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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.

June 25, 2007 |
Supreme Court Decision in Rita v. United States Resolves Role for Presumption of Reasonableness in Federal Sentencings

On June 21, 2007, the Supreme Court issued an 8-1 decision in Rita v. United States, No. 06-5754, affirming the ability of appellate courts to use a presumption of reasonableness where the sentences they are reviewing were imposed within the applicable range under the Federal Sentencing Guidelines. The decision in Rita comes more than two years after the Court ruled in United States v. Booker that the United States Sentencing Commission’s mandatory Guidelines violated the Sixth Amendment right to have a jury find any fact that increases the maximum sentence a court may impose. The remedy in Booker was: (1) to make the Guidelines advisory — one factor among several that the sentencing judge must consider when determining the appropriate sentence; and (2) to direct appellate courts to determine whether sentences appealed under this new regime are “unreasonable.” Several courts of appeals, in turn, adopted a “presumption of reasonableness” for sentences that are imposed within the range called for by the Guidelines. Rejecting arguments that such a presumption gives too much weight to the now-advisory Guidelines, the Rita decision upheld use of the presumption.  By encouraging federal courts of appeals to defer to within-Guideline sentences, the Supreme Court’s decision reaffirms that the Guidelines are still a significant part of the sentencing process. But the impact of the opinion, authored by Justice Breyer and joined in full by five other Justices, is limited in certain important respects.  The presumption of reasonableness for within-Guidelines sentences is not “binding.” Unlike more familiar evidentiary presumptions, it does not require one side to shoulder a burden of persuasion or proof in order to prevail. Moreover, appellate courts are not even required to use this presumption. The presumption can operate only at the appellate level. The sentencing judge is required to entertain arguments that the Guidelines should not apply “perhaps because (as the Guidelines themselves foresee) the case at hand falls outside the ‘heartland’” or “perhaps because the Guidelines sentence itself fails properly to reflect” the statutory sentencing considerations, or “perhaps because the case warrants a different sentence regardless.” The Court made clear that “[i]n determining the merits of these arguments, the sentencing court does not enjoy the benefit of a legal presumption that the Guidelines sentence should apply.” The fact that courts of appeals may adopt a presumption of reasonableness for Guidelines sentences does not mean they may adopt a presumption of unreasonableness for sentences that are outside of the Guidelines. These points are important, in part, because they signal that the deference inherent in the presumption of reasonableness is not grounded in the premise that the Guidelines themselves are presumptively reasonable. Whatever weight the presumption carries, it derives from the fact that a sentencing judge has independently reached a result — after applying the relevant sentencing factors to the individual defendant — that accords with the Commission’s view of the appropriate application of sentencing considerations “in the mine run of cases[.]” It is also significant that two of the Justices whose votes were needed to form a majority opinion — Justices Stevens, joined in his concurring opinion by Justice Ginsburg — stated separately that it should be clear from the Rita decision that “appellate courts must review sentences individually and deferentially whether they are inside the Guidelines range (and thus potentially subject to a formal ‘presumption’ of reasonableness) or outside that range.” To emphasize the point, Justice Stevens added: “Given the clarity of our holding, I trust that those judges who had treated the Guidelines as virtually mandatory during the post-Booker interregnum will now recognize that the Guidelines are truly advisory.” Counsel for defendants sentenced after Rita will want to emphasize to the sentencing judge the ways in which the decision signals greater ability to tailor the result to the individual case. In two cases scheduled for argument in the October 2007 term, the Court will grapple with the level of deference appropriate for a non-Guidelines sentence. In Kimbrough v. United States the Court will review the Fourth Circuit’s reversal of a below-Guidelines sentence in a drug case where the district judge was motivated in part by a concern that the 100:1 penalty ratio for crack and powder cocaine resulted in a sentence greater than necessary to achieve the purposes of sentencing. And in Gall v. United States the Court will determine whether a district judge must find “extraordinary circumstances” before imposing a sentence that varies significantly from the range determined under the Guidelines. As is evident from Justice Scalia’s opinion (joined by Justice Thomas) concurring in the result in Rita, the Justices have not come to agreement on the extent to which the Sixth Amendment permits appellate courts to impose limitations on sentencing outside the Guidelines. In the view of Justices Scalia and Thomas, “reasonableness” review must be rather deferential to avoid a situation where the presence or absence of judicial factfinding (that is, facts neither found by the jury nor admitted by the defendant) will make the difference between whether a sentence is lawful or not. Because Rita involved a sentence that was affirmed on appeal, while Gall and Kimbrough involve appellate reversals of sentences (in each case, sentences that were significantly below the Guidelines), it is safe to assume that further clarification will come within the next several months on the extent to which the “reasonableness” standard of review limits the latitude of sentencing judges after Booker. In the meantime, it remains to be seen whether Rita will affect the number of sentences imposed outside of the Guidelines. The majority opinion recognized that the Commission’s work is ongoing and that this process includes revising the Guidelines based, in part, on feedback from the courts in the form of non-Guidelines sentences. The level and nature of this feedback will depend on whether district and appellate judges recognize the ability to vary from the Guidelines based on the application of the statutory sentencing factors in individual cases.  The Supreme Court’s decision is available at:http://www.supremecourtus.gov/opinions/06pdf/06-5754.pdf  Gibson Dunn attorneys Miguel A. Estrada and David Debold, assisted by John W.F. Chesley, filed an amicus brief in support of Victor Rita, on behalf of the National Association of Criminal Defense Lawyers (NACDL). Mr. Estrada, Mr. Debold and Minodora Vancea will also be filing an amicus brief for NACDL in support of Petitioner Michael Gall in Gall v. United States, which will be argued later this year. Gibson Dunn is representing NACDL in these matters as part of the firm’s and its lawyers’ strong commitment to performing significant work on a pro bono basis. This Update was prepared 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 Business Crimes 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.

May 30, 2007 |
Rolling the Dice in Corporate Fraud Prosecutions

Washington, D.C. Partner Joseph Warin and Of Counsel Peter Jaffe are the authors of "Rolling the Dice in Corporate Fraud Prosecutions" [PDF] published in the Spring 2007 issue of Litigation Magazine. Reprinted with permission, Litigation Magazine, Volume 33 Number 3, Spring 2007, © 2007 American Bar Association.

