrated when they come.  On June 30, the U.S. Attorney’s Office for the Southern District of New York moved to dismiss (which motion was granted on July 1) the charges against Mr. Pinkerton, advising, "further prosecution . . . in this case would not be in the interests of justice."  As we reported in our last update, Mr. Pinkerton and his co-defendant, Frederic Bourke, were successful in persuading Judge Shira Scheindlin to dismiss most of the charges in the indictment on statute-of-limitations grounds.  The DOJ appealed Judge Scheindlin’s decision to the Second Circuit, where the case has been briefed, argued, and is awaiting a decision, but ab initio elected to dismiss the remaining charges against Mr. Pinkerton in this motion.  The charges against Mr. Bourke, as well as his fugitive co-defendant, Victor Kozeny, are still pending.  2008 FCPA Opinion Procedure Releases (through June 30, 2008) By statute, the DOJ must provide a written opinion at the request of an "issuer" or "domestic concern" as to whether the DOJ would prosecute the Requestor under the FCPA’s anti-bribery provisions for prospective conduct that the Requestor is considering taking.  The DOJ publishes these opinions on its FCPA website, but only a party who joins in the request may authoritatively rely upon the opinions.  That said, opinion releases provide excellent – perhaps the best – insight into the DOJ’s views on the scope of the statute.  In the FCPA’s thirty-one year history, the DOJ has issued only forty-nine such opinions, including three in 2007 and two thus far in 2008.  In 2006, then-Assistant Attorney General Alice Fisher commented that "the FCPA opinion procedure has generally been under-utilized" and noted that she wants it "to be something that is useful as a guide to business."  FCPA Opinion Procedure Release 2008-01 On January 15, the DOJ issued its first FCPA opinion release of 2008.  This Opinion is unusually lengthy as compared to prior releases, and contains a myriad of details specific to the Requestor’s proposed transaction.  According to the Opinion, the Requestor sought to make an investment in a joint venture, majority-owned (56%) by an unnamed foreign government, that provides public services to foreign municipalities.  The foreign government wished to completely divest its interest in, and thereby privatize, the joint venture.  The Requestor agreed to purchase the government’s 56% interest in the joint venture, but only after the interest was first purchased by the private foreign entity that owned the minority (44%) share.  Thus, the private foreign entity would form a new company with the foreign government’s shares and then sell those shares to the Requestor. The Requestor conducted extensive pre-acquisition due diligence focused on FCPA compliance.  It considered the owner of the foreign private company to be a "foreign official" under the FCPA because he also served as general manager of the then still government-controlled joint venture.  This concerned the Requestor because it planned to purchase the shares from the general manager at a substantial premium over purchase price.  Accordingly, the Requestor sought an opinion from the DOJ that neither the projected payments to the owner of the private foreign entity nor any shares received by the owner from the divesting government entity would violate the FCPA.  It made certain representations to the DOJ, including that the foreign private company owner’s purchase of the foreign government’s shares would be lawful under the foreign country’s laws and that the owner will cease to be a "foreign official" once the private company purchased the government’s majority stake in the joint venture (i.e., before the Requestor would pay the premium purchase price). The DOJ concluded that it would not pursue an enforcement action with respect to this proposed transaction based on a number of factors.  First, the Requestor conducted reasonable due diligence of the anticipated seller of the privatized shares and would maintain the relevant documentation in the United States.  Second, the Requestor required complete transparency in the transaction and that adequate disclosures be made to the foreign government.  Third, the Requestor plans to obtain from the private foreign entity owner representations and warranties regarding past and future compliance with anti-corruption laws.  Fourth, the Requestor agreed to retain contractual rights to discontinue the business relationship if the joint venture agreement were breached for any reason, including for a violation of anti-corruption laws.  FCPA Opinion Procedure Release 2008-02  The DOJ’s second FCPA opinion release of 2008, issued on June 13, is a groundbreaking statement on an acquiror’s successor liability for FCPA violations by a target company.  The Opinion creates a framework through which U.S. acquirors might seek amnesty for pre- and even post-acquisition FCPA violations by the target, particularly in deals negotiated under the laws of foreign jurisdictions (such as the U.K.) where pre-acquisition due diligence is less open than in the United States.  The requestor, Halliburton Corp., sought to acquire Expro International Group, a publicly traded British oilfield services provider.  Halliburton’s principal competitor in the bidding, Umbrellastream, had made an unconditional bid to Expro (neither Expro nor Umbrellastream is identified in the Opinion, but both are named in numerous media accounts of the bidding war).  Halliburton represented to the DOJ that, "as a result of U.K. legal restrictions inherent in the bidding process for a public U.K. company, it has had insufficient time . . . to complete appropriate FCPA and anti-corruption due diligence."  Further, under the U.K. Takeover Code, an acquiror has no legal ability to insist upon a specified level of due diligence until after the acquisition is completed.  Accordingly, if Halliburton conditioned its bid upon satisfactory completion of pre-acquisition FCPA due diligence, Expro would be free to reject this conditional offer in favor of Umbrellastream’s unconditional bid, even if Umbrellastream offered a lower price.  Accepting the restrictive nature of U.K. due diligence procedures, the DOJ agreed to grant Halliburton a 180-day grace period post-closing during which Halliburton could self-report pre- and post-acquisition FCPA violations without itself being prosecuted, provided Halliburton adhered to a stringent post-acquisition due diligence and integration plan (described below).  Although reserving the right to proceed against Expro for any FCPA violations, the DOJ stated that it does not intend to pursue any enforcement action against Halliburton in connection with (1) the acquisition of Expro in and of itself; (2) any pre-acquisition unlawful conduct by Expro that Halliburton discloses to the DOJ within 180 days of closing; and (3) any post-acquisition unlawful conduct by Expro that Halliburton discloses to the DOJ within 180 days of closing (or within one year if, in the judgment of DOJ, the conduct cannot be fully investigated in 180 days). Five Key Takeaways from the First Half of 2008 FCPA Enforcement Beyond the frenzied nature of the prosecution environment, there are five developments in FCPA enforcement from the first half of 2008 that every general counsel of a business with international operations and every lawyer practicing in this area must key into.  They are: 1.      The outburst of civil litigation collateral to FCPA investigations; 2.      The introduction of legislation that would provide for a private right of action under the FCPA; 3.      The increasing number of foreign corruption investigations; 4.      The growing importance of FCPA due diligence in business transactions, particularly acquisitions; and 5.      Substantial jail terms for individual defendants convicted under the FCPA.   Civil Litigation Collateral to FCPA Investigations Like a broken record, our recurring advice to clients and friends has been to expect and prepare for "tag along" civil litigation when a governmental FCPA investigation becomes public.  In the first half of 2008, we have witnessed this admonition borne out as never before, with a new diversity of FCPA-inspired civil litigation theories.  Over the last few months we have seen four distinct types of collateral litigation emerge:  (1) § 10(b) securities fraud actions; (2) shareholder derivative suits; (3) lawsuits brought by foreign governments; and (4) lawsuits brought by business partners.  As we have previously reported, the first two categories – § 10(b) securities fraud and shareholder derivation actions – are not new to the FCPA world.  But FARO Technologies, Inc. has the unfortunate distinction of facing both arising from the same investigation – on top of criminal and administrative settlements with the U.S. government.  As noted previously, on June 5, FARO entered into dispositions with the DOJ and SEC through which it agreed to pay just over $2.95 million.  Only three days earlier, the U.S. District Court for the Middle District of Florida gave preliminary approval to a $6.875 million settlement resolving a § 10(b) suit filed on behalf of purchasers of FARO stock alleging that FARO "knowingly or recklessly attested to the accuracy of [its] internal controls system, when [it] knew that the system was, in fact, seriously inadequate."  And as if that were not enough, FARO is additionally in settlement negotiations with a plaintiff shareholder who filed a derivative suit on January 11, 2008.  Other companies currently engaged in shareholder derivative litigation stemming from FCPA investigations include BAE Systems PLC and Chevron Corp.  A Michigan public pension system filed suit in 2007 in federal district court in the District of Columbia against BAE’s officers and directors alleging that they breached their fiduciary duties by permitting the company’s managers to make and authorize more than $2 billion in bribes and kickbacks in violation of the FCPA and other foreign anti-corruption laws.  The defendants have moved to dismiss the complaint arguing that plaintiffs lack personal jurisdiction over the leadership of the British company and that, in any event, English law grants plaintiffs neither standing to sue nor a cause of action against BAE’s officers and directors.  The plaintiff shareholder in the Chevron matter filed suit in California state court in May 2007, just two weeks after the New York Times reported that Chevron was in settlement negotiations with the U.S. government concerning its conduct under the Oil-for-Food Program (Chevron would ultimately settle its U.S. government liability in November 2007 for $30 million).  The plaintiff ultimately converted his suit to a shareholder demand on Chevron’s Board of Directors, but a Special Committee of the Board recently declined, after investigation, to file suit against the directors.  The plaintiff shareholder has since refiled his lawsuit.     Chevron has also found itself part of a new wave of FCPA-inspired civil litigation:  one where foreign governments sue U.S. companies that allegedly corrupted the foreign government’s own officials.  On June 27, 2008, the Republic of Iraq filed suit in Manhattan federal district court against ninety-one companies and two individuals alleging that the defendants conspired with Saddam Hussein’s regime to corrupt the Oil-for-Food Program by diverting as much as $10 billion in funds intended for the humanitarian use of the Iraqi people to the illicit use of Hussein’s government.  Iraq claims, inter alia, that the defendants violated the Racketeering Influenced Corrupt Organizations ("RICO") Act, with mail fraud, wire fraud, money laundering, and violations of the Travel Act constituting the necessary predicate violations.  In addition to Chevron, ten other defendants named by the Republic of Iraq have already settled with U.S. government regulators for allegations arising from the Oil-for-Food Program.  Iraq’s Oil-for-Food lawsuit follows closely on the heels of another RICO action filed by a foreign government, that brought by the Kingdom of Bahrain against Alcoa, Inc.  Bahrain’s state-owned aluminum smelter, Aluminum Bahrain ("Alba"), filed suit in federal district court in Pittsburgh on February 27 alleging that Alcoa and its affiliates conspired to corrupt one or more of Alba’s senior officials, influencing the officials to cause Alba to pay inflated prices for Alcoa’s products and to favor the sale of a controlling interest in Alba to Alcoa.  Alba is seeking more than $1 billion in damages, including punitives, but the court has stayed the suit on motion of the DOJ as an intervener.  DOJ sought the stay of proceedings, which neither party opposed, so that it might conduct its own criminal investigation – which does not appear to have been open prior to the civil suit – without the ongoing distraction of civil litigation.  But the DOJ’s stay of Alba’s lawsuit did not stay all of the civil litigation arising from this matter, for on May 1, 2008 a Hawaiian pension fund filed a shareholder derivative action.  Interestingly, the DOJ has not (yet) moved to stay those proceedings, which are presently at the stage of defendants moving to dismiss for failure to make a pre-suit demand upon Alcoa’s Board of Directors.  The final category of FCPA-inspired civil litigation emerging in 2008 is commercial litigation brought by a private plaintiff against its business partners.  On February 21, 2008, Jack Grynberg filed a RICO suit against BP plc and StatoilHydro ASA alleging that they bribed Kazakh officials to win oil rights for joint ventures in which he had an interest, thereby diverting his share of the joint venture profits.  Bringing the classic aphorism "the best defense is a good offense" to the FCPA context, Mr. Grynberg recently told the Daily Telegraph that he brought this suit in an effort to head off a potential prosecution by the DOJ, stating, "Unless I assert that I am an unwilling participant in this, my neck could be on the line."   Another recent example of such a business partner lawsuit with FCPA connotations is that brought by Agro-Tech Corp. against its Japanese distributor, Yamada Corp.  Yamada is presently under investigation by Japanese government authorities for its dealings with Japan’s Ministry of Defense, an investigation that has led to the arrest of a senior Yamada executive as well as the former Vice Minster of Defense.  On March 24, 2008, Agro-Tech filed suit in the U.S. District Court for the Northern District of Ohio seeking a declaratory judgment that it may now lawfully terminate its distributor agreement with Yamada on the grounds that Yamada has breached its contractual obligations to use "ethical means" and to "obey the letter and spirit" of anti-bribery laws, including the FCPA.  Yamada has since counter-sued Agro-Tech, claiming that Agro-Tech’s lawsuit is just a ploy to terminate unlawfully the fifty-year exclusive distributorship arrangement Yamada has with Agro-Tech.    Foreign Business Bribery Prohibition Act of 2008 (H.R. 6188) In a pending development related to our collateral civil litigation discussion above – yet significant enough to warrant individual mention – on June 4, 2008 Rep. Ed Perlmutter (D. Colo.) introduced in the House of Representatives the Foreign Business Bribery Prohibition Act of 2008.  This bill would provide for a limited right of private action under the FCPA; such a right does not presently exist.  Rep. Perlmutter’s bill would amend the FCPA to permit issuers and domestic concerns to bring suit seeking treble damages against "foreign concerns" for FCPA violations that both assist the foreign concern in obtaining or retaining business and prevent the plaintiff from obtaining or retaining that business.  The bill would provide a right of action only against "foreign concerns," defined as any person other than an issuer or domestic concern, and even then only where the foreign concern’s actions violate the FCPA.  Therefore, the class of potential defendants under this bill would be limited to foreign persons and businesses unaffiliated with U.S. stock exchanges and who corruptly use instrumentalities of interstate commerce within the United States in furtherance of their bribes.  Still, this would be an important development in the effort to "level the playing field" of FCPA enforcement worldwide.  The bill is presently awaiting consideration in the House Judiciary and Energy and Commerce committees.  FCPA Acquisition Due Diligence and Post-Acquisition Compliance Integration One of the most pressing issues facing the FCPA bar right now is how to assess successor liability of an acquiror for pre-acquisition FCPA violations by a target company.  The government’s right to impose successor liability as a matter of law is difficult to challenge.  Yet as a policy matter, such prosecutions can have a perverse effect:  discouraging the "race to the top" created where companies with superior FCPA compliance programs acquire those with less thorough programs, inculcating the latter into the former’s culture of compliance.  At the end of the day, everyone, including the U.S. government, benefits when companies with superior compliance programs acquire companies with less effective programs, even when they come with warts.   The DOJ’s focus on this issue in the two FCPA opinion releases issued this year is encouraging.  Particularly so is the DOJ’s acknowledgement in FCPA Op. Proc. Rel. 2008-02 that providing Halliburton with a limited safe harbor in which to conduct post-acquisition due diligence without fear of prosecution "advances the interests of the Department in enforcing the FCPA and promoting FCPA due diligence in connection with corporate transactions."  In detailing the procedures that Halliburton must follow in order to avail itself of the protection afforded by 2008-02, the DOJ has set forth its view on "best practices" for post-acquisition compliance integration.  Halliburton agreed to take the following steps: Immediately upon closing, imposing Halliburton’s Code of Business Conduct on all Expro operations and meeting with the DOJ to discuss whether the information that Halliburton has learned to that point shows potential pre-acquisition FCPA violations; within 10 days of closing, preparing and presenting to the DOJ a comprehensive FCPA due diligence work plan that addresses and categorizes each of the following into high, medium, and low risk elements:  use of third-party representatives, commercial dealings with state-owned customers, joint ventures, teaming or consortium agreements, customs and immigration matters, tax matters, and government licenses and permits; utilizing in-house resources, outside counsel, and third-party consultants (e.g., forensic accountants) as appropriate to conduct post-acquisition due diligence, including a review of Expro e-mails and financial records and interviews of legacy-Expro employees; requiring legacy Expro third-party representatives that Halliburton intends to use post-acquisition to sign new contracts with Halliburton that incorporate audit rights and FCPA and other anti-corruption provisions; providing FCPA training to legacy Expro employees "whose positions or job responsibilities warrant such training on an expedited basis" within 60 days of closing and providing such training to all other employees within 90 days; and disclosing to the DOJ all "FCPA, corruption, and related internal controls and accounting issues that it uncovers during the course of its 180-day due diligence." Although not all of these measures will be practical in all acquisitions, companies should take note of these procedures and structure their integration measures in line with these steps where possible.  For additional guidance on the topic of transactional due diligence, please see the article by F. Joseph Warin, et al., Acquisition Due Diligence: A Recipe to Avoid FCPA Enforcement, TEXAS STATE BAR OIL, GAS, & ENERGY RESOURCES LAW SECTION REPORT 2 (June 2006).  Parallel Foreign Proceedings Another key trend that we have been following during the first half of 2008 is that the enforcement of foreign bribery statutes is increasingly becoming a global enterprise.  After years of not-too-subtle nudging by international anti-corruption watchdogs, most notably the Organization for Economic Cooperation and Development ("OECD") and Transparency International ("TI"), foreign jurisdictions are finally beginning to launch their own investigations that parallel those brought by U.S. enforcement agencies.  Although some jurisdictions have not pursued bribery investigations aggressively and none can claim to match the torrid pace set by the DOJ and SEC, we believe that the trend of parallel foreign enforcement actions and investigations will only intensify in the future.  Investigations arising out of the Oil-for-Food Program comprise a significant portion of the foreign parallel proceedings.  For example, the United Kingdom’s Serious Fraud Office (“SFO”) is actively pursuing Oil-for-Food investigations against several major companies, including at least one (GlaxoSmithKline plc) that has publicly disclosed being under investigation by the DOJ and SEC.  Other foreign countries with open Oil-for-Food investigations include Italy, which has initiated preliminary court proceedings against a number of companies and their employees, Ireland, and Switzerland, which has already imposed $17 million in fines against eight unnamed companies.    Although international anti-corruption activity is increasing overall, not all countries have been consistent in investigating and prosecuting corruption offenses.  As we have reported previously, in 2006 the SFO controversially dropped on national security grounds its investigation concerning allegedly corrupt payments made by BAE Systems plc to senior Saudi governmental officials.  On April 10, 2008, the High Court of London declared the SFO’s decision to close the investigation illegal and ordered the agency to reopen the investigation.  The British government is now appealing that decision to the House of Lords, the U.K.’s highest court.  A fascinating development in the interplay between foreign and domestic corruption investigations is the DOJ’s recent decision to forgo – in two Oil-for-Food cases – criminal sanctions against foreign businesses in light of pending actions against the companies in their home states.   In our last FCPA review, we reported that the DOJ elected not to impose a criminal fine in connection with its December 2007 non-prosecution agreement with Akzo Nobel provided that Akzo Nobel caused one its Dutch subsidiaries to enter into a criminal disposition with the Dutch Public Prosecutor and pay a fine of at least €381,602 ($549,419) within six months.  And during the current reporting period, on February 21, 2008, the DOJ completely declined prosecution of a Dutch subsidiary of Flowserve in return for Flowserve agreeing to cause that subsidiary to enter into a criminal disposition with the Dutch Public Prosecutor.  Although these prosecutions in the Netherlands are not publicly reported, a Dutch representative recently informed TI that Dutch prosecutors have filed seven Oil-for-Food cases.  It took the United States many years to reach its current state of enforcement and we expect that other nations will experience growing pains as well.  But with an enhanced commitment on the part of many nations, coupled with pressure from non-governmental organizations and a newfound willingness by the DOJ to defer to home state prosecution in appropriate circumstances, we expect anti-corruption enforcement to take on an increasingly global character in the future.  Substantial Jail Time for Individual Defendants As we have reported previously, efforts to prosecute individuals for violations of the FCPA have skyrocketed in the past few years.  Focusing on criminal prosecutions, we have identified forty-six individual defendants charged by the DOJ over the last ten years for allegedly participating in foreign bribery schemes, including many former senior executives and other high-ranking employees.  Approximately 91% of the individuals to resolve their charges – thirty-three of thirty-six – have pleaded guilty or been convicted at trial of at least one charge.  Only three defendants has been acquitted at trial or have had their charges dismissed.  Resolution of Criminal FCPA Anti-Bribery Cases Brought Against Individuals from 1998 to the Present. Of the thirty-three convicted individual defendants, only twenty have gone to sentencing.  This reflects the DOJ’s common practice in FCPA prosecutions of postponing sentencing for lengthy periods – even years – as the convicted defendant cooperates with the government’s investigation.  Of the twenty sentenced defendants, thirteen have received jail terms, ranging from several months to more than five years.  This figure includes sentences of incarceration for all four defendants to have been convicted at trial and sentenced. These figures are not trending more favorably to individual FCPA defendants.  In the past five years, eight out of ten individuals sentenced for their role in a foreign bribery scheme have been sentenced to a term of imprisonment.  Sentences for Individual Criminal Defendants Convicted in FCPA  Cases from 1998 to the Present.  Sentences for Individual Criminal Defendants Sentenced in FCPA Cases from 2003 to the Present. This trend is unmistakable:  incarceration is becoming a near certainty for individuals convicted of violating the FCPA.  One recent example is Ramendra Basu, a former World Bank official, who on April 22, 2008 was sentenced to 15 months incarceration for assisting consultants in bribing a Kenyan official.  Additionally, sentencing is pending for thirteen defendants, all of whom face the prospect of at least several months’ imprisonment.  We anticipate that many, if not all, of these individuals will receive jail time.  Given the zeal with which the DOJ has pursued FCPA cases in recent years, it does not appear that the trend toward aggressive prosecution of individuals and imposition of severe penalties will soon abate.  Conclusion As breathtaking as the pace of FCPA enforcement was in 2007, the first half of 2008 has proved a worthy successor.  With many large matters pending in the investigative stage, we expect more of the same for the second half.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 20 attorneys with substantive FCPA expertise. Joe Warin, a former federal prosecutor, currently serves as a compliance consultant pursuant to a DOJ and SEC enforcement action. The firm has 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)  Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) Judith A. Lee (202-887-3591, jalee@gibsondunn.com) David P. Burns (202-887-3786, dburns@gibsondunn.com)  Jim Slear (202-955-8578, jslear@gibsondunn.com)Michael S. Diamant (202-887-3604, mdiamant@gibsondunn.com)John W.F. Chesley (202-887-3788, jchesley@gibsondunn.com)Patrick F. Speice, Jr. (202-887-3776, pspeicejr@gibsondunn.com) New YorkLee G. Dunst (212-351-3824, ldunst@gibsondunn.com)James A. Walden (212-351-2300, jwalden@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com)J. Taylor McConkie (303-298-5795, tmcconkie@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los Angeles Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com), the former United States Attorney for the Central District of California,Michael M. Farhang (213-229-7005, mfarhang@gibsondunn.com)Douglas M. Fuchs (213-229-7605, dfuchs@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 1, 2008 |
Going It Alone: The Costs of Unilateral Law Enforcement

