Quarterly FCPA Report: First Quarter 2011 - 2011 Starts with Steady Pace of Settlements and Flurry of Litigation

Author:Mr William Pendergast, Sara A. Murphy, Jennifer D. Riddle, Joshua R. Christensen and Noah B. Pinegar
Profession:Paul, Hastings, Janofsky & Walker LLP
  1. Introduction

    Following 2010's record year of Foreign Corrupt Practices Act ("FCPA") enforcement, 2011 began steadily with four company and seven individual defendants – one of which included a blockbuster forfeiture – and with a flurry of litigation activity challenging DOJ's prosecution theories and tactics. Individual defendants in various cases filed during 2009 and 2010 challenged long-standing definitions of key components of the FCPA. In total, there were four corporate settlements of U.S. Securities and Exchange Commission ("SEC") charges, two of which also entered into deferred prosecution agreements with the U.S. Department of Justice ("DOJ"). There were also five guilty pleas, two sentencing decisions, and one settlement with the SEC by individual defendants.

    The increased litigation by individuals has focused on the definition of "foreign official" under the FCPA. In the case of United States v. Noriega et al,1 defendants argued that the FCPA does not apply to employees and officers of foreign state-owned entities, specifically Mexico's state-owned utility company, CFE. Relying on the Mexican Constitution and statutory law as factual evidence, U.S. District Court Judge for the Central District of California A. Howard Matz held that CFE officials fall under the dictionary-definition of "instrumentality" of a foreign government, making them "foreign officials" under the FCPA. Judge Matz denied defendants' motion to dismiss, and the case will now go to trial. Meanwhile, the same defense is being argued in United States v. Carson et al2 (also in the Central District of California) and in United States v. O'Shea3 in the Southern District of Texas. The Noriega ruling along with the respective motions and potential rulings from Carson and O'Shea have the potential either to change the way the FCPA is enforced or strengthen the DOJ prosecution theories.

    The first quarter of 2011 also saw groundbreaking enforcement of the FCPA against individuals. Jeffrey Tesler, central to the TSKJ-Bonny Island consortium, agreed to forfeit nearly $149 million, the largest FCPA-related forfeiture by an individual to date. Additionally, two defendants pleaded guilty in the high-profile arms contract case, the largest FCPA enforcement action against individuals, with twentytwo indicted defendants. The immensity of Tesler's fine as well as the scope of the twenty-twodefendant arms contract case, show the government's continued focus on prosecuting individuals for FCPA violations.

    The corporate settlements of this first quarter illustrate the government's current focus on foreign subsidiaries and joint ventures of U.S. companies. All four settlements involved related foreign entities and included claims of failure to implement and maintain an effective system of internal controls. In three of these cases – Ball Corp., Tysons, Inc., and Maxwell Technologies – internal concerns had been raised to management, however, the DOJ and SEC claimed in each that the companies' reactions to these warnings were not sufficient. At the end of the quarter, the United Kingdom Ministry of Justice released its guidance on the UK Bribery Act, and the law will go into effect July 1, 2011. Paul Hastings released the first of a series of Client Alerts regarding the Act and the guidance issued (found here).

  2. Four Recent Corporate Enforcement Actions

    1. Maxwell Technologies – Inflated Invoices in China

      On January 31, 2011, the DOJ resolved charges against Maxwell Technologies for violating the FCPA's anti-bribery provisions and the books and records provisions by entering into a three-year deferred prosecution agreement ("DPA"). The SEC also settled civil charges against Maxwell for failure to devise and maintain an effective system of internal controls and for improperly recording the unlawful payments on its books. Maxwell will pay $8 million in criminal penalties. The company must also implement an enhanced compliance program and internal controls capable of preventing and detecting FCPA violations and must cooperate with the DOJ in the continuing investigation. To resolve the SEC's civil charges, Maxwell will forfeit a combined $6.3 million in disgorgement and prejudgment interest.

      Maxwell Technologies produces energy-storage and power delivery technology, and is headquartered in San Diego, California. Between July 2002 and May 2009, a Swiss subsidiary of Maxwell engaged a Chinese agent to sell Maxwell's products in China. According to the DPA, the agent was paid approximately $2.8 million, which was then allegedly distributed to Chinese foreign officials in return for securing contracts for Maxwell. To achieve this, the agent would allegedly invoice the Chinese companies an extra twenty-percent. The agent would then...

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