March 15, 2007 |
Insider Trading Prosecutions Return: What Public Companies Should Do Now

On successive days this month, the Securities and Exchange Commission and the Department of Justice announced major enforcement actions alleging insider trading in connection with merger and acquisition activity. These actions, coupled with a strong market for mergers and acquisitions, expressed public concern about trading activity by some market participants, and adverse academic commentary about the efficacy of so-called "10b5-1" plans, all suggest a renewed focus by both agencies on alleged insider trading. The Actions.  On March 1, the United States Attorney for the Southern District of New York unsealed ten indictments and criminal informations charging thirteen people with conspiracy, securities fraud, wire fraud, commercial bribery, false statements, and other offenses.  All of the charges arose out of two schemes, one to misappropriate and trade on information of impending stock ratings changes by the research department of a major investment bank, the other to misappropriate and trade on information regarding forthcoming actual and potential merger and acquisition activity by clients of another major investment bank. 1 On the same day, the SEC filed suit against eleven individuals and three self-styled hedge funds seeking injunctions, disgorgement of ill-gotten gains, and civil money penalties. The SEC alleged that the scheme netted more than $15 million in illegal profits. 2 The following day, the SEC sought, and obtained, a temporary restraining order freezing assets of certain unknown purchasers of call options for the common stock of TXU Corporation, alleging in its complaint that one or more persons purchased 8,020 call option contracts in the week before the announcement of the TXU leveraged buyout and obtained $5.4 million in illicit profits by trading through overseas accounts. 3 Publicly Expressed Concerns. Federal regulators and others have also expressed concern that certain investors have been seeking and relying upon material non-public information in making trading decisions. Most recently, SEC Director of Enforcement Linda Chatman Thomsen, citing recent academic literature suggesting that corporate officers using 10b5-1 plans may be achieving results that suggest abuse of the rule, announced an intention to investigate this area as well. 4 The Environment. The recent enforcement actions and public statements come in the midst of a market environment that is, in many respects, similar to the 1980s when the SEC and Department of Justice brought prosecutions against executives of Wall Street firms and of other major corporations for insider trading. Merger activity is again active, and the size of some of the transactions is such that acquirers often consist of a consortium of bidders financed by more than one financial institution. Thus, information about the proposed transaction may be more dispersed than was typical in the past. Moreover, the market surveillance departments of the New York Stock Exchange and of NASDAQ have increased their oversight in this area.  The Consequences. Penalties for securities offenses have increased significantly since the 1980s. Securities fraud now carries a twenty-year prison term that, when coupled with the Federal Sentencing Guidelines (even in the post-Booker advisory form), means the likelihood of incarceration for a convicted offender is substantial. Since 1988, the SEC has had the authority to seek and obtain civil money penalties of up to three times the profit obtained or loss avoided by the trade. The SEC also routinely seeks orders barring persons adjudged liable for insider trading from future service as an officer or director of a public company, or as an associated person of a brokerage firm or an investment adviser.  For public companies, insider trading investigations also carry substantial costs. Evidence of insider trading can cause companies to make disclosure of corporate events sooner than planned, can disrupt the market for a company’s stock, and can force a company into the distracting process of responding to the regulators’ need for information. For brokerage firms and other market participants, alleged leaks are harmful to reputation and create potential exposure. 5 What Should Companies Do Now? In light of this environment, several prudential measures may be in order. 1. Remind officers, directors, and employees of the company’s insider trading and disclosure policies. Reemphasize the importance of trading "windows" as a way to protect the corporation and its employees. Education and prevention can help avoid later difficulties. 2. Consider a new look at existing Rule 10b5-1 plans. Rule 10b5-1 was adopted by the SEC in 2000 to allow corporate officers and directors to sell stock in an orderly manner without fear of insider trading liability. Rule 10b5-1 plans continue to have great value. But the safe-harbor depends on the careful construction of the plan and continued adherence to it. 3. When engaged in a major corporate transaction, remind the participants of the importance of maintaining confidentiality, keep information on need-to-know basis, and keep track of which persons have been informed of the transaction and when. 4. For brokerage firms and investment advisers, consider reinforcing ethical screen, watch list, and control room procedures. None of the brokerage firms victimized in the recent Guttenberg cases were criticized by the regulators, and the complaint alleges elaborate measures, such as the use of disposable cell phones and codes, to conceal the sources of information. Faithful adherence to compliance processes will demonstrate a firm’s commitment to adequate controls.  5. Be thorough, careful, and prompt in responding to requests for information by regulators regarding suspected insider trading. Public companies and brokerage firms are almost always victims of insider trading, rather than suspected offenders. But erroneous information may lead regulators to draw the wrong inferences. Thus, requests for a chronology of events or other information about a transaction must be taken seriously and handled with great care.   1. Office of the United States Attorney for the Southern District of New York, Press Release No. 07-051 (March 1, 2007), available at http://www.usdoj.gov/usao/nys/pressreleases/March07/ubsinsidertradingpr.pdf (last visited March 15, 2007).   2. SEC v. Michael S. Guttenberg, et al., No. 07 CV 1774 (S.D.N.Y.)(PKC), March 1, 2007. 3. SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp., No. 07C1208 (N.D.Ill. March 2, 2007). 4. Remarks at the 2007 Corporate Counsel Institute, March 8, 2007, available at http://www.sec.gov/news/speech/2007/spch030807lct2.htm (last visited March 15, 2007). 5. Brokerage firms and investment advisers are required by law to have policies and procedures reasonably designed to prevent the misuse of material, non-public information. Under the Insider Trading Securities Fraud Enforcement Act of 1988, corporations may, in some circumstances, have liability for insider trading by employees.   Gibson, Dunn & Crutcher lawyers are available to assist in addressing questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or John H. Sturc (202-955-8243, jsturc@gibsondunn.com), Barry R. Goldsmith (202-955-8580, bgoldsmith@gibsondunn.com), Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com), Brian J. Lane (202-887-3646, blane@gibsondunn.com), or Ronald O. Mueller (202-955-8671, rmueller@gibsondunn.com) in Washington, DC; Robert F. Serio (212-351-3917, rserio@gibsondunn.com), Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com) or James Walden (212-351-2300, jwalden@gibsondunn.com) in New York; Jonathan C. Dickey (650-849-5324, jdickey@gibsondunn.com) in Palo Alto; Scott A. Fink (415-393-8267, sfink@gibsondunn.com) in San Francisco; Wayne W. Smith (949-451-4108, wsmith@gibsondunn.com) or James J. Moloney (949-451-4343, jmoloney@gibsondunn.com) in Orange County; or Gareth T. Evans (213) 229-7734, gevans@gibsondunn.com) in Los Angeles.  © 2007 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 10, 2007 |
The Foreign Corrupt Practices Act: Recent Developments, Trends, and Guidance

Washington D.C. partner F. Joseph Warin and Denver partner Robert C. Blume are the authors of "The Foreign Corrupt Practices Act: Recent Developments, Trends, and Guidance" published in the February 2007 issue of Insights. Reprinted with the permission of Aspen Publishers www.aspenpublishers.com.