New York associate Matthew Benjamin is a co-author of "Going It Alone: The Costs of Unilateral Law Enforcement" published by ALM Law Journal Newsletters’ Business Crimes Bulletin. Reprinted with permission, © 2008, ALM Properties, Inc.

May 21, 2008 |
Briefing on Doing Business Internationally: Minimizing FCPA Risk Exposure

OVERVIEW Foreign Corrupt Practices Act (FCPA) enforcement has proliferated dramatically in recent years. In addition to new criminal and civil enforcement activities brought by the Department of Justice and the SEC, private civil actions now often involve the FCPA. The growth in FCPA enforcement actions and civil litigation, coupled with the ever-increasing globalization of business, should spur any U.S. company conducting or outsourcing business internationally to address FCPA compliance and risk issues. This program is designed for decision-makers in compliance, legal, risk management, finance or sales who have involvement in and/or oversight responsibilities for international operations. Our panel will address key topics in this increasingly important area for businesses, particularly for those doing business internationally. These key topics include: Compliance program “best practices” in managing a sales force Evaluating potential mergers, joint ventures and business partners Interacting with the Department of Justice and the SEC Minimizing the risk of FCPA-related civil litigation, including securities class action and derivative lawsuits Managing the growing risk exposure for directors and officers The FCPA’s accounting requirements – the “Books and Records” provisions Materials from the briefing are available: PowerPoint presentation  [pdf] PRESENTERS F. Joseph Warin, Gibson, Dunn & Crutcher LLP Mr. Warin is chair of Gibson Dunn’s Washington, D.C. Litigation Department, which consists of over 115 attorneys. He also serves as co-chair of the firm’s White Collar Defense and Investigations Practice Group. Mr. Warin’s areas of expertise include white collar crime, securities enforcement, FCPA investigations, special committee representations, False Claims Act cases, compliance counseling and complex civil litigation. Mr. Warin has handled FCPA investigations in more than 30 countries. He is currently serving as the FCPA compliance monitor for a multinational oil company. Nina Gross, Deloitte Financial Advisory Services LLP Ms. Gross is the southeast leader of the Deloitte FAS FCPA Forensic & Dispute Services practice. Her experience includes numerous corporate internal and external fraud investigations across a range of industries, including, energy, mining, technology, healthcare, manufacturing, consumer products, and publishing. David Burns, Gibson, Dunn & Crutcher LLP Mr. Burns’s practice focuses on white collar criminal matters, including FCPA and False Claims Act investigations, as well as internal corporate investigations, compliance counseling and complex commercial litigation. Prior to joining Gibson Dunn, from 2000 to 2005, Mr. Burns served as an Assistant United States Attorney in the Southern District of New York. He was awarded the Department of Justice’s Director’s Award for superior performance as a federal prosecutor. Howard Scheck, Deloitte Financial Advisory Services LLP Mr. Scheck is a partner in the Forensic & Dispute Services practice in Washington, D.C. He assists counsel in conducting complex corporate investigations arising from SEC enforcement inquiries and internal whistleblower complaints. Mr. Scheck specializes in investigating and defending alleged financial statement errors involving fraud, books and records and FCPA violations. Michael Diamant, Gibson, Dunn & Crutcher LLP Mr. Diamant is a litigator whose practice concentrates on the FCPA and other white collar criminal matters. Mr. Diamant is a magna cum laude graduate of Georgetown University Law Center, where he was inducted into the Order of the Coif. Mr. Diamant clerked for the Honorable Fortunato P. Benavides of the U.S. Court of Appeals for the Fifth Circuit. Gibson, Dunn & Crutcher LLP certifies this activity is approved for MCLE credit by the State Bar of California in the amount of 1.25 hours. This program has been approved for transitional credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. Credit is pending in Texas and Virginia.