February 7, 2007 |
2006 Year-End FCPA Update

This client update provides an overview of Foreign Corrupt Practices Act ("FCPA") enforcement activities in 2006, a discussion of the trends we see from that activity, and practical guidance to help companies avoid or limit FCPA liability. FCPA Overview The FCPA’s anti-bribery provisions make it illegal to make payments of money or anything of value to any foreign government official or foreign political party in order to obtain or retain business or secure any improper advantage.  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 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 and 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 the issuer to devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  2006 In Review 2006 marked one of the busiest years in FCPA enforcement and further evidenced the recent proliferation of FCPA enforcement activity.  Several high-profile FCPA enforcement actions, including charges against four companies and numerous individuals, were brought by either the Department of Justice ("DOJ") or Securities and Exchange Commission ("SEC").  Along with this explosion of enforcement activity comes warnings from the DOJ and the Federal Bureau of Investigation of "increased vigilance" in pursuing FCPA cases.  For example, in a speech on October 16, 2006, Assistant Attorney General Alice Fisher made clear that the FCPA is a "high priority": Do we care about the FCPA?  Is the FCPA relevant in today’s global business climate?  Is enforcing the FCPA a high priority?  The answer to all of those questions is yes.  Prosecuting corruption of all kinds is a high priority for the Justice Department and for me as head of the Criminal Division.  That includes public corruption, corruption in the procurement process, and the Foreign Corrupt Practices Act. Among the most important enforcement actions against corporations are: In the Matter of Oil States International, Inc. On April 27, 2006, the SEC announced that Oil States International, Inc., a Houston-based oil drilling service provider, had consented to the entry of an administrative order requiring the company to cease and desist from committing any future books and records or internal controls violations.  The SEC did not impose any financial penalties on Oil States. This case involved alleged improper payments made by a Venezuelan subsidiary of Oil States International to officials of Venezuela’s state-owned oil company, Petroleos de Venezuela, S.A. ("PDVSA").  The Venezuelan subsidiary had hired a consultant to interface with the PDVSA.  The consultant, together with three of the subsidiary’s employees, then engaged in a kickback scheme whereby the subsidiary paid approximately $348,000 in improper payments to PDVSA employees.  After discovering the kickback scheme, Oil States undertook extensive corrective and remedial measures and voluntarily reported its findings to the SEC and DOJ.  In declining to impose financial penalties, the SEC noted that it considered Oil States’ extensive remedial acts and its cooperation with the SEC staff. Schnitzer Steel Industries, Inc. On October 16, 2006, the DOJ and SEC announced a plea and settlement with Schnitzer Steel Industries, Inc., based in Portland, Oregon, and its foreign subsidiary, SSI Korea.  In the plea documents, SSI Korea admitted that it violated the FCPA’s anti-bribery provisions by making more than $1.8 million in corrupt payments over a five-year period to government-owned steel mill managers in China.  SSI Korea made the payments to induce the steel mill managers to purchase scrap metal from Schnitzer Steel.  The bribes, which took the form of commissions, refunds, and gratuities via off-book bank accounts, led to a substantial increase in business.  In addition, the SEC also alleged that Schnitzer Steel violated the FCPA’s books and records and internal controls provisions. To settle the criminal and administrative charges levied against it for violating the FCPA, Schnitzer Steel agreed to pay a total of $15.2 million.  In the criminal proceeding, the company’s wholly owned subsidiary, SSI Korea, pleaded guilty to violations of the FCPA’s anti-bribery and books and records provisions.  SSI Korea agreed to pay a $7.5 million criminal fine.  The DOJ deferred prosecution against Schnitzer Steel, the parent corporation.  In the deferred prosecution agreement, Schnitzer Steel accepted responsibility for the conduct of its employees and agreed to enhance its internal compliance measures.  The deferred prosecution agreement also provided for the appointment of an independent compliance consultant to review Schnitzer Steel’s compliance program and monitor the implementation of new internal controls related to the FCPA.  In the parallel SEC administrative proceeding, Schnitzer Steel consented to the entry of a cease-and-desist order and agreed to pay a $7.7 million civil penalty. Statoil, ASA On October 13, 2006, the DOJ and SEC announced that Statoil ASA, an international oil company in Norway whose ADRs are traded on the New York Stock Exchange, had agreed to pay a total of $21 million to settle criminal and administrative charges for violating the FCPA’s anti-bribery and accounting provisions.  Pursuant to a deferred prosecution agreement, Statoil agreed to a $10.5 million criminal penalty and the appointment of an independent compliance consultant who will review and report on Statoil’s FCPA compliance.  In the parallel SEC administrative proceeding, Statoil consented to the entry of an administrative order requiring the company to cease and desist from committing any future FCPA violations, and to pay disgorgement of an additional $10.5 million. Individual Enforcement Actions The DOJ and SEC also aggressively pursued individuals last year who were alleged to have violated the FCPA: U.S. v. Richard John Novak:  On March 20, 2006, Richard John Novak pleaded guilty to violating the FCPA, wire fraud, and mail fraud statutes.  Novak operated a "diploma mill" that issued fraudulent diplomas from falsely accredited universities.  Novak made payments to Liberian diplomats and officials to induce them to issue certificates of accreditation for Novak’s fictitious universities.  Novak’s sentencing was continued until December 2007 because he is offering ongoing assistance to the DOJ in criminal proceedings against Novak’s co-defendants, who are scheduled for trial in October 2007. U.S. v. Steven Lynwood Head<:  On June 23, 2006, Steven Lynwood Head, the former CEO of Titan Africa, Inc., pleaded guilty to falsifying the books and records of an issuer under the FCPA.  In the guise of "advanced social payments," Head authorized the payment of approximately $2 million to the President of Benin’s reelection campaign and then submitted false invoices to hide the payments.  Head is expected to be sentenced in March 2007.  Head’s former employer, Titan Africa, Inc., pleaded guilty in 2005 to FCPA violations in a well-publicized prosecution,  and paid $28.5 million in criminal penalties, disgorgement, and prejudgment interest. SEC v. John Samson, John Munro, Ian Campbell, and John Whelan:  On July 5, 2006, the SEC filed a complaint against four employees of ABB Ltd. for alleged violations of the FCPA.  The criminal and enforcement proceedings against ABB and its subsidiaries resulted in fines and penalties totaling more than $16 million.  The four employees allegedly participated in a scheme to bribe Nigerian government officials in furtherance of ABB’s bid to obtain a lucrative contract to supply oil drilling equipment in Nigeria. The four employees consented to the entry of final judgments that (1) permanently enjoined them from future FCPA violations, (2) ordered each to pay a civil penalty ($50,000 as to Samson, and $40,000 each for Munro, Campbell, and Whelan), and (3) ordered Samson to pay $64,675 in disgorgement and prejudgment interest. This action derived from another proceeding in 2004, in which ABB subsidiaries pleaded guilty to violating the anti-bribery provisions of the FCPA and ABB entered into a cease-and-desist order with the SEC.  U.S. v. Faheem Mousa Salam: On August 4, 2006, Faheem Mousa Salam pleaded guilty to one count of violating the FCPA’s anti-bribery provisions.  As a translator working in Iraq, Salam admitted offering a bribe to an Iraqi official to induce the official to purchase a printer and 1,000 armored vests.  On February 2, 2007, Salam was sentenced in the U.S. District Court for the District of Columbia to three years in prison.  This sentence, coupled with the sentences imposed on former American Rice executives David Kay and Douglas Murphy (discussed below), demonstrates that FCPA violations will be met with harsh, long prison sentences. SEC v. David M. Pillor:  David Pillor was the former Senior Vice President of Sales and Marketing for InVision Technologies, Inc.  In December 2004, InVision entered into a non-prosecution agreement with the DOJ, and in February 2005, InVision settled with the SEC.  On August 15, 2006, the SEC settled charges against Pillor for alleged violations of the FCPA for failing to maintain an adequate system of internal controls and for causing the falsification of the company’s books and records.  Pillor agreed to pay a $65,000 civil penalty and consented to a permanent injunction from future FCPA violations. U.S. v. Yaw Osei Amoako:  On September 6, 2006, Yaw Osei Amoako, a former regional manager of ITXC Corporation, pleaded guilty to one count of conspiring to violate the FCPA’s anti-bribery provisions.  Amoako pleaded guilty to paying approximately $266,000 in bribes to employees of foreign state-owned telecommunications carriers in various African countries.  Amoako is expected to be sentenced in February 2007. SEC v. Jim Bob Brown:  On September 14, 2006, the SEC settled a civil enforcement against Jim Bob "J.B." Brown, a former employee of a subsidiary of Willbros Group, Inc.  The SEC alleged violations of the FCPA’s anti-bribery, books and records, and internal controls provisions by Brown, who participated in a scheme to bribe foreign officials in Nigerian and Ecuadorian government-owned oil companies.  Brown consented to a permanent injunction against future FCPA violations.  Although Brown agreed to settle the SEC’s claim for injunctive relief, he has not settled the SEC’s claim for monetary penalties.  Those proceedings have been stayed pending the outcome of a parallel criminal proceeding. Reported Cases On December 8, 2006, the Second Circuit issued an opinion in U.S. v. James H. Giffen, 473 F.3d 30 (2d. Cir. 2006).  This case involved an interlocutory appeal by the DOJ from the district court’s order in the FCPA trial denying the government’s motion to preclude Giffen from raising a defense that he was authorized to act by public officials ("public authority defense").  Giffen had argued that he was a government informant, acting on behalf of "an agency of the U.S. government," and therefore he lacked the corrupt intent necessary to sustain an FCPA violation.  The district court had ruled previously that Giffen was entitled to review classified government documents to assess the viability of his public authority defense.  But when Giffen proffered the classified documents to use at trial in support of his public authority defense, the government objected and moved to preclude the defense.  The district court overruled the objection and permitted Giffen to present evidence of a public authority defense at trial.  The government appealed.  The Second Circuit refused to hear the appeal, however, after determining that the government’s interlocutory appeal was premature.  Nevertheless, in dicta, the Court opined that the district court may have misunderstood the requirements of the public authority defense.  According to the Second Circuit, the defense would not apply in this case because the evidence proffered by Giffen showed only that he may have been a government agent charged with "stay[ing] close to the President [of Kazakhstan]" and reporting possible criminal activity to U.S. authorities.  This authority did not authorize Giffen to violate the FCPA as alleged in the indictment. The 2007 Docket A review of FCPA actions pending in 2007 suggest that the trend of increasing enforcement will continue.  Following are several examples: U.S. v. Viktor Kozeny et al.:  On October 6, 2005, the DOJ announced that a federal grand jury in the Southern District of New York had indicted Viktor Kozeny, Frederic Bourke, Jr., and David Pinkerton for allegedly participating in a massive scheme to bribe government officials in Azerbaijan.  The three men allegedly bribed government officials to ensure that those officials 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.  Although Bourke and Pinkerton have appeared in the case, Kozeny has refused to appear.  He has been arrested in the Bahamas and the United States is seeking his extradition.  A court in the Bahamas has ordered Kozeny’s extradition, but that ruling is pending on appeal.  SEC v. Steven Ott and Michael Young:  On September 6, 2006, the SEC sued Steven Ott and Michael Young, both former executives of ITXC Corporation, in the U.S. District Court for the District of New Jersey.  The SEC alleges that Ott and Young violated the FCPA by approving and negotiating bribes paid to foreign state-owned telecommunications carriers in various African countries.  The SEC seeks injunctions, disgorgement of ill-gotten gains, and civil penalties.  All discovery has been stayed pending conclusion of the DOJ’s parallel criminal prosecution, which is ongoing. SEC v. Osei Amoako:  The SEC also has another pending civil enforcement action against another former ITXC employee, Yaw Osei Amoako, which was filed on September 1, 2005 in the U.S. District Court for the District of New Jersey.  The SEC’s complaint alleges that Amoako bribed a senior official of the government-owned telephone company in Nigeria, in order to obtain a lucrative contract for ITXC.  The SEC is seeking an injunction, disgorgement of ill-gotten gains, and civil penalties.  This civil action has been stayed pending the final outcome of the criminal proceedings, mentioned above. United States v. Kay and Murphy: In 2002, the Justice Department indicted David Kay and Douglas Murphy, two former employees of American Rice, Inc., for violating the FCPA by making improper payments to Haitian government officials to reduce customs and sales taxes on rice imported by American Rice.  According to the indictment, Kay and Murphy bribed customs officials to understate the true amount of rice imported by American Rice, thereby subjecting American Rice to lower customs duties and sales taxes.  The original issue for the court was how broadly it should interpret the FCPA’s statutory prohibition on the making of payments to foreign officials to "obtain or retain business." The district court dismissed the indictment, holding that the statutory language "to obtain or retain business" applied only to payments that lead directly to the obtaining of new or the retaining of old business, which, the district court held, had not occurred here.  United States v. Kay, 200 F. Supp. 2d 681 (S.D. Tex. 2002).  The Fifth Circuit, however, reversed the district court’s decision.  United States v. Kay, 359 F.3d 738 (5th Cir. 2004).  Relying on the legislative history of the FCPA and its amendments, the court held that Congress intended the "obtain or retain business" language to apply to any payments to foreign officials intended to either directly or indirectly assist the payor in obtaining or retaining business.  The Fifth Circuit noted that bribes to foreign officials to secure illegally reduced customs and sales taxes, if intended to assist someone in obtaining or retaining business, could fall with the FCPA’s anti-bribery provisions. After remand, a jury found Kay and Murphy guilty of violating the anti-bribery provisions of the FCPA.  In June 2005, the Court sentenced Kay to 37 months imprisonment and Murphy to 63 months imprisonment.  Both defendants have appealed their convictions and sentences; the appeals are currently pending in the Fifth Circuit.  One of the issues before the Fifth Circuit will be whether the district court properly instructed the jury on the mens rea element of an offense under the FCPA.  