April 14, 2008 |
Recent Ninth Circuit Court Decision Reiterates DOJ and SEC Broad Freedom to Conduct Parallel Criminal and Civil Investigations

On April 4, 2008, the United States Court of Appeals for the Ninth Circuit reversed the much-discussed Oregon federal court decision, United States v. Stringer, which had dismissed a criminal indictment due to the government’s violation of the defendant’s due process rights resulting from "egregious" behavior in conducting a parallel civil-criminal investigation. United States v. Stringer, No. 06-30100 (9th Cir. Apr. 4, 2008).  The Stringer District Court case, United States v. Stringer, 408 F. Supp. 2d 1083 (D. Or. 2006), generated quite a bit of publicity, with many commentators suggesting the case could broadly impact the manner in which the DOJ and the SEC coordinate their investigations. Additionally, some saw the case as signaling that federal courts would become more interventionist in monitoring the behavior of the DOJ and the SEC in the conduct of such parallel criminal and civil investigations. Indeed, the Stringer case was not the first time that the DOJ’s improper manipulation of a SEC deposition has resulted in the dismissal of criminal charges. In United States v. Scrushy, 366 F. Supp. 2d 1134 (N.D. Ala. 2005), it was determined that the DOJ played an important behind-the-scenes role in orchestrating the SEC’s deposition of the defendant, leading the court to suppress his deposition testimony and dismiss the perjury charges against him, concluding that the government had "depart[ed] from the proper administration of justice" by its actions vis-à-vis the SEC deposition. Id. at 1138. However, even prior to the Ninth Circuit’s opinion, a close examination of the District Court opinion in Stringer suggested that it was merely a bump in the road for coordinated federal criminal-civil investigations and did not spell the death knell for parallel DOJ-SEC investigations or signal an upsurge in judicial supervision of such probes. The Ninth Circuit confirmed that view as correct in reversing the Oregon District Court, as it focused on the fact that the government did not "affirmatively mislead" the subjects that the investigation was purely civil and would not lead to future criminal charges. Though the SEC investigators undoubtedly skirted the question when defense counsel inquired about a criminal investigation, the Ninth Circuit looked only at the fact the SEC made no actual misrepresentations.  Additionally, the Ninth Circuit afforded significant weight to the fact the SEC provided the subjects with Form 1662, an SEC form that states the SEC “often makes its files available to other governmental agencies, particularly the United States Attorneys and state prosecutors.” Form 1662 continues, stating “[t]here is a likelihood that information supplied by you will be made available to such agencies where appropriate.” With that disclosure, the Ninth Circuit found the SEC did not hide from defendants the possibility, even likelihood, that the DOJ may undertake its own investigation. This may lead the SEC to rely on Form 1662 more and not to provide separate or additional disclosures of parallel investigations. Although the Scrushy decision remains good law — albeit in that narrow factual setting — the Ninth Circuit’s decision in Stringer gives the SEC and DOJ nearly unchecked ability to conduct undisclosed parallel investigations, particularly if the SEC provided the investigation subjects with Form 1662, so long as neither makes affirmative misrepresentations about the investigations. While the Ninth Circuit notes it was “significant” that the SEC’s civil investigation began prior to the DOJ’s criminal investigation, the court seemed uninterested in the extent to which the investigators coordinated efforts or the fact that both the SEC and DOJ benefited from witness statements and a settlement to which the subjects may not have agreed had they been aware of the ongoing criminal investigation. Indeed, the Ninth Circuit expressed no outrage, or even mild displeasure, with the government’s actions in coordinating their investigation of the Stringer defendants, instead focusing solely in its Form 1662 disclosure and lack of affirmative misrepresentations.  The Ninth Circuit has therefore conclusively established that the Stringer District Court opinion was not the watershed moment, perhaps indicating that the courts were about to engage in hands-on supervision of parallel criminal-civil investigations, that some in the white collar bar may have desired. The District Court opinion did result in some more minor changes, however — both in terms of how the SEC and DOJ conduct parallel investigations and how defense attorneys counsel their corporate and individual clients — and those are likely to continue regardless of the Ninth Circuit’s reversal of the Stringer District Court opinion. In light of the opinion, practitioners should always be aware that a possible federal criminal investigation may lie in the wings of an ongoing SEC investigation. Parallel criminal cases are not invariable — at the end of the day, the underlying facts must have some jury appeal with discernable financial "victims" and a palpable monetary benefit to a potential defendant. The present government policy of not disclosing the existence of a parallel criminal investigation and the Ninth Circuit’s willingness to countenance that policy means that counsel will need to consider several issues. First, for company counsel, a common priority is to resolve matters with the government expeditiously and at the lowest cost. Company counsel will need to be proactive in ascertaining whether there is a parallel criminal investigation and, if so, whether direct dialogue with the prosecutors is warranted. Second, the potential for a parallel criminal investigation suggests that company and other counsel will need to be conscious of the possibility of conflicts of interest when representing more than one client in the SEC investigation. Third, counsel for individuals in an SEC investigation will need to be thorough in their advice to clients about whether to testify and about the need to give careful, accurate testimony so as to avoid the "perjury trap" that was one of the apparent objects of the parallel investigations conducted by the respective authorities in the Stringer case.   The Ninth Circuit’s decision is available online.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C.F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)John H. Sturc (202-955-8243, jsturc@gibsondunn.com)Barry R. Goldsmith (202-955-8580, bgoldsmith@gibsondunn.com)David P. Burns (202-887-3786, dburns@gibsondunn.com)   New YorkJames A. Walden (212-351-2300, jwalden@gibsondunn.com) Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los AngelesThomas E. Holliday (213-229-7370, tholliday@gibsondunn.com)Marcellus A. McRae (213-229-7675, mmcrae@gibsondunn.com)Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com) San FranciscoScott A. Fink (415-393-8267, sfink@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 24, 2008 |
Learning from High-Profile Perjury Cases

New York Partner Lee Dunst is the author of "Learning from High-Profile Perjury Cases" [PDF] published in the March 24, 2008 issue of The National Law Journal.

March 3, 2008 |
White Collar Defense Roundtable 2008

Los Angeles partners Michael Farhang and Debra Wong Yang were panelists in the "White Collar Roundtable 2008" [PDF] published in the March 2008 issue of California Lawyer.