The DOJ acknowledged that the district court failed to properly instruct the jury that the FCPA has both "willfulness" and "corruptly" elements.  Nevertheless, the parties disagree about the meaning of "willfulness" under the FCPA, and, specifically, whether the FCPA requires a showing by the government that the defendant acted with intent to violate the FCPA.  DOJ Opinion Procedure Release On October 16, 2006, the DOJ issued its first FCPA Opinion Procedure Release since September 3, 2004.  The DOJ stated that it would not take enforcement action against a company proposing to contribute $25,000 to the customs department of an African country.  In approving the transaction, the DOJ noted that there was no corrupt intent associated with the payment and that the payment was to the government and not to a foreign official.  In commenting on the release, Assistant Attorney General Alice Fisher remarked that "the FCPA opinion procedure has generally been under-utilized" and that she wants it "to be something that is useful as a guide to business." Trends With the increase in enforcement activity, we see several important trends developing in the arena of FCPA enforcement, many of which were directly addressed by Assistant Attorney General Fisher in her recent speech.  Voluntary Disclosures The number of voluntary disclosures continued to rise in 2006.  Seventeen of the twenty newly disclosed FCPA investigations during the past two years were voluntarily disclosed to the DOJ or SEC following internal investigations by the companies.  In the early 2000s, by contrast, the government initiated most of the reported investigations.  In encouraging companies to voluntarily disclose transgressions, Assistant Attorney General Fisher noted that, although the result of voluntary disclosure is uncertain, it will result "in a real, tangible benefit."  As explained below, there are various factors a company must consider when deciding whether to voluntary disclose an FCPA violation. Appointment of Monitors and Consultants In several of the most recent FCPA dispositions, the DOJ and SEC have required the company to appoint monitors or consultants to ensure FCPA compliance.  In addition to ABB, Diagnostic Products Corporation, DPC (Tianjin) Ltd., InVision, Micrus, Monsanto, and Titan, all of which were required to make such appointments in the past few years, in 2006 both Schnitzer Steel and Statoil were required to hire a compliance consultant to review the company’s system of FCPA internal controls.  Notwithstanding this recent trend, however, Assistant Attorney General Fisher explained that "there is no presumption that a compliance consultant is required in every FCPA disposition."  According to Ms. Fisher, when considering whether to require a compliance consultant, the DOJ will consider "the strength of the company’s existing management and compliance team, the pervasiveness of the problem, and the strength of the company’s existing FCPA policies and procedures." Increased Penalties Enforcement activity in 2006 continued the trend of increasing the severity of penalties.  Looking back, the SEC first required a company to disgorge the profits of its unlawful FCPA activities in 2004.  Today, the practice appears to have become standard fare.  In October 2006, for example, Statoil ASA agreed to a DOJ fine of $10.5 million and SEC disgorgement of an additional $10.5 million.  Schnitzer Steel’s Korean subsidiary agreed to a DOJ fine of $7.5 million while Schnitzer Steel agreed to pay the SEC $7.7 million in disgorgement and prejudgment interest.   Increasingly Broad Jurisdictional Nexus U.S. enforcement authorities have shown a willingness to reach far and wide outside traditional jurisdictional boundaries and think creatively when assessing the connection that the company or activity has with the United States.  The Statoil matter marked the first time that the DOJ has taken criminal enforcement action against a foreign issuer for violating the FCPA.  Assistant Attorney General Fisher noted that the criminal enforcement action against Statoil was intended as "a clear message" to foreign companies trading on the American exchanges that they must comply with U.S. laws.  Ms. Fisher added that "[t]his prosecution demonstrates the Justice Department’s commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope." Ongoing Civil Liability — Private Litigants/Shareholders Although the FCPA does not grant a private right of action, 2006 may have created a glimmer of promise for hopeful securities, class-action plaintiffs under the FCPA.  Following Immucor’s announcement of a formal SEC investigation into allegations of an improper payment under the FCPA, a shareholder class filed a complaint under §§ 10-b and 20(a) of the Exchange Act.  In re Immucor Inc., No. 1:05-CV-2276-WSD, 2006 WL 3000133 (N.D. Ga. Oct. 4, 2006).  The suit alleged that Immucor’s statements in securities filings, two of its press releases, and an analyst teleconference — all of which tended to underplay the severity of the potential FCPA violations — constituted material misstatements and omissions.  Notably, similar shareholder suits against InVision Technologies and Syncor International Corporation had been dismissed by district courts for failure to meet the pleading requirements of the Private Securities Litigation Reform Act ("PSLRA").  On October 4, 2006, the District Court for the Northern District of Georgia denied Immucor’s motion to dismiss the shareholder claim.  The court found that the plaintiffs had adequately alleged false or misleading statements, that the facts alleged regarding the various statements (notably an attribution of the payments’ costs to "bookkeeping" errors) did support the heightened pleading requirements as to scienter under the PSLRA.  In other words, for the first time, a federal court held that plaintiffs had met the heightened pleading requirement for fraud under the PSLRA in an FCPA case. Currently, more than 24 other major corporations are under SEC investigation for FCPA violations.  This landscape may provide fertile ground for plaintiffs’ counsel in search of a class to fashion FCPA-based suits.  Though corporate defendants historically have succeeded in challenging the standing of FCPA-based shareholder actions, cases like Immucor suggest that, especially in the current environment of heightened scrutiny, such claims may start to gain traction.  Regardless of outcome, however, one thing is clear: the legal road towards resolving an FCPA violation in the U.S. now stretches far beyond achieving peace with the SEC. Also of special note is the United Nations Convention Against Corruption, which requires member states to provide a private right of action for those who suffer damages as a result of an "act of corruption."  The U.S. Senate provided its Advice and Consent to the U.N. Convention on September 15, 2006, but in so doing, specifically made the reservation that U.S. law would remain unchanged and that no new private right of action was created in the U.S.  Nevertheless, to date 140 countries have become signatories to the U.N. Convention and it has been ratified by 80 countries.  Thus, although U.S. law remains unchanged, U.S. companies should be aware that other countries may provide for a private right of action, which could subject U.S. companies to increased litigation in foreign jurisdictions. Guidance In light of developments over the past year concerning the FCPA, we offer the following guidance to our clients and friends. Deciding Whether to Make a Voluntary Disclosure Although not mandated by the FCPA, voluntary disclosure of an FCPA violation to the DOJ and/or SEC, as appropriate, may help a company avoid prosecution or obtain partial mitigation of civil and criminal penalties.  Although there is no way to quantify the mitigation impact of a voluntary disclosure, a review of the Statoil, Schnitzer Steel, and Oil States International cases suggests strongly that voluntary disclosure and exceptional cooperation can result in relatively lenient criminal and administrative sanctions.  