January 4, 2008 |
2007 Year-End FCPA Update

2007 – A "Landmark Year" in FCPA Enforcement "2007 is by any measure a landmark year in the fight against foreign bribery." When Mark F. Mendelsohn, Deputy Chief of the Fraud Section in the Department of Justice’s Criminal Division ("DOJ") and the government’s top criminal Foreign Corrupt Practices Act ("FCPA") enforcer, opened the 2007 ACI FCPA Conference with this bold statement, not a single eyebrow rose across the ballroom filled with members of the ever-growing FCPA Bar. Nor was anyone surprised to hear Fredric D. Firestone, an Associate Director in the Securities and Exchange Commission’s Division of Enforcement ("SEC"), which shares enforcement responsibility under the FCPA with the DOJ, utter moments later "ditto from the SEC." For Messrs. Mendelsohn and Firestone spoke only what everyone in the room already knew: as the statute celebrated its thirtieth birthday, FCPA enforcement, already trending steeply upward in recent years, exploded in 2007. This client update provides an overview of the FCPA and other foreign bribery enforcement activities in 2007, a discussion of the trends we see from that activity, and practical guidance to help companies avoid or limit liability under these laws. A collection of Gibson, Dunn & Crutcher LLP ("Gibson Dunn") publications on the FCPA, including prior enforcement updates and more in-depth discussions of the statute’s complicated framework, may be found on Gibson Dunn’s FCPA website. FCPA Overview The FCPA’s anti-bribery provisions make it illegal to provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business. The anti-bribery provisions apply to "issuers," "domestic concerns," and "any person" that violates the FCPA while in the territory of the United States. The term "issuer" covers any business entity that is registered under 15 U.S.C. § 78l or is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose American Depository Receipts ("ADRs") are traded on U.S. exchanges are "issuers" for purposes of this statute. The term "domestic concern" is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has a principal place of business in the United States.  In addition to the anti-bribery provisions, the FCPA’s books-and-records provision requires issuers to make and keep accurate books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Finally, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. 2007 in Review The explosion of FCPA enforcement activity in 2007 is best captured in the following chart and graph, which each track the number of FCPA enforcement actions filed by the DOJ and SEC during the past five years: 2007   2006   2005   2004   2003 DOJ 18 SEC 20 DOJ 7 SEC 8 DOJ 7 SEC 5 DOJ 2 SEC 3 DOJ 2 SEC 0   FCPA Prosecutions 2003 — 2007 The thirty-eight FCPA enforcement actions brought by the DOJ and SEC in 2007 substantially more than doubled the fifteen governmental actions in 2006, which was until this year itself the busiest year ever in FCPA enforcement. And it is clear that the recent surge will not soon abate. Mr. Mendelsohn recently stated that the enforcement activity throughout the past few months represents "just the tip of the iceberg," noting that the DOJ has "many more matters under investigation." Mr. Firestone concurred, indicating that the SEC is engaging in "a full-court press on FCPA investigations." From our representation of corporations and individuals, our network of relationships, and our constant review of public disclosures, Gibson Dunn has identified approximately 100 companies that are the subject of open FCPA investigations.  2007 Enforcement Trends Record-Setting Resolutions  Not only did the DOJ and SEC bring record numbers of FCPA enforcement actions in 2007, they brought cases with record-setting penalties. In the largest criminal FCPA resolution to date, on February 6, 2007, three wholly owned subsidiaries of Vetco International pleaded guilty and a fourth entered into a deferred prosecution agreement. These four subsidiaries (collectively "Vetco Subsidiaries") agreed to pay a total of $26 million in criminal fines. According to the plea agreements, the Vetco Subsidiaries engaged in a scheme to authorize corrupt payments to officials in the Nigerian Customs Service. From 2001 through 2003, the Vetco Subsidiaries made at least 378 corrupt payments totaling approximately $2.1 million to customs officials in Nigeria through an "international freight forwarding and customs clearance company." The purpose of the payments was allegedly to gain preferential treatment in the customs clearance process and to secure an improper advantage in the importation of goods and equipment into Nigeria. Notably, the charges did not allege that the payments were to "obtain or retain business." The deferred prosecution agreement also requires that Vetco International hire an independent compliance monitor to oversee the formation and maintenance of a robust FCPA compliance program.  In the largest combined FCPA settlement to date, on April 26, 2007, the DOJ and SEC announced settlements with Texas-based oilfield services provider Baker Hughes, Inc. and its wholly owned subsidiary, Baker Hughes Services, International ("BHSI"), worth a combined $44 million. According to the settlement documents, between 2001 and 2003, Baker Hughes and BHSI paid approximately $5.2 million to two agents operating in Kazakhstan with the knowledge that some or all of that money would be funneled to officials of Kazakhstan’s state-owned oil company. Additionally, between 1998 and 2004, Baker Hughes and BHSI allegedly paid or authorized more than $15 million in commission payments to agents operating in Angola, Indonesia, Kazakhstan, Nigeria, Russia, and Uzbekistan "under circumstances in which the compan[ies] failed to adequately assure [themselves] that such payments were not being passed on, in part, to [government] officials."  To resolve the SEC’s complaint, which alleged violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions, Baker Hughes agreed to pay approximately $23 million in disgorgement and prejudgment interest and to pay a $10 million civil penalty for purportedly violating a 2001 SEC cease-and-desist order prohibiting future violations of the FCPA. This $10 million penalty, the first of its kind in FCPA enforcement, underscores that an injunction should never be entered into nonchalantly as it may form the basis for an increased penalty should the party become involved in a subsequent FCPA matter.  In the DOJ action, BHSI pleaded guilty to violating and conspiring to violate the FCPA’s anti-bribery provisions and aiding and abetting the falsification of Baker Hughes’s books and records, and it agreed to pay an $11 million criminal fine. Baker Hughes also entered into a deferred prosecution agreement alleging the same three violations to which BHSI pleaded guilty. Both the DOJ and SEC resolutions require the company to retain a compliance monitor for three years.  Commenting on the Baker Hughes settlements, Assistant Attorney General Alice S. Fisher, head of the DOJ’s Criminal Division, noted that "[t]he record penalties leveled in this case leave no doubt that foreign bribery is bad for business." And from the SEC side, Director of Enforcement Linda Thompson noted that the $10 million civil penalty for violating a prior cease-a-desist order "demonstrates that companies must adhere to Commission Orders and that recidivists will be punished."  Leveraging Isolated Cases into Worldwide & Industry-Wide Investigations Two other trends that emerged in FCPA enforcement in 2007 were investigations involving worldwide activities of single companies and industry-wide investigations of multiple companies. Traditionally, most FCPA investigations involved corrupt payments to government officials in a single country by a single company (and occasionally one or more of its employees). But today it is not uncommon for multinational companies that identify FCPA concerns in one locale to expand their internal inquiry to examine their operations around the globe. And where they do not, they can expect to receive the "So where else have you looked?" inquiry should they ever find themselves across the table from the DOJ or SEC. Prominent examples from 2007 of single-company FCPA resolutions spanning multiple countries include the following: York International Corp. — charged with making more than 870 improper payments, totaling more than $8.7 million, to obtain or retain more than 775 contracts in Bahrain, China, Egypt, India, Iraq, Nigeria, Turkey, the United Arab Emirates, and unspecified European countries;  Textron, Inc. — charged with making nearly $700,000 in improper payments to obtain or retain business in Bangladesh, Egypt, India, Indonesia, Iraq, and the United Arab Emirates; and  Paradigm B.V. — charged with providing foreign government officials with hundreds of thousands of dollars in cash and improper travel and entertainment benefits to obtain or retain business in China, Indonesia, Kazakhstan, Mexico, and Nigeria.  In 2007, the DOJ and SEC also took clear aim at leveraging single-company inquiries into industry-wide probes. The most recent example involves orthopedic implant manufacturers Biomet, Inc.; Medtronic, Inc.; Smith & Nephew plc; Stryker Corp.; and Zimmer Holding, Inc.; all of which publicly disclosed receiving letters from the DOJ or SEC requesting information concerning payments to government-employed physicians in various foreign countries, including Germany, Greece, and Poland. The letters followed on the heels of each of the companies, except Medtronic, entering into settlements with the New Jersey U.S. Attorney’s Office on September 27, 2007 alleging violations of the domestic anti-kickback statute relating to their sales of orthopedic implants to physicians in the United States. And in February 2007, Johnson & Johnson, the parent company of DePuy Orthopedics, which was also a party to the domestic physician anti-kickback settlement, publicly reported having voluntarily disclosed to the DOJ and SEC potential improper payments to government-employed physicians in foreign countries.  In another prominent example of an industry-wide probe from 2007, on July 2, the DOJ sent letters to eleven oil and oil services companies requesting information about their dealings with Panalpina Welttransport Holding AG, a Swiss logistics and freight forwarding company. Panalpina is widely believed to be the "major international forwarder and customs clearance agent" implicated in the February Vetco International FCPA settlement that allegedly made improper payments to officials of the Nigerian Customs Service. The DOJ is investigating Panalpina’s activities in Nigeria, Kazakhstan, and the Middle East. Most of the eleven companies that received the DOJ letter, as well as several other oil services companies, have publicly disclosed internal investigations concerning potential improper payments made through Panalpina and other agents to government officials in various countries, including Nigeria. Panalpina has announced that it is and will continue to cooperate with the DOJ’s investigation and that it has suspended its services in Nigeria. This investigation demonstrates the risks of doing business in countries where corruption is rampant, and it also emphasizes the need for companies to conduct adequate due diligence before hiring agents or consultants and to monitor the activities of those third parties post-retention to ensure FCPA compliance.  The mother of all 2007 industry-wide investigations has to be that arising from the Oil-for-Food Program ("OFFP"). Likely the largest international corruption investigation ever — involving a U.N.-commissioned international investigative body, four congressional committees, the DOJ, two U.S. Attorney’s Offices, the SEC, the Manhattan District Attorney’s Office, the Department of Treasury’s Office of Foreign Assets Control ("OFAC"), and at least six foreign governments — OFFP spawned six SEC and four DOJ FCPA enforcement actions in 2007. This all began when the U.N. Independent Inquiry Committee ("IIC"), commonly known as the Volcker Committee after its Chairman (and former Chairman of the Federal Reserve) Paul A. Volcker, published its final report detailing the results of its sixteen-month investigation into alleged corruption surrounding the OFFP. When the smoke cleared, the IIC had named 2,253 companies worldwide as having made more than $1.8 billion in "kickbacks" to the Iraqi government. More than two dozen companies have since publicly disclosed that they are under investigation by the DOJ and/or SEC, suggesting there may be more OFFP prosecutions to come in 2008.  First to settle FCPA-related OFFP charges was El Paso Corp., a Houston-based energy company. On February 7, 2007, El Paso agreed to settle with the SEC on charges that it violated the FCPA’s books-and-records and internal controls provisions, and at the same time entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York ("SDNY") on non-FCPA (wire fraud and OFAC) charges. According to the SEC’s complaint, El Paso purchased oil from third parties while knowing that the third parties had themselves made approximately $5.5 million in illegal kickback payments in connection with their purchase of the oil from the Iraqi government. El Paso allegedly reimbursed the intermediary purchasers for their kickback payments through higher commission payments and then improperly recorded the whole of the commissions as "cost of goods sold." El Paso agreed to pay a $2.25 million civil penalty to the SEC and agreed to forfeit $5.48 million — the SEC refers to the forfeiture as disgorgement of "profits," while the SDNY refers to the figure as reflecting the value of the kickback payments — to the SDNY for ultimate transfer to the Development Fund for Iraq.  For the first half of 2007, El Paso remained the only company to settle FCPA charges arising from the OFFP. Then, on August 23, the DOJ and SEC announced FCPA books-and-records settlements (the SEC’s complaint also alleged internal controls violations) with Textron, Inc. According to the settlement documents, two relatively recently acquired French subsidiaries of Textron — which participated in the "Humanitarian" side of the OFFP, unlike El Paso, which was an "Oil" side participant — used a third-party agent to funnel $580,000 to ministries of the Iraqi government in connection with the sale of industrial pumps and related spare parts under the OFFP. Textron’s subsidiaries allegedly funded the payments, which equaled 10% of the contracts’ values, by inflating the value of their contracts by 10%, thereby receiving an extra 10% from the U.N.’s escrow account. Textron’s subsidiaries then increased the value of their agents’ commissions by 10%, reimbursing the agents for making the payments, and improperly recorded the whole of the payments to the agents as "commissions" and "consultation fees." To resolve the allegations concerning the OFFP, as well as other allegedly improper payments made in several countries outside the OFFP, Textron paid a $1.15 million fine to the DOJ as part of a non-prosecution agreement, and paid an $800,000 civil penalty to the SEC along with approximately $2.7 million in disgorgement with prejudgment interest. Both the DOJ and SEC acknowledged Textron’s early discovery and self-reporting of the improper payments, as well as the company’s remedial actions and significant cooperation in the government’s investigation of it and other companies.  Rounding out the ranks of companies to settle OFFP FCPA charges (thus far) are the following: York International Corp. — On October 1, settled FCPA books-and-records and internal controls charges with the SEC, and books-and-records and wire fraud charges with the DOJ, for its Dubai subsidiary allegedly funneling approximately $670,000 in kickbacks to the Iraqi government through third-party agents, funded by inflated contract price submissions to the United Nations. Also, as described above, York International’s subsidiaries in China, India, and the United Kingdom allegedly paid more than $8 million in bribes in Bahrain, China, Egypt, India, Nigeria, Turkey, the United Arab Emirates (SEC alleged FCPA anti-bribery violations in the UAE only), and unspecified European countries. York paid a $2 million civil penalty to the SEC and agreed to disgorge just over $10 million in profits plus prejudgment interest. As part of a deferred prosecution agreement with the DOJ, York paid a $10 million criminal fine and was required to retain an independent compliance consultant.  Ingersoll-Rand Co. Ltd. — On October 31, settled FCPA books-and-records and internal controls charges with the SEC, and books-and-records and wire fraud charges with the DOJ, for its subsidiaries in Belgium, Germany, Ireland, and Italy allegedly paying or promising to pay approximately $1.5 million in kickbacks to the Iraqi government through third-party agents, funded by inflated contract price submissions to the United Nations. Ingersoll-Rand paid a $2.5 million criminal fine to the DOJ in connection with a deferred prosecution agreement and paid a $1.95 million civil penalty to the SEC together with approximately $2.27 million in disgorgement plus prejudgment interest.  