Schnitzer Steel, for instance, voluntarily disclosed its wrongdoing to the DOJ, conducted an extensive internal investigation, shared the results of the investigation promptly, cooperated extensively with the DOJ’s ongoing investigation, took appropriate disciplinary action against wrongdoers, replaced senior management, and took additional significant remedial actions, including the implementation of a robust compliance program.  Assistant Attorney General Fisher explained that Schnitzer’s "exceptional cooperation" … "was critical to its ability to obtain a deferred prosecution agreement" and a DOJ recommendation that it pay a fine "well below what it would otherwise have received."  Ms. Fisher added that "voluntary disclosure followed by extraordinary cooperation with the Department results in a real, tangible benefit to the company." Notwithstanding Ms. Fisher’s comments, however, the "credit" given for voluntary disclosure and cooperation in any particular case remains uncertain.  Perhaps disposition of cases pending in 2007 will enlighten this further.  In the meantime, however, corporations must weigh the potential benefits of a voluntary disclosure, including mitigation, against the costs of such disclosure, including the expense and resources required to cooperate with a government investigation, the uncertain scope of civil and criminal penalties, the risk and expense of private litigation, and the public relations and business consequences, both in the U.S. and overseas. Due Diligence is Necessary In the merger and acquisition context, and because of the substantial civil and criminal penalties possibly imposed for violations of the FCPA, corporations must remain focused on proper diligence before, during, and after the proposed acquisition.  Of note, three recent FCPA enforcement actions (ABB, GE/InVision, and Titan Corporation) came to light during M&A due diligence. Although the type and scope of FCPA due diligence required before an acquisition will vary depending on the particular risks involved, most pre-acquisition FCPA due diligence should contain the following elements: A determination of the risk that the target company has engaged in violations of the FCPA, based on the target company’s line of business and the countries where the target company is located or does business; A review of the effectiveness of the target company’s FCPA compliance program and policies and procedures for marketing-and-entertainment-related expenditures; Interviews with employees of the target company and other knowledgeable individuals regarding rumors of unethical or suspicious conduct by the target company, its employees, or its agents, consultants or representatives; A review of the target company’s books, records and accounts to determine whether such books, records and accounts accurately and fairly reflect all transactions and expenditures by the target company; An enhanced review of all contracts between the target company and any foreign government, foreign government-controlled entity, foreign government employee or foreign political candidate; An enhanced review of all contracts between the target company and any foreign agent, consultant or representative of the target company; and An enhanced review of any "red flags" indicating that violations of the FCPA may have occurred. Maintain Adequate Compliance Program and Internal Controls To minimize exposure to penalties under the FCPA, companies should establish, implement, and maintain an effective FCPA compliance program.  This program must be designed to deter violation of the FCPA and detect possible violations of the FCPA before they occur.  An effective FCPA compliance program also must be tailored to a company’s size, line of business, scope of international operations, and associated risk of violating the FCPA, among other factors.  At the very least, an effective compliance program should contain the following: Policy Statement: The company’s CEO or other member of senior management should issue a company-wide policy statement that clearly affirms the company’s commitment to comply fully with the FCPA and to maintain the highest level of ethical standards in the conduct of its business. Compliance Manual: The company should prepare and distribute an FCPA Compliance Manual containing written standards and guidelines to be followed by the company’s officers, directors, employees and agents to ensure their full compliance with the FCPA. Compliance Officer: The company should designate an individual from the company’s senior management or general counsel’s office to serve as the company’s FCPA Compliance Officer. Education and Training Programs: The company’s FCPA compliance program should include appropriate educational and training programs for all of the company’s directors, officers, employees and agents. Confidential Hotline: The company should establish a confidential telephone hotline that may be used by the company’s officers, directors, employees and agents to report any suspected or actual violation of the company’s FCPA Compliance Manual. Internal Audit: In addition to regular financial audits, the company should periodically review and test compliance with its FCPA compliance program. Miscellaneous: An effective compliance program should also (i) require annual certifications from employees that they have reviewed and agreed to comply with the FCPA Compliance Manual; (ii) help avoid unusual or extravagant payments or gifts; (iii) prohibit or require approval of gifts; (iv) provide FCPA guidance in all foreign languages where the company conducts business; (v) encourage employees to elevate FCPA issues; (vi) thoroughly screen third-party agents; and (vii) identify "red flags." Given the continued proliferation of FCPA enforcement activity in 2006, we expect U.S. authorities to initiate an increasing number of enforcement actions in the next few years and to seek more severe penalties for FCPA violators.  A company’s investment in an effective FCPA compliance program could help it avoid liability altogether or reduce the severity of penalties imposed against the company if it or one of its officers, directors, employees or agents violates the FCPA.   Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than ten attorneys with substantive FCPA expertise. Please contact the Gibson Dunn attorney with whom you work, or F. Joseph Warin (202-887-3609, jwarin@gibsondunn.com), Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com), Judith A. Lee (202-887-3591, jalee@gibsondunn.com), Jim Slear (202-955-8578, jslear@gibsondunn.com), Andrew S. Boutros (202-887-3727, aboutros@gibsondunn.com), or Jeremy A. Bell (202-887-3508, jbell@gibsondunn.com) in the firm’s Washington, D.C. office, Robert C. Blume (303-298-5758, rblume@gibsondunn.com) or J. Taylor McConkie (303-298-5795, tmcconkie@gibsondunn.com) in the Denver office, Nicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) in the Orange County office, or Debra Wong Yang (213-229-7472, dwongyang@gibsondunn.com), the former United States Attorney for the Central District of California, in the Los Angeles office. © 2007 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 5, 2007 |
Rule Change Significantly Alters Civil Settlement Negotiation Environment; Permits Government to Use Civil Settlement Statements in Criminal Prosecutions