Chevron Corp. — On November 15, 2007, entered into a books-and-records and internal controls resolution with the SEC and agreed to pay a $3 million penalty to settle allegations that it purchased oil from third parties while knowing that the third parties had themselves made approximately $20 million in kickbacks in connection with their purchase of the oil from the Iraqi government.  Chevron’s SEC settlement required $20 million in disgorgement, but the disgorgement was deemed satisfied by the company’s payment of the same amount to the SDNY (to be transferred to the Development Fund for Iraq) as part of a non-prosecution agreement on non-FCPA charges.  The company also paid a $2 million civil penalty to OFAC and paid $5 million to the Manhattan District Attorney’s Office to reimburse it for investigative costs. Akzo Nobel N.V. — On December 20, settled FCPA books-and-records and internal controls charges with the SEC, and books-and-records charges with the DOJ, for its Dutch subsidiaries allegedly funneling nearly $280,000 in kickbacks to ministries of the Iraqi government through their third-party agents, funded by inflated contract price submissions to the United Nations. Akzo Nobel agreed to pay a $750,000 civil penalty to the SEC and to disgorge approximately $2.23 million in profits plus prejudgment interest. Its non-prosecution agreement with the DOJ does not require the payment of a fine, provided that one of Akzo Nobel’s subsidiaries reaches a criminal settlement with Dutch authorities by June 2008 and pays at least a EUR 381,602 ($549,419) fine in connection with that settlement. This is the first time that the DOJ has declined to impose a financial penalty altogether in an FCPA case in light of a foreign disposition, although it did credit a foreign government-imposed fine in the 2006 Statoil ASA FCPA prosecution.  The OFFP investigation has also highlighted another topic of great interest to those involved in FCPA matters: the increasingly inconsistent usage of non-prosecution and deferred prosecution agreements by the DOJ and the many United States Attorneys’ Offices. Thus far, Akzo Nobel, Chevron, El Paso, and Textron have received non-prosecution agreements from the DOJ and SDNY, while for essentially the same conduct, York International and Ingersoll-Rand received deferred prosecution agreements, widely believed (and for good reason) to be a more harsh sanction.  DOJ and SEC Target Individual Defendants This year, of thirty-one FCPA defendants, fifteen were individuals, by far the highest annual total in the statute’s thirty-year history. Asked at a recent American Bar Association event whether the prosecution of individuals in 2007 is a trend or an aberration, SEC Assistant Director Cheryl J. Scarboro said that the SEC will "continue to focus on individuals." Mr. Mendelsohn, also a panelist at this event, added that the trend of individual enforcement is "part of a very concerted effort" intended to "deter the conduct." And as if this were not disconcerting enough for individuals with potential FCPA liability, Donald W. Freese, the head of the Federal Bureau of Investigation’s new FCPA unit, recently expressed his view that the only way to deter FCPA conduct is to put people in jail.  Perhaps the highest profile FCPA prosecution of an individual in 2007 is that of sitting United States Congressman William J. Jefferson. On June 4, 2007, a grand jury in the Eastern District of Virginia returned a sixteen-count indictment charging Jefferson with violating the FCPA’s anti-bribery provisions, solicitation of a bribe by a public official, wire fraud, money laundering, obstruction of justice, and violating the Racketeer Influenced and Corrupt Organizations Act. The FCPA charges stem from Jefferson’s alleged promise to make a $500,000 "front-end payment" to a high-ranking Nigerian official, widely believed to be former Vice President Atiku Abubakar, to induce the official to assist Jefferson in obtaining regulatory approvals from the Nigerian state-owned telecommunications company for a joint venture between a Nigerian company and iGate, Inc., a Kentucky-based company for which Jefferson was acting as agent. Jefferson also allegedly offered the Nigerian official a "back-end payment" of 50% of the joint venture’s future profits. When the FBI raided Jefferson’s Washington, D.C. home, acting on the tip of a confidential informant, they discovered $90,000 cash in Jefferson’s freezer, which the indictment alleges was to be used in partial satisfaction of the $500,000 front-end payment. Jefferson has pleaded not guilty to all charges and is presently scheduled to go to trial in February 2008. Although lacking the media cachet of the Jefferson indictment, another particularly interesting 2007 FCPA individual enforcement action was the SEC’s settlement with Monty Fu, the founding Chairman of Syncor International Corp., a California-based provider of radiopharmaceutical products. Otherwise relatively standard FCPA fare, what makes this case truly significant is that the resolution was reached nearly five years after Syncor International and its foreign subsidiary Syncor Taiwan settled FCPA charges with the DOJ and SEC in December 2002. The SEC’s complaint charged Fu only with FCPA books-and-records and internal controls violations. According to the complaint, from 1985 through 2002, Syncor Taiwan made more than $1.1 million in improper commission payments to both private and state-employed physicians in Taiwan to influence them to purchase Syncor Taiwan’s products. The SEC alleged that Fu, as the Chairman of Syncor International, had the authority to implement a system of internal controls within Syncor Taiwan, yet failed to do so. Additionally, the SEC alleged that he either knew, or was reckless in not knowing, that the improper payments were being falsely recorded on Syncor Taiwan’s books and records, which were then incorporated into Syncor International’s books and records. Interestingly, given the nature of the charges and the lengthy time period to reach a settlement, it does not appear that Mr. Fu will be criminally prosecuted.  Other corporate officials to be charged in 2007 after their respective employers settled FCPA charges in prior years include Robert W. Philip (SEC) and Si Chan Wooh (DOJ and SEC), formerly the CEO and Executive Vice President, respectively, of Schnitzer Steel Industries, Inc., which together with its Korean subsidiary settled criminal and administrative FCPA charges with the DOJ and SEC in October 2006, and Charles M. Martin (SEC), formerly the Asian Governmental Affairs Director of Monsanto Co., which itself settled civil and administrative FCPA charges with the SEC in January 2005.  International Enforcement and Cooperation One can’t help but suspect that Mark Mendelsohn chose carefully his words featured at the outset of this Update — "2007 is by any measure a landmark year in the fight against foreign bribery." For not only did FCPA enforcement reach unprecedented levels in 2007, but this year also featured never-before-seen vigor among foreign prosecutors in at least investigating, if not yet prosecuting, international graft. Chiming in on this point, Alice Fisher recently described the DOJ’s efforts to work "more effectively with foreign authorities around the world to investigate and prosecute FCPA offenses," resulting in "an increase in the number of joint investigations." Representative of this increased multinational cooperation, on November 20 and 21, 2007, Ms. Fisher, Mr. Mendelsohn, and William B. Jacobson, Assistant Chief of the DOJ’s Fraud Section and the DOJ’s second-most senior FCPA prosecutor, participated in an international conference to celebrate the tenth anniversary of the OECD Anti-Bribery Convention. Together with the DOJ representatives, prosecutors from Brazil, Chile, France, Germany, Hong Kong, Hungary, Italy, South Africa, and Switzerland gave presentations on the status of international bribery enforcement in their own countries. This coordination between U.S. and foreign anti-bribery enforcement agencies may subject multinational companies to dual enforcement actions in the United States and foreign countries, much as we saw in the 2006 prosecutions of Statoil ASA and expect to soon see for Akzo Nobel N.V. Several recent cases highlight this trend toward more aggressive international enforcement of foreign anti-bribery laws. On October 5, 2007, German conglomerate Siemens AG announced that it had accepted a German court’s order to pay a EUR 201 million ($284 million) fine in connection with alleged bribes paid by Siemens’s telecommunications unit to win contracts in a number of countries, including Russia. Siemens also agreed to pay German tax authorities EUR 179 million ($253 million) in back taxes related to improper deductions taken for the unlawful payments. In addition, the German authorities indicted at least one executive from the telecommunications unit in connection with the alleged bribery, and press reports indicate that additional indictments are expected. These significant fines came on the heels of a EUR 38 million ($51 million) fine levied against Siemens’s power-generation unit in May 2007, and Siemens has confirmed that it is continuing to investigate suspicious payments made by several other units. Both the DOJ and SEC have open FCPA investigations related to the alleged bribery, which many speculate will lead to even more sizeable penalties than those imposed in Germany, which already dwarf the highest FCPA settlement on record, Baker Hughes, Inc. with $44 million. China, Greece, Hungary, Indonesia, Italy, Japan, Norway, and Switzerland also have reportedly launched investigations into the same conduct. In one of the most highly publicized and controversial international corruption investigations in recent memory, BAE Systems PLC, a major British defense contractor, is suspected of having paid billions of dollars to members of the Saudi royal family over several decades to secure lucrative contracts to provide fighter jets and other military equipment to Saudi Arabia. The British Serious Fraud Office ("SFO") had reportedly been investigating BAE for several years when then-Prime Minister Tony Blair intervened to halt the inquiry in December 2006, invoking national security concerns when Saudi Arabia threatened to withdraw from cooperative anti-terrorism efforts. But that would not be the end of BAE’s troubles, for on June 26, 2007, BAE announced that the DOJ had opened its own investigation into the Saudi payments. While British authorities have reportedly resisted cooperating with the DOJ, the Swiss authorities have agreed to provide relevant financial records to assist the DOJ’s investigation. And according to media reports, the DOJ recently flew a BAE employee to the United States for interviews, routing him through Paris so as to avoid attention. Accordingly, the BAE investigation highlights the fact that the level of international cooperation may vary greatly, depending on the particular countries involved. In early December, the SFO announced a new investigation of BAE, focusing on potentially improper payments made to secure contracts with the governments of Romania, South Africa, and Tanzania. In November 2007, the former chief legal officer for the Samsung Group, the largest conglomerate (chaebol) in South Korea, publicly reported that the company and its affiliates paid billions of dollars to various government officials to ensure that the son of Samsung’s current chairman would succeed his father as the head of the chaebol. The whistleblower claimed that the money was kept in slush funds that were concealed through unlawful bookkeeping practices. State prosecutors in South Korea are investigating the allegations, and President Roh Moo-hyun recently approved legislation mandating the launch of a separate, independent, investigation. Several commentators have speculated that the negative press arising from the bribery allegations may trigger changes in Samsung’s business practices, but skeptics have noted that the culture of bribery is deeply rooted in South Korea, where the chaebols wield significant political influence. The Only Way to (Sponsor) Travel  Company-sponsored travel by government officials was clearly an area of focus for the DOJ and SEC in 2007. The FCPA’s anti-bribery provisions provide for an affirmative defense permitting companies to pay for the "reasonable and bona fide" expenses of foreign government officials, "such as travel and lodging expenses," incurred in connection with either (1) the "promotion, demonstration, or explanation" of the payer’s products or services or (2) "the execution or performance of a contract with a foreign government or agency thereof." But as the DOJ and SEC made clear in 2007, there is a right way and a wrong way to go about sponsoring travel for foreign government officials.  The "right way" is exemplified in two very similar FCPA Opinion Procedure Releases issued by the DOJ in July and September, respectively (the FCPA Opinion Procedure Release process is described in greater detail below). In FCPA Op. Proc. Rel. 2007-01, the DOJ wrote that it would not take enforcement action against a company that wished to cover domestic travel expenses — including transportation, lodging, and meals — expected to be incurred by a six-person delegation of a foreign government in connection their visit to one of the requestor’s U.S. sites (the foreign government agreed to pay the officials’ international travel expenses). The Opinion highlighted the following facts as relevant to the DOJ’s conclusion that the requestor’s contemplated conduct would fall within the FCPA’s "promotional expenses" affirmative defense:  the foreign officials making the trip were selected by the foreign government, not the requestor; the foreign officials had no authority to make decisions that would affect the requestor’s planned operations in the foreign country; the requestor would pay all incurred expenses directly to the service providers, not to the officials, and would properly record such payments in its books and records; the air transportation to be provided by the requestor would be "economy class"; the requestor obtained a written legal opinion "that the requestor’s sponsorship of the visit and its payment of the expenses described in the request is not contrary to the law of the foreign country"; the requestor would not "fund, organize, or host any entertainment or leisure activities for the officials, nor [would] it provide the officials with any stipend or spending money"; any souvenirs to be provided to the foreign officials "would reflect the requestor’s name and/or logo and would be of nominal value"; and  the requestor would "not pay any expenses for spouses, family, or other guests of the officials."  In FCPA Op. Proc. Rel. 2007-02, the DOJ issued very similar advice to a requestor contemplating the payment of domestic travel and lodging expenses for foreign government officials already in the United States on business unrelated to the requestor. The only significant differences between FCPA Op. Proc. Rels. 2007-01 and 2007-02 are that the requestor in this instance additionally sought: to reimburse incidental expenses incurred by the visiting foreign officials "up to a modest daily minimum, upon presentation of a written receipt"; and  to provide a "modest four-hour city sightseeing tour" for the officials.  The DOJ again concluded that payment of the foreign officials’ travel expenses under these circumstances would fall within the FCPA’s "promotional expenses" affirmative defense.  On the "how not to" side of the government official travel sponsoring ledger, on December 21, 2007, the DOJ and SEC announced FCPA books-and-records and internal controls settlements with Lucent Technologies, Inc., a global telecommunications provider that merged with Alcatel SA in November 2006. The settlement documents allege that, between 2000 and 2003, Lucent spent more than $10 million sponsoring 315 trips for approximately 1,000 Chinese government officials. The majority of these trips were ostensibly designed to allow officials before whom Lucent had pending or expected tenders to inspect Lucent’s factories or to train Chinese officials with whom Lucent had ongoing contracts on how to use Lucent equipment. In fact, the Chinese government officials spent little to no time visiting Lucent’s facilities — indeed, for much of the relevant period Lucent had relocated its production facilities to countries, including China, other than where the travel was provided — and instead spent the majority of these trips visiting popular tourist destinations in Australia, Canada, Europe, and many locations within the United States, including Disney World, the Grand Canyon, Hawaii, Las Vegas, and Niagara Falls. Each trip typically lasted fourteen days and cost Lucent between $25,000 and $55,000. In connection with some of these trips, Lucent additionally provided between $500 and $1,000 per day to the traveling foreign officials as a "per diem," even though Lucent was already funding all of the officials’ travel expenses. And Lucent’s funding of these trips was so transparently gratuitous to at least one Chinese official, that he even requested (and Lucent agreed) that Lucent pay $21,000 to cover the costs of him obtaining his MBA in lieu of paying for him to attend one of the trips.  