Although there has been much attention focused on both recent changes to the Federal Rules of Civil Procedure governing discovery of electronic documents, and the proposed changes to Federal Rule of Evidence 502, governing the scope of the attorney-client privilege, clients should not overlook another recent Federal Rule change of great significance. On December 1, 2006, Federal Rule of Evidence 408 was amended, at the request of the U.S. Department of Justice, to permit the government to use any "conduct or statements" made during civil settlement negotiations with a government agency against a defendant in a criminal proceeding. The amended rule significantly alters how defense counsel and their clients should approach settlement negotiations with any government agency.  Prior to the amendment, in most Federal Circuits, parties could rely on Rule 408 to exclude statements made during settlement negotiations from admission to prove a party’s liability. The rule provided that evidence stemming from settlement discussions, offers to compromise and "[e]vidence of conduct or statements made in compromise negotiations" offered to prove the validity or invalidity of a claim in both civil and criminal proceedings was "not admissible." The rule served to foster an open environment for settlement discussions, assuring that statements made during the negotiations could not be used against a party in later criminal or civil proceedings.  The amended rule now subverts this historical purpose, and eliminates such protection in subsequent criminal proceedings for "conduct or statements made in compromise negotiations regarding the claim . . . related to a claim by a public office or agency in the exercise of regulatory, investigative, or enforcement authority." The Advisory Committee notes to Amended Rule 408 bluntly explain the expanded scope of the change: “Where an individual makes a statement in the presence of government agents, its subsequent admission in a criminal case should not be unexpected.”  The amended rule’s vagueness also dictates that potential defendant’s and their counsel should approach any discussions with government regulators with extreme caution. The rule fails to define either “conduct” or “statements” or differentiate these terms in any way. The rule also fails to explain whether the term “statements” includes authorized or unauthorized statements of counsel, as well as client statements. Such ambiguities create complex challenges for successful settlement discussions — especially for the corporate defendant.  The Advisory Committee notes do provide some guidance on limiting the potential impact of the amended rule, stating "individuals can seek to protect against subsequent disclosure through negotiation and agreement with the civil regulator or an attorney for the government." However, this somewhat naïve guidance presupposes that government regulators would be willing to enter into confidentiality agreements that would deny access to the criminal authorities — something that government agencies may be both reluctant and unauthorized to do. Because amended Rule 408 dramatically increases the sensitivity of any regulatory or investigatory settlement interaction with the government, clients must be mindful of the potentially severe consequences from the outset of discussions with the government. As with any government inquiry, counsel should be consulted at the earliest possible moment in order to ensure that the client successfully resolves the regulatory investigation without exposing itself to criminal liability.   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 Timothy J. Hatch (213-229-7368; thatch@gibsondunn.com) in Los Angeles, Karen L. Manos (202-955-8536; kmanos@gibsondunn.com) in Washington, D.C. or James C. Dougherty (415-393-8347; jdougherty@gibsondunn.com) in San Francisco.  To learn more about the firm’s Government and Commercial Contracts Group, please contact any member of the group or the practice group Chair:Joseph D. West (202-955-8658; jwest@gibsondunn.com)  To learn more about the firm’s Business Crimes and Investigations Group, please contact any member of the group or the practice group Co-Chairs:Thomas E. Holliday (213-229-7370; tholliday@gibsondunn.com)Marcellus A. McRae (213-229-7675; mmcrae@gibsondunn.com) © 2007 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 3, 2006 |
World Bank Announces New Voluntary Disclosure Program: Entities That Voluntarily Report Wrongdoing Will Not Face Sanctions

The World Bank has announced that its Board of Executive Directors has approved a new Voluntary Disclosure Program intended to encourage entities to report fraudulent and corrupt practices involving projects financed or supported by the World Bank. Administered by the World Bank’s Department of Institutional Integrity, the Voluntary Disclosure Program allows entities that have engaged in fraud, bribery, corruption, and other wrongdoing in connection with World Bank-financed or supported projects to avoid sanctions if they self-report their wrongdoing and comply with non-negotiable, standardized terms and conditions. The benefits afforded to entities entering the Program are significant. Such participants  Avoid debarment from World Bank programs for disclosed misconduct; Avoid having their identities disclosed to the public or to third parties such as government authorities in connection with self-reported information;  Avoid the payment of any monetary fines or other sanctions; Avoid being placed on the World Bank’s public “black list” of entities found to have engaged in fraud or corruption; and Maintain their eligibility to compete for World Bank-supported projects. The new rules governing self-reporting under the Voluntary Disclosure Program mark a significant shift in World Bank policy, representing an emphasis on compliance and internal controls as opposed to punishment. In announcing the Program, World Bank President Paul Wolfowitz said that the Voluntary Disclosure Program is “[d]esigned to prevent and deter corruption in [World Bank] projects and contracts,” and “encourage[] companies to adopt business practices that will contribute to a more competitive and healthy private sector.” Prior to the implementation of the Program, the World Bank had publicly debarred more than 330 firms and individuals. Under the Voluntary Disclosure Program, entities should now undertake a new calculus in determining whether to voluntarily report wrongdoing uncovered in connection with World Bank-financed or supported projects. This analysis may often be implicated in transactions where companies have paid bribes internationally and face liability under the Foreign Corrupt Practices Act. Eligibility  Any individual or entity, other than World Bank employees, that has received World Bank financing or support in connection with a project is eligible to enter the Voluntary Disclosure Program, except that the Program is not available to individuals or entities that are under active investigation by the World Bank. Entities that are under criminal investigation by a government authority may be eligible for the Program so long as the criminal investigation does not relate to an activity financed or supported by the World Bank. If a criminal investigation by a government authority relates to a World Bank-financed or supported activity, the Voluntary Disclosure Program may not be available in those cases where the World Bank is aware of the investigation. Under such circumstances, the Department of Institutional Integrity will open its own investigation into the case. The Voluntary Disclosure Program is not available to entities providing goods or services directly to the World Bank through its General Services Department.  Rules Governing The Program To enter the Voluntary Disclosure Program, a participant must complete an Entry Request Form and Background Data Sheet and accept the Program Terms and Conditions. Upon entering the Program, a participant must agree not to commit any misconduct in any World Bank-financed or supported project and must disclose known misconduct that has already been committed. Next, the participant must conduct an internal investigation and submit a report detailing its findings. The Voluntary Disclosure Program may not alter the Bank’s obligation to comply with a validly issued subpoena by a government authority.  Within one year of submitting an investigative report, the World Bank will conduct an audit – at the expense of the entity – of up to 30% of the contracts discussed in the entity’s report. The participant must then implement a robust internal compliance program and hire an independent compliance monitor, who must be approved by the World Bank. The World Bank will conduct three annual reviews of the monitor’s reports – once again, at the expense of the entity – and suggest additional ethics measures, as it deems necessary. Participants should therefore expect to remain in the Voluntary Disclosure Program for 4 or 5 years, until the Program runs its full course. At the conclusion of the compliance phase, the World Bank will prepare a report containing a summary of all the participant’s disclosures. This report will be shared with the Offices of the Bank President and General Counsel. A redacted version of the report – intended to preserve the anonymity of the participant – may be shared with World Bank member countries and other designated audiences such as anti-corruption non-governmental organizations. Upon entering the Program, participants face a mandatory 10-year public debarment in accordance with applicable World Bank procedures should they: (1) fail to voluntarily, fully, and truthfully disclose all misconduct; (2) continue to engage in misconduct during the term of the Program; or (3) commit a material breach of the Program’s terms and conditions.  