Although the conduct described in the settlement documents arguably implicates the FCPA’s anti-bribery provisions — the DOJ and SEC have previously charged corporate largesse through gratuitous travel sponsorship as anti-bribery violations — Lucent was only alleged to have improperly recorded the expenses and to have failed to maintain a system of internal controls. For example, Lucent allegedly booked many of the trips to a "Factory Inspection Account," even where the officials did not visit a Lucent factory at any time during the trip. With regard to Lucent’s internal controls, the settlement documents allege that Lucent "failed, for years, to properly train its officers and employees to understand and appreciate the nature and status of its customers in China in the context of the FCPA."  Lucent’s settlements, through which it will pay a $1.5 million civil penalty to the SEC and a $1 million fine to the DOJ, resolve a longstanding investigation into Lucent’s travel practices in China. According to Lucent’s public filings, the company nearly went to the mat on this investigation, receiving a "Wells" notice from SEC Staff in September 2006 and submitting a written response to the Commission in late 2006. Another interesting aspect of the settlement is that the DOJ’s non-prosecution agreement, which typically resolves all of a company’s outstanding FCPA liabilities, expressly provides that it does not cover the DOJ’s ongoing investigation of pre-merger Alcatel SA activities in "Costa Rica and elsewhere." Alcatel’s former Country Manager for Costa Rica, Edgar Acosta, was indicted on FCPA charges in March 2007, and its former Director of Latin American Sales, Christian Sapsizian, who was originally indicted on FCPA charges in 2006, pleaded guilty in June 2007.  Transactional Due Diligence With the recent upsurge in global M&A activity coinciding with that of FCPA enforcement, the FCPA has become a central issue in transactional due diligence. So much so that Alice Fisher made the topic a centerpiece of a recent speech she gave on the FCPA, advising that there are five questions that every acquirer will want to know, at a minimum, about a prospective target before it closes on an acquisition: "The extent to which the company’s customers are government entities, including state-owned companies; "Whether the company is involved in any joint ventures with government entities; "What government approvals and licenses the company needs to operate abroad, how it obtained them, and when they require renewal; "The company’s requirements relating to Customs in foreign countries and how it fulfills those requirements; and "The company’s relationships with third party agents or consultants who interact with foreign officials on the company’s behalf, including how those agents were chosen and vetted by the company."  Nearly half of the corporate FCPA enforcement actions of 2007 implicated some aspect of M&A activity. For example, Delta & Pine Land Co. and York International Corp. each settled FCPA enforcement actions in 2007 shortly after being acquired by, respectively, Monsanto Co. and Johnson Controls, Inc. Interestingly, Delta & Pine’s pre-merger SEC filings suggest that it had identified the FCPA issue forming the basis for the SEC’s administrative cease-and-desist order — the provision of approximately $43,000 in cash, travel expenditures, and office furniture, among other items, to Turkish Ministry of Agriculture officials to influence them in providing Delta & Pine with regulatory approvals — years prior the Monsanto acquisition. But Delta & Pine determined that the payments did not violate the FCPA, perhaps because it believed that they fit within the "facilitating payments" exception to the FCPA’s anti-bribery provisions, and accordingly did not report the conduct to the DOJ or SEC. But when Monsanto discovered these payments in the course of pre-acquisition due diligence, it required Delta & Pine to report the conduct to the DOJ and SEC, ultimately leading to a post-closing FCPA settlement.  Commenting on the York International settlement, Mark Mendelsohn recently noted that counsel for Johnson Controls actively participated in settlement negotiations with the DOJ and SEC, and that while there was "recognition around the table" that the matter would be settled, the "big issue was to ensure York was the settling party; not Johnson Controls." Mr. Firestone added that the SEC is likewise sensitive to issues such as who the settling party will be in the context of a merger.  For additional guidance on the topic of transactional due diligence, please see the article by F. Joseph Warin, et al., Acquisition Due Diligence: A Recipe to Avoid FCPA Enforcement, TEXAS STATE BAR OIL, GAS, & ENERGY RESOURCES LAW SECTION REPORT 2 (June 2006).  The Pain Continues — FCPA-Inspired Civil Litigation  Although the FCPA does not grant a private cause of action, several federal district courts have recently refused to dismiss § 10(b) actions based on allegedly false and misleading statements regarding FCPA violations made in companies’ financial statements. These courts have held that the plaintiffs met the heightened pleading requirement for fraud under the Private Securities Litigation Reform Act ("PSLRA").  Continuing this trend, on September 18, 2007, the U.S. District Court for the Middle District of Florida decided two motions to dismiss a securities class action arising, in part, from alleged FCPA violations by FARO Technologies, Inc. The class action complaint named as defendants FARO, several individual FARO employees, and FARO’s auditor, Grant Thornton ("GT"). The complaint made various allegations of fraud, including a claim that the company overstated income by including sales resulting from FCPA violations and a claim that the company falsely stated that its system of internal controls was adequate. In the court’s decision, it adopted a magistrate judge’s recommendation to deny FARO’s motion to dismiss the plaintiffs’ second amended complaint. The magistrate judge found that the complaint sufficiently alleged that the individual employees’ knowledge of unlawful payments should be imputed to FARO and that FARO and the individual defendants "knowingly or recklessly attested to the adequacy of the internal controls system, when they knew that the system was, in fact, seriously inadequate." In contrast, the magistrate judge recommended that the court grant GT’s motion to dismiss because GT did not actively participate in the fraudulent activities alleged against FARO, nor did GT have knowledge of FARO’s inadequate internal controls. In addition, despite the existence of some "red flags," the magistrate judge found that GT was not reckless in failing to detect FARO’s inadequate controls and fraudulent activity. Accordingly, the court granted GT’s motion to dismiss on the magistrate judge’s recommendation. In May 2007, following a denial of its motion to dismiss, Georgia-based medical equipment manufacturer Immucor, Inc. agreed to settle a similar class action for $2.5 million. In denying Immucor’s motion to dismiss, the district court held that the "weaknesses [in Immucor’s internal controls] could have lead [sic] . . . to liability under the FCPA and impacted the value of Immucor’s stock. The Court cannot rule as a matter of law that Immucor’s misstatement of those weaknesses was not material." Then on September 27, 2007, just one day after the district court approved the class action settlement, Immucor and its President, Gioacchino De Chirico, entered into administrative settlements with the SEC charging them with violating the FCPA’s anti-bribery, books-and-records, and internal controls provisions and ordering them to cease-and-desist from future violations of the same. There was no financial penalty imposed upon Immucor or De Chirico.  On September 19, 2007, in the U.S. District Court for the District of Columbia, a public pension system based in Michigan filed a derivative lawsuit related to alleged FCPA violations against BAE Systems PLC. The lawsuit claims that BAE’s officers and directors encouraged and permitted the company’s managers to make and authorize more than $2 billion in bribes and kickbacks to win lucrative contracts in violation of the FCPA and other foreign anti-corruption laws. The complaint alleges that this conduct constituted an intentional, reckless, and negligent breach of the directors’ and officers’ fiduciary duties to the company. In addition, the plaintiff shareholder claims that the defendants misrepresented the quality and effectiveness of the company’s compliance program.  Litigation continues in two shareholder derivative suits filed in May 2007 against certain of Baker Hughes, Inc.’s current and former directors and officers. The plaintiffs allege that the defendants failed to implement adequate internal controls, policies, and procedures to prevent the conduct that gave rise to the company’s April 2007 settlements with the DOJ and SEC.  Another recent civil case, one with a particularly peculiar fact pattern, demonstrates yet another way in which civil liability can follow from alleged FCPA violations. In March 2006, the Government of the Dominican Republic and the Secretariat of State for the Environment and Natural Resources of the Dominican Republic filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against AES Corporation ("AES"), which is based in Virginia, several of its subsidiaries, and an independent contractor. The complaint alleges that the defendants conspired to dump hazardous coal ash on two beaches in the Dominican Republic, resulting in ecological destruction and undermining the physical and economic health of local communities. In addition to allegations that the defendants violated various environmental laws and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, the Dominican Government asserted that the defendants violated the FCPA and the Racketeer Influenced and Corrupt Organizations Act by approving the payment of bribes to Dominican officials to allow the dumping to occur. Further, the complaint alleges that after a Dominican District Attorney attempted to halt the dumping, he was himself offered a bribe and, when he refused, subjected to an attempted physical assault, an attempted firebombing of his car, and death threats before ultimately being fired by corrupt Dominican officials. The complaint asserts that the defendants all knew about and ratified these activities. Interestingly, the Dominican government conceded that corruption was so problematic in its own judiciary that it sought relief in a U.S. court because of concerns that the defendants would purportedly resort to further bribery to win a case brought in its home country. In February 2007, one week before trial, AES settled the case for $6 million. In short, corporations and their directors and officers must not overlook the third member of the FCPA Trifecta: the DOJ, the SEC, and the civil litigant.  2007 DOJ Opinion Procedure Releases By statute, the DOJ is required to provide a written opinion at the request of an "issuer" or "domestic concern" as to whether the DOJ would prosecute the requestor under the FCPA’s anti-bribery provisions for prospective conduct that the requestor is considering taking. These opinions are published on the DOJ’s FCPA website, but only a party who joins in the request may officially rely upon the opinions.  In the FCPA’s thirty-year history, the DOJ has issued but forty-seven such written opinions, including three in 2007. In 2006, Alice Fisher commented that "the FCPA opinion procedure has generally been under-utilized" and noted she wants it "to be something that is useful as a guide to business." The three opinion releases issued in 2007 are the most issued in a single year since 2004, when the DOJ issued four releases. The first two of these releases were described above in the Sponsoring Travel Section; the third is described below.  FCPA Op. Proc. Rel. 2007-03 The DOJ issued its final FCPA Opinion Procedure Release of 2007 on December 21. In this Opinion, the requestor sought to make a $9,000 "advance payment" required by a family court judge in a foreign country to cover administrative costs expected to be incurred by the court in administering a dispute over the estate of a deceased relative of the requestor. The requestor represented that she had obtained a written opinion from a lawyer with law degrees in both the United States and the foreign country that the payment she sought to make was not only not contrary to, but explicitly provided for, under the foreign country’s laws. The requestor further represented that the payment would be made directly to the clerk’s office of the family court, not to the foreign judge presiding over the dispute. The DOJ concluded that the proposed payment would be lawful under two grounds: (1) the payment "will be made to a government entity, the court clerk’s office, rather than a foreign official" and "there is nothing to suggest that the presiding judge . . . will personally benefit from the funds after they are paid into the government account"; and (2) the payment is contemplated under the local law of the foreign country so it falls under the FCPA’s "lawful under the written laws and regulations" of the foreign country affirmative defense.  2007 FCPA Enforcement Litigation  United States v. Kay On October 24, 2007, the United States Court of Appeals for the Fifth Circuit issued a much awaited opinion concerning the scope of the FCPA. In United States v. Kay, the court held that payments to foreign officials made to reduce customs duties and taxes, thereby helping the payer gain a competitive advantage in the marketplace, may violate the FCPA’s prohibition on payments made to "obtain or retain business." During the 1990s, David Kay and Douglas Murphy, executives at American Rice, Inc. ("ARI"), paid bribes to various Haitian officials, allowing ARI to avoid paying certain customs duties and taxes on its rice imports. In 2002, following a disclosure to the SEC, Kay and Murphy were indicted, but the district court granted their motion to dismiss the indictment, "concluding that payments to foreign government officials made for the purpose of reducing customs duties and taxes do not fall under the scope of obtaining or retaining business pursuant to the text of the FCPA." In 2004, the Fifth Circuit reversed that decision, holding that "bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription" provided that the "bribery was intended to produce an effect — here, through tax savings — that would assist in obtaining or retaining business." (Emphasis in original). After Kay and Murphy were found guilty at trial, they moved to dismiss and arrest judgment, renewing their argument based on lack of fair warning. The district court judge denied the motion, and Kay and Murphy appealed to the Fifth Circuit on the ground that application of the Fifth Circuit’s prior opinion on the scope of the FCPA violated the Due Process Clause by denying them fair notice that their conduct was illegal. The Fifth Circuit considered four standards for fair notice, ultimately concluding that Kay and Murphy’s convictions met each standard. First, the court noted that although the FCPA’s "obtain or retain business" provision was "imprecise general language," the FCPA did not violate the prohibition against vagueness because the defendants viewed their payments as measures necessary to keep up with competitors — i.e., to obtain or retain business — and thus a man of common intelligence would have understood that the defendants were "treading close to a reasonably-defined line of illegality." Second, the court explained that when the district court determined that the facts of the case fell within the FCPA’s prohibitions, it did not extend the FCPA beyond its explicit terms and thereby violate the prohibition on retroactive application of a novel interpretation of a statute, because "[t]he explicit terms of the FCPA do not include either language relating specifically to contracts or defining more general business practices that may fall under the [FCPA’s] business nexus test." Third, the court held that the mere fact that the FCPA "contained an ambiguous provision" did not mean that it was void for vagueness, and the relative dearth of prosecutions under the FCPA of individuals for the "narrow type of payment" at issue in the case did not permit Kay and Murphy to argue that they "were unaware of the boundaries of illegality under the [FCPA] in the 1990s." Finally, the court held that the rule of lenity, which "ensures fair warning by so resolving ambiguity in a criminal statute as to apply it only to conduct clearly covered," did not apply, because the rule permits use of legislative history to resolve ambiguity, and "the mere possibility of articulating a narrower construction of an act . . . does not by itself make the rule of lenity applicable."  The Fifth Circuit also held that the district court’s jury instructions, which required that the defendants have committed the act "voluntarily and intentionally" and "with a bad purpose or evil motive of accomplishing either an unlawful end or result, or a lawful end or result by some unlawful method or means," met the common law definition of "willfully," by requiring that a defendant know he is committing the act itself, and know that it is "in some way wrong." The court expressly declined to include a third requirement — that the defendant "knew that he was violating the specific provisions of a law" — thus agreeing with prior Second Circuit precedent in limiting the requirement of such specific knowledge to "highly technical exceptional statutes" such as federal tax laws, reiterating the traditional rule for criminal willfulness: "ignorance of the law is no excuse." The Fifth Circuit affirmed the convictions of both defendants. The Kozeny Cases On June 21, 2007, Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York dismissed all FCPA counts pending against Frederic Bourke and David Pinkerton on statute-of-limitations grounds. Along with Viktor Kozeny, Bourke and Pinkerton were indicted on May 12, 2005 for allegedly participating in a massive scheme to bribe government officials in Azerbaijan. The three men allegedly bribed government officials to ensure that they would privatize Azerbaijan’s state-owned oil company, thus allowing Kozeny, Bourke, Pinkerton, and others to share in the anticipated profits arising from that privatization. Judge Scheindlin later reinstated several of the FCPA counts on July 16, 2007, though the reasoning for her opinion did not change.  Pinkerton and Bourke had moved to dismiss the FCPA counts as time-barred (Kozeny, who has thus far refused to submit to U.S. jurisdiction, did not join in the motion). The DOJ had previously sought and received a court order tolling the statute of limitations under 18 U.S.C. § 3292, which permits the United States to obtain such orders for up to three years while it pursues an official request to obtain evidence located in a foreign country. Although the DOJ filed the official request at issue in this case with the governments of the Netherlands and Switzerland within the five-year statute-of-limitations period, it did not obtain the § 3292 court order until after the statute of limitations had run. Judge Scheindlin held that it is the court order, not the application with the foreign government, that tolls the statute of limitations under 18 U.S.C. § 3292. The DOJ has appealed Judge Scheindlin’s decision to the Second Circuit, which has yet to schedule oral argument.  As noted above, Kozeny has thus far refused to appear in U.S. court to answer the charges against him. He was arrested in the Bahamas and the DOJ filed an extradition application with the Bahamian courts. On October 25, 2007, after a lower Bahamian court approved the application, an intermediate appellate court overturned the extradition order, basing its decision, in part, on the failure of the U.S. government to disclose Judge Scheindlin’s decision dismissing the FCPA charges against Kozeny’s co-defendants. Kozeny has been released on $300,000 bail as the prosecution appeals the intermediate court’s ruling to the highest court in the Bahamas.  In another related case from 2007, on July 6, following the district court’s dismissal of the FCPA charges against Bourke and Pinkerton, the DOJ and SDNY jointly announced a non-prosecution agreement with hedge fund Omega Advisors, Inc. to resolve allegations surrounding its participation in the Azeri oil privatization effort. According to the agreement, Omega invested more than $100 million in companies controlled by Kozeny while knowing that he had entered into corrupt arrangements with Azeri officials giving them a financial interest in the privatization effort. Omega agreed to forfeit $500,000 in connection with its FCPA settlement.  2007 Legislation Relevant to the FCPA Two pieces of legislation relevant to the FCPA are currently pending in Congress. If either bill passes, the implications for companies subject to the FCPA could be far-reaching. On August 3, 2007, Representative Gene Green (D-TX) introduced H.R. 3405, a bill that would require all government contractors to certify, before any Executive Agency may contract with it, that they, their employees, and their agents have not violated the FCPA or analogous foreign international corruption statutes. The legislation arises from a concern that U.S. companies are at a disadvantage when competing against foreign competitors who are not bound by the FCPA. The intent of H.R. 3405 is to level that playing field somewhat by requiring all companies to certify their compliance with the FCPA before bidding on contracts with the U.S. government. Several companies have criticized the bill because it would render them unable to make the requisite certification and bid on a U.S. government contract if they have ever violated the FCPA in the past, even if the past violations were voluntarily disclosed, fully investigated, and prosecuted by the government. The bill could also require all government contractors to notify the government of previously undisclosed past violations of the FCPA. H.R. 3405 remains in the House Subcommittee on Government Management, Organization, and Procurement, where it was referred in September 2007. On November 13, 2007, the House passed H.R. 3013, a bill that would prohibit federal prosecutors and agents from demanding, requesting, or conditioning treatment based on a company’s disclosure of, or refusal to disclose, privileged attorney-client communications or attorney work product. H.R. 3013 would also prohibit federal prosecutors and agents from conditioning a charging decision on such disclosures or using any such disclosures as a factor in determining whether a company has cooperated with the government. This legislation is a response to the "culture of waiver" that has been created by recent policy guidance issued by the DOJ that treats companies more harshly if they do not waive the attorney-client privilege and work product protections.  H.R. 3013 would apply in all situations in which the government investigates and prosecutes a company, but the issue of waiver arises frequently in the context of FCPA investigations. In many cases, a company that has voluntarily disclosed allegedly improper payments to the DOJ or the SEC will conduct its own internal inquiry of the conduct and then cooperate with the government’s investigation to receive favorable treatment. In the past, the government expected that companies in such a position would waive privilege to gain the full benefits of cooperating with the government. The House Report discussing H.R. 3013 discusses the importance of the attorney-client privilege and the work product doctrine, concluding that "[t]he clear thrust of [the DOJ’s] new policies is that waiver is required to get ‘cooperation’ credit, a crucial element in charging decisions." Accordingly, H.R. 3013 tries to "strike a balance between the promotion of effective law enforcement and compliance effort . . . and the preservation of essential legal protections."  On November 14, 2007, H.R. 3013 was referred to the Senate Judiciary Committee. In September 2007, the Senate Judiciary Committee held hearings on S. 186, a bill that is identical to the version of H.R. 3013 that was first introduced in the House, but there has been no further action.  2008 Litigation Docket A collateral consequence of the drastic upswing in the prosecution of individual defendants for alleged FCPA violations is almost certain to be an increase in litigated FCPA cases, of which there are but a handful in the statute’s thirty-year history. Without the same complex mix of public relations and other collateral concerns that pressure many corporate defendants to settle — call it the Arthur Andersen Effect — not to mention the motivation of literally fighting for their freedom, individual defendants have traditionally been more willing to put the government to its burden at trial. Look for at least one of the below pending cases to see a jury in 2008: United States v. William J. Jefferson — Allegations described above, the trial proceedings are presently scheduled to begin before Judge T.S. Elliot III in the U.S. District Court for the Eastern District of Virginia on February 25, 2008. A potential trial derailment factor may be the DOJ’s recent petition for certiorari from an adverse decision of the D.C. Circuit Court of Appeals suppressing certain evidence seized in a search of Jefferson’s congressional office on Speech or Debate Clause grounds.  United States v. Leo W. Smith — Smith, a co-founder of California-based military equipment manufacturer Pacific Consolidated Industries LP, was indicted on April 25, 2007 on FCPA anti-bribery, money laundering, and tax offenses stemming from an alleged ten-year conspiracy whereby Smith made more than $300,000 in bribe payments to an official of the United Kingdom’s Ministry of Defence in return for the award of U.K. Royal Air Force contracts collectively worth more than $11 million for his employer. Smith was arrested on June 18, 2007, has pleaded not guilty to all charges, and is presently scheduled to go to trial before Judge Andrew Guilford in the U.S. District Court for the Central District of California on April 1, 2008. United States v. Frederic Bourke and David Pinkerton — As described above, Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York dismissed some, but not all, of the FCPA charges pending against Bourke and Pinkerton on statute-of-limitations grounds. The DOJ has appealed Judge Scheindlin’s ruling to the Second Circuit, but in a recent court filing, she nonetheless insisted on keeping a March 3, 2008 status hearing to discuss a trial date for the remaining counts. And, as noted above, Victor Kozeny’s indictment remains outstanding should the United States be successful in its extradition application.  United States v. Gerald and Patricia Green — Gerald Green, a Los Angeles film company executive, and Patricia Green, Gerald’s wife and business partner, were both arrested on December 18, 2007 on the basis of a criminal complaint charging them with conspiring to violate the FCPA’s anti-bribery provisions by paying more than $1.7 million to a Thailand Tourism Authority official to persuade the official to award the Green’s businesses contracts to run the annual Bangkok International Film Festival. A trial date has yet to be scheduled.  SEC v. Yaw O. Amoako, Steven J. Ott, Roger M. Young — Amoako, Ott, and Young all pleaded guilty to criminal FCPA anti-bribery violations in 2007 arising from their conduct while employed by ITXC Corp. But all additionally have pending civil FCPA actions that were brought by the SEC in 2005 and 2006 and stayed during the pendency of the criminal prosecutions. In a December 2007 status report, the DOJ advised the court that the SEC expected Commission action on a settlement proposal for Ott and Young by January 31, 2008. Amoako’s status is less certain, as his attorney recently successfully sought to be removed on the grounds that Amoako has refused to pay accrued legal fees.  SEC v. Roy Fearnley — When the SEC filed a settled civil action with Baker Hughes, Inc. in April 2007 (described above), it also filed a contested complaint against Fearnley, a former Baker Hughes Business Development Manager, charging him with FCPA anti-bribery violations and aiding and abetting his former employer’s violations of the FCPA’s books-and-records and internal controls provisions. Fearnley, a U.K. citizen last known to reside in Kazakhstan, has not answered the SEC’s complaint.  United States v. Edward V. Acosta — As noted above, Acosta, former Senior Costa Rican Country Manager for Alcatel SA, was indicted on criminal FCPA anti-bribery charges in March 2007. In June 2007, the U.S. District Court for the Southern District of Florida transferred Acosta to fugitive status.  Guidance China, China, China — The Perils of Doing Business China remains a high-risk environment for conducting business in compliance with the FCPA. In 2007 alone, the DOJ and SEC brought FCPA cases against Si Chan Wooh and Robert W. Philip, both formerly of Schnitzer Steel Industries, Inc. (which itself settled FCPA charges in 2006); Lucent Technologies, Inc.; York International Corp.; and Paradigm B.V.; all stemming from allegedly improper conduct in China. These five FCPA actions in 2007 nearly doubled the number involving China from the previous three years combined. Ranked seventy-second on Transparency International’s 2007 Corruption Perceptions Index, corruption is rampant in China, and Chinese government officials routinely seek free meals, gifts, entertainment, cash-equivalent vouchers, and sponsored travel opportunities. According to the U.S.-China Business Council, "[s]o tightly knit are corrupt practices into the fabric of modern Chinese society that they are almost invisible. . . . For businesspeople, corrupt practices have layered cost upon cost, as each government organization with any say over a given deal has to be negotiated with, cajoled, and managed in order to fend off the rent-seeking behavior."  China’s layered government enhances this already corrupt environment. Businesses seeking licenses are forced to deal with several layers of government and several agencies within each layer. Recent central government anti-corruption reforms have not affected local customary practice. Moreover, in China, the intersection of private and governmental business makes it difficult to identify foreign officials. For instance, many businesspeople also hold governmental positions; and many major businesses are state-owned or state-controlled. It is typical for an ex-government official who remains a Communist Party member and maintains continuing ties to the government to serve as a "consultant." Further, as a multitude of cases and settlements have made clear, the definition of "foreign official" is broad indeed, encompassing airport officials (InVision Technologies, Inc.), physicians and lab employees at government-owned hospitals (Diagnostic Products Corp.), and employees of China National Offshore Oil Company (Paradigm B.V.). China is especially dangerous because the line between bona fide business expenses and corruption is not well-defined. For instance, the network of connections built on personal relationships (guanxi) is essential for successful business in China. Yet, access to that network often requires providing gifts, meals, and entertainment. Additionally, gifts for Chinese holidays, like Chinese New Year and the Mid-Autumn Festival, can also blur the line. The difference between traditional gifts (e.g., mooncakes) and cash gifts — even those of lesser value — can mean the difference between a mere symbolic gesture and a bribe. Of more recent note, officials are increasingly requesting "good works" marketing, in which funds are redirected to community projects in exchange for business. These cultural and community pressures make doing business in China a precarious proposition. Conclusion As the mix of revenues for U.S. corporations increasingly shifts abroad, and as foreign corporations increasingly take advantage of U.S. securities markets, the challenges of navigating foreign environments in compliance with the FCPA continually increase. The pitfalls for even the most compliance conscious corporations are substantial. A quick "top-ten" checklist to bolster FCPA compliance should include: 1. Clearly articulated policy against violations of the FCPA and foreign anti-bribery laws; 2. Appropriate disciplinary procedures to address compliance violations;  3. Regular FCPA training for, with mandatory compliance certifications by, employees and third-party representatives;  4. Careful pre-retention scrutiny of all third-party representatives; 5. Senior management oversight of third-party representatives post-retention;  6. Inclusion of anti-corruption representations and undertakings, with audit and termination rights, in all third-party representative agreements; 7. Anonymous "Helpline" reporting system; 8. Centralization of accounting systems to achieve corporate headquarters-review of all financial transactions (i.e., follow the money);  9. Thorough pre-acquisition due diligence of prospective targets, with a particularized focus on the FCPA and analogous foreign anti-bribery laws; and  10. Immediate integration of recently acquired subsidiaries to assure that the new entity is effectively bathed in the compliance culture of the acquirer.    Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 20 attorneys with substantive FCPA expertise. Joe Warin, a former federal prosecutor, currently serves as a compliance consultant pursuant to a DOJ and SEC enforcement action. The firm has 20 former Assistant U.S. Attorneys and DOJ attorneys. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)  Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) Judith A. Lee (202-887-3591, jalee@gibsondunn.com) David P. Burns (202-887-3786, dburns@gibsondunn.com)  Jim Slear (202-955-8578, jslear@gibsondunn.com)Michael S. Diamant (202-887-3604, mdiamant@gibsondunn.com)John W.F. Chesley (202-887-3788, jchesley@gibsondunn.com)Patrick F. Speice, Jr. (202-887-3776, pspeicejr@gibsondunn.com) New YorkLee G. Dunst (212-351-3824, ldunst@gibsondunn.com)James A. Walden (212-351-2300, jwalden@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com)J. Taylor McConkie (303-298-5795, tmcconkie@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) Los AngelesDebra Wong Yang (213-229-7472, dwongyang@gibsondunn.com), the former United States Attorney for the Central District of California.  © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. 