Although this Program has substantial hurdles for entities and many ongoing commitments, the total amnesty afforded to self-disclosing entities may be quite attractive to organizations that discover fraud or improper payments and are concerned about the ramifications of voluntary disclosure. The only equivalent amnesty program offered by the U.S. Department of Justice is the Antitrust Division program, which allows the first entity to report an antitrust violation to completely avoid prosecution. See http://www.usdoj.gov/atr/public/guidelines/0091.htm.  Gibson, Dunn & Crutcher’s Business Crimes and Investigations Group is available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn attorney with whom you work or F. Joseph Warin (202-887-3609), fwarin@gibsondunn.com; or Andrew S. Boutros (202-887-3727), aboutros@gibsondunn.com in the firm’s Washington, D.C. office.  © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 6, 2006 |
The United States Sentencing Commission Votes to Eliminate Requirement That Corporations Waive Attorney-Client Privilege to Earn Credit for Cooperating with Government

The United States Sentencing Commission voted unanimously on April 5 to eliminate language from the Federal Sentencing Guidelines that requires corporations to waive the attorney-client privilege and work product protections in certain circumstances in order to earn sentencing credit for cooperation with a government investigation. The amendment was prompted by extensive commentary from a wide array of organizations and individuals, including lawyers at Gibson, Dunn & Crutcher, about the chilling effect that a waiver requirement has on communications between employees and counsel for the corporation. In 2004, the Sentencing Commission modified the Sentencing Guidelines that apply to corporations convicted of federal offenses. These Guidelines determine, among other things, what fine the court should consider imposing. The factors identified in the Guidelines include: (1) seriousness of the offense;  (2) whether the corporation has an effective compliance program;  (3) whether the corporation has a history of administrative, civil or criminal infractions; and  (4) whether the corporation self-reported the violation and cooperated in the government’s investigation.  One of the revisions in 2004 was a provision stating that to receive credit for cooperating with the government, a corporation is not required to waive the attorney-client privilege or work product protections “unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization." (Emphasis added). Although the Commission explained at the time it adopted the amendment that it expected such waivers to be required “on a limited basis,” prosecutors soon began routinely citing the language in an effort to press corporation counsel to waive the privilege and reveal confidential communications and attorney work product.  A recent large-scale survey sponsored by over a dozen organizations including the Association of Corporate Counsel, the Business Roundtable and the U.S. Chamber of Commerce found that a majority of the outside counsel who responded had been pressured by federal enforcement officials to waive the privilege in connection with one or more government investigations and that those officials most frequently cited Department of Justice guidelines governing the prosecution of corporations and the Sentencing Guidelines waiver language as the reasons the corporation should disclose confidential attorney-client communications and attorney work product. The Commission’s decision to remove the privilege waiver language from the Guidelines should enable corporations to earn sentence reductions by cooperating with the government even if they decline to reveal confidential attorney-client discussions or attorney work product. This will ease some of the pressure to waive the privilege.  Government attorneys and agents still may seek these waivers despite the Commission’s action. As noted above, prosecutors frequently invoke the Department of Justice’s “Thompson Memorandum,” which states that in “gauging the extent of the corporation’s cooperation” – a relevant factor in deciding whether to charge the corporation with a federal crime – the prosecutor may consider, among other things, the corporation’s willingness “ to disclose the complete results of its internal investigation” and “to waive attorney-client and work product protection.” As a result, corporations faced with the question whether to waive the privilege will now need to evaluate how they are likely to fare under the other criteria for non-prosecution in the Thompson Memorandum as well as the damage they might suffer by releasing privileged and protected material. That damage includes civil litigation exposure in light of the growing number of court rulings that the privilege has been waived as to all third parties by disclosure to the government, and the negative effect waiver would have on employee willingness to confide in company counsel in the future. As to the latter harm, various organizations commenting on the Sentencing Guidelines provision pointed out that the attorney-client privilege helps corporations learn of small problems before they become large and of potential problems before they become real, because employees are more likely to seek legal advice from counsel and report suspected wrongdoing if they know such discussions will remain confidential. Thus, despite this positive development at the Sentencing Commission, corporations still face the challenge of resisting what will likely be continuing pressure from prosecutors to waive the privilege in order to avoid prosecution under the Department of Justice’s internal guidelines. The amendment deleting the waiver language will be published on or before May 1. By statute, the amendment will go into effect on November 1 unless Congress passes legislation rescinding or modifying it. The Commission has made nearly 700 amendments to the Sentencing Guidelines over the last 17 years, and Congress has only prevented two of those changes from taking effect.    Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have about these issues, including the required elements of effective compliance programs and other techniques for minimizing the risk of prosecution. Please contact the Gibson Dunn attorney with whom you work, or John F. Olson – Washington, DC (202-955-8522, jolson@gibsondunn.com)  Ronald O. Mueller – Washington, DC (202-955-8671, rmueller@gibsondunn.com)  Amy L. Goodman – Washington, DC (202-955-8653,   agoodman@gibsondunn.com)F. Joseph Warin – Washington, DC (202-887-3609, fwarin@gibsondunn.com) Thomas E. Holliday – Los Angeles (213-229-7370, tholliday@gibsondunn.com) Orin Snyder – New York (212-351-2400, osnyder@gibsondunn.com) Lee G. Dunst – New York (212-351-3824, ldunst@gibsondunn.com) Jim Walden – New York (212-351-2300, jwalden@gibsondunn.com) Robert C. Blume – Denver (303-298-5758, rblume@gibsondunn.com) David Debold – Washington, DC (202-955-8551, ddebold@gibsondunn.com) David P. Burns – Washington, DC (202-887-3786, dburns@gibsondunn.com)  © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 17, 2006 |
The Future of Parallel Criminal-Civil Investigations: Business as Usual or Increased Judicial Oversight?

New York Partner Lee Dunst is the author of "The Future of Parallel Criminal-Civil Investigations: Business as Usual or Increased Judicial Oversight?" [PDF], published in the March 17, 2006 issue of White Collar Crime Report.