December 17, 2007 |
Internet Gambling Rules Would Enlist Banks to Fight Uphill Battle

Washington, D.C. Partner Amy Rudnick and New York Associate Anthony Mahajan are authors of “Internet Gambling Rules Would Enlist Banks to Fight Uphill Battle” [PDF] published in BNA’s Banking Report.

December 12, 2007 |
Two Recent Supreme Court Decisions Emphasize the Significant Discretion of District Judges to Impose Sentences Outside of the Sentencing Guidelines Range

On December 10, 2007, the Supreme Court issued two 7-2 decisions clarifying that federal district judges have significant discretion to impose sentences below (or above) those called for under the Federal Sentencing Guidelines. These new decisions, in Gall v. United States, No. 06-7949, and Kimbrough v. United States, No. 06-6330, reinforce and further clarify the rulings in United States v. Booker and Rita v. United States that the Guidelines are merely advisory (one factor among several that must be considered by the sentencing judge) and that appellate courts may review sentences only for reasonableness, under the deferential abuse of discretion standard. Booker has had a limited impact in practice, because in its aftermath a majority of courts of appeals have required “extraordinary circumstances” for many non-Guidelines sentences, making it difficult for district judges to justify treating the Guidelines as truly advisory. In Gall, however, the Supreme Court rejected the “extraordinary circumstances” requirement as dangerously close to an impermissible presumption of unreasonableness for non-Guidelines sentences and inconsistent with the abuse of discretion standard of review.  The Gall opinion, authored by Justice Stevens, provided new guidance for lower courts. A district court must start with calculating the Guidelines range as an initial benchmark, but then is required to consider all “of the §3553(a) factors to determine whether they support the sentence requested by a party.” Put differently, the district court “may not presume that the Guidelines range is reasonable” but “must make an individualized assessment based on the facts presented.” If deciding to impose a non-Guidelines sentence, the district court must ensure that the justification supports the variance. Finally, the district court “must adequately explain the chosen sentence to allow for meaningful appellate review and to promote the perception of fair sentencing.”  An appellate court must first ensure that the district court committed no significant procedural error (e.g., the judge properly calculated the Guidelines range, considered the §3553(a) factors and adequately explained the chosen sentence). Next, the appellate court must consider the substantive reasonableness of the sentence under an abuse-of-discretion standard. Although the appellate court may apply a presumption of reasonableness to sentences within the Guidelines range, “the court may not apply a presumption of unreasonableness” to sentences outside the Guidelines range. Rather, while the appellate court may consider the extent of the deviation from the Guidelines, it “must give due deference to the district court’s decision that the §3553(a) factors, on the whole, justify the extent of the variance. The fact that the appellate court might reasonably have concluded that a different sentence was appropriate is insufficient to justify reversal of the district court.” Applying these standards, the Supreme Court held that the court of appeals in Gall had erred in failing to give deference to the district court’s decision “that the §3553(a) factors justified a significant variance” from the Guidelines. Brian Gall’s voluntary withdrawal from the drug conspiracy in which he had participated, and his rehabilitation, each of which lends “strong support to the District Court’s conclusion that Gall is not going to return to criminal behavior and is not a danger to society,” created a reasonable basis for sentencing him to probation.  In an opinion authored by Justice Ginsburg, the Supreme Court also faulted the court of appeals in Kimbrough for its lack of deference to the district court’s decision in that case, which involved trafficking in crack cocaine. The Supreme Court explained that “a reviewing court could not rationally conclude that the 4.5-year sentence reduction Kimbrough received qualified as an abuse of discretion.” Rather, “in determining that 15 years was the appropriate prison term, the District Court properly homed in on the particular circumstances of Kimbrough’s case and accorded weight to the Sentencing Commission’s consistent and emphatic position that” the disparate penalties for crack and powder cocaine are “at odds with §3553(a).” The district court properly addressed all “the relevant §3553(a) factors, including the Sentencing Commission’s reports criticizing” the disparate penalties and appropriately “framed its final determination in line with §3553(a)’s overarching instruction to ‘impose a sentence sufficient, but not greater than necessary’ to accomplish the sentencing goals.”  Of potential concern to criminal defendants is the Supreme Court’s dictum in Kimbrough that sentences outside the Guidelines range “attract greatest respect” when the case is not “a mine-run case” and that “closer review may be in order” in a mine-run case “when the sentencing judge varies from the Guidelines based solely on the judge’s view that the Guidelines range ‘fails properly to reflect §3553(a) considerations.’” Nonetheless, the majority opinion admitted that this issue was not properly presented in this case because the crack Guidelines “do not exemplify the Commission’s exercise of its characteristic institutional role” that would warrant the type of respect it receives in mine-run cases, on account of the Commission’s failure to take account of “empirical data and national experience.” Accordingly, it would “not be an abuse of discretion for a district court to conclude when sentencing a particular defendant that the crack/powder disparity yields a sentence ‘greater than necessary to achieve §3553(a)’s purposes, even in a mine-run case.” Of particular note, Justice Scalia’s concurrence in Kimbrough takes issue with this dictum, explaining that, consistent with the requirements of the Sixth Amendment, this dictum cannot be read as a withdrawal from the holdings in Booker, Gall and Rita that a district court is “free to make its own reasonable application of the §3553(a) factors, and to reject (after due consideration) the advice of the Guidelines.”  It remains to be seen whether these two decisions will affect the number of sentences imposed outside of the Guidelines. The Supreme Court has now clearly signaled that judges have the power to impose non-Guidelines sentences, but the decision whether to exercise that power on a case-by-case basis ultimately rests with those same judges. In any event, while few defendants have the significant mitigating circumstances present in petitioner Gall’s case, the absence of such significant circumstances should not require a within-Guidelines sentence. To the contrary, the Supreme Court in Gall made clear that in every case–including an ordinary case or a “mine-run case”–the district court “may not presume that the Guidelines range is reasonable” but “must make an individualized assessment based on the facts presented,” based on all of the §3553(a) factors. Gibson Dunn attorneys Miguel A. Estrada and David Debold, assisted by Minodora D. Vancea, filed an amicus brief in support of the defendants in these two cases, on behalf of the National Association of Criminal Defense Lawyers (NACDL). The Supreme Court adopted a test consistent with that advocated in Gibson Dunn’s brief for NACDL: That the proper formulation of reasonableness review “is one that gives the district court appropriate deference under the abuse of discretion standard fashioned by this Court in Rita and Booker and that focuses on whether the district judge considered all of the pertinent statutory factors as they apply to that particular case. The court of appeals should also examine whether the judge, after considering those factors, complied with the duty to impose a sentence sufficient, but ‘not greater than necessary’ to achieve the statute’s purposes.” Gibson Dunn represented NACDL in these matters as part of the firm’s and its lawyers’ strong commitment to performing significant work on a pro bono basis.  The Supreme Court’s decisions are available at: http://www.supremecourtus.gov/opinions/07pdf/06-6330.pdf, andhttp://www.supremecourtus.gov/opinions/07pdf/06-7949.pdf This Update was prepared by Ms. Vancea and by Mr. Debold, who is also co-chair of the Practitioners Advisory Group to the United States Sentencing Commission and previously served as Special Counsel to the Commission.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, Miguel A. Estrada (202-955-8257, mestrada@gibsondunn.com) or David Debold (202-955-8551, ddebold@gibsondunn.com) in the firm’s Washington, D.C. office.  Gibson Dunn’s White Collar Defense and Investigations Practice Group has vast experience defending against a wide range of federal and state prosecutions in a variety of areas. For more information on the firm’s business crimes practice, please contact any member of the group, or practice group Co-Chairs Thomas E. Holliday (213-229-7370, tholliday@gibsondunn.com) – Los AngelesMarcellus A. McRae (213-229-7675, mmcrae@gibsondunn.com) – Los AngelesJames A. Walden (212-351-2300, jwalden@gibsondunn.com) – New YorkF. Joseph Warin (202-887-3609, fwarin@gibsondunn.com) – Washington, D.C.Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com) – Los Angeles  © 2007 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 1, 2007 |
FCPA Investigations: Working Through A Media Crisis

Washington, D.C. Partner Joseph Warin and Associate Andrew Boutros are the authors of "FCPA Investigations:  Working Through A Media Crisis" [PDF] published in the December 2007 issue of White Collar Crime.

November 26, 2007 |
Treasury Issues New Bank Secrecy Act Guidance for Casinos and Card Clubs

On November 14, 2007, for the first time in several years, the Department of the Treasury, Financial Crimes Enforcement Network ("FinCEN"), issued Bank Secrecy Act ("BSA") compliance guidance for casinos and card clubs, Frequently Asked Questions:  Casino Recordkeeping, Reporting, and Compliance Program Requirements (FIN-2007-G005).  The guidance, which is in the form of twenty-three questions and answers, addresses questions about what types of gaming establishments are subject to the BSA requirements and questions about compliance with the BSA requirements by casinos and card clubs, including currency transaction reporting (31 C.F.R. § 103.22), recordkeeping (31 C.F.R. §§ 103.33 and 103.36), suspicious activity reporting (31 C.F.R. § 103.21), and maintenance of a BSA compliance program (31 C.F.R. § 103.64). Among the highlights of the guidance, FinCEN concludes that: If state (or tribal) law defines a slot machine or video lottery operation at a racetrack or "racino" as a "casino, gambling casino, or gaming establishment," and the gross annual gaming revenues of the slot machines and video lottery operation exceed $1 million, the operation would be a casino under the BSA subject to all of the BSA requirements for casinos. Establishments in Nevada and tribal jurisdictions that offer only off track betting are casinos under the BSA if the establishments offer "account wagering" and the gross annual gaming revenue exceeds $1 million. However, a horse racetrack that offers pari-mutuel or other wagering only on races at the track would not be considered a casino under the BSA. Unlike coin transactions, paper money transactions for slot club accountholders identified through slot monitoring systems must be aggregated with other "cash-in" transactions for currency transaction reporting ("CTR-C") purposes. If a casino were to "turn off the dollar counter" slot machine feature, it could be subject to an enforcement action under the BSA. Casinos are no longer required to file a CTR-C (FinCEN Form 103) to report slot jackpot wins paid in currency in excess of $10,000. In order to comply with the suspicious activity reporting requirement, as part of its internal controls, a casino or card club must develop procedures for using all available information, including information in its automated systems, surveillance system, and surveillance logs to identify transactions or patterns of suspicious activity. While not required, a casino should develop an internal control to document the basis for its determination that a transaction was determined not to be suspicious after investigation, i.e., a decision not to file a suspicious activity report.  The guidance can be accessed at FinCEN Casino FAQs Final.pdf. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Amy Rudnick (202-955-8210, arudnick@gibsondunn.com), Linda Noonan (202-887-3595, lnoonan@gibsondunn.com), in the firm’s Washington, D.C. office or Nicola T. Hanna (949-451-4270, nhanna@gibsondunn.com), in the firm’s Orange County office.  © 2007 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 25, 2007 |
View from here: Countering corruption

Partners F. Joseph Warin and Robert C. Blume and Associate J. Taylor McConkie are the authors of "View from here: Countering corruption" published in the October 25, 2007 issue of Legal Week.

September 4, 2007 |
Swift Prosecutions of Corporations And Executives

New York Of Counsel Alexander H. Southwell and Associate Oliver Olanoff  are the authors of "‘Swift’ Prosecutions of Corporations And Executives" [PDF] published in the September 2007 issue of Business Crimes Bulletin.

August 1, 2007 |
Navigating the Foreign Corrupt Practices Act: The Increasing Cost of Overseas Bribery

Partner Robert C. Blume and Associate J. Taylor McConkie are the authors of "Navigating the Foreign Corrupt Practices Act: The Increasing Cost of Overseas Bribery" [PDF] published in the August 2007 issue of The Colorado Lawyer.