Why it matters: The Foreign Corrupt Practices Act (FCPA) continues to make news in 2016. Since our last newsletter, DOJ officials have been making the rounds to talk up their recently announced FCPA voluntary disclosure pilot program. In the courts, a Delaware Chancery Court judge dismissed a shareholder derivative lawsuit (brought on “demand futility” grounds) filed on behalf of Wal-Mart against its board of directors alleging the board covered up FCPA violations in Mexico. And a review of recent securities filings sheds a light on the government’s ongoing corporate investigations into alleged FCPA violations in foreign territories around the world.
Detailed discussion: Here, we review some of the recent FCPA-related matters that caught our eye.
FCPA voluntary disclosure pilot program: Since the DOJ announced its new one-year FCPA voluntary disclosure pilot program (FCPA Pilot Program) on April 5, 2016, DOJ officials have been making the rounds to talk up the program and reassure both corporations and the individuals who run them. To briefly recap, the DOJ’s new FCPA Pilot Program is intended to, among other things, motivate corporations in connection with FCPA investigations to (1) “voluntarily self-disclose” both corporate and individual misconduct, (2) “fully cooperate” and (3) "timely and appropriately remediate.” The DOJ also provided written descriptions of those terms and outlined the maximum mitigation credit available to a corporation that adheres to them.
On May 10, 2016, Deputy Attorney General Sally Q. Yates spoke at the New York City Bar Association White Collar Crime Conference where she discussed the new FCPA Pilot Program in conjunction with her eponymous September 9, 2015 memo regarding the DOJ’s overall policy to hold individuals accountable (Individual Accountability Policy—a.k.a. the Yates Memo although Yates said at the conference that that moniker was “disconcerting” to her). After emphasizing yet again that the Individual Accountability Policy was the DOJ’s effort to reinforce and centralize the DOJ’s already existing priorities for holding individuals accountable for corporate misconduct, Yates referred to the FCPA Pilot Program as one example where the Individual Accountability Policy had “led different corners of the Justice Department to announce new component-level policies focused on individuals.” Yates went on to say that the FCPA Pilot Program “helps put into practice not only the Individual Accountability Policy’s threshold requirement for cooperation, but also the revisions to the U.S. Attorney’s Manual I announced in November that separates the concept of self-disclosure from that of cooperation. Those revisions account for the difference between a company raising its hand and voluntarily disclosing misconduct and a company simply agreeing to cooperate once it gets caught. We made this this change to emphasize that while the concepts of voluntary disclosure and cooperation are related, they are distinct factors to be given separate consideration in charging decisions. To recognize the significant value of early, voluntary self-reporting, prompt voluntary disclosure by a company—or the lack thereof—is now an independent factor that will be weighed as we evaluate charging decisions.”
In addition, on May 12, 2016, Assistant U.S. Attorney Leslie R. Caldwell sat down with a reporter from The Recorder for an interview about the FCPA Pilot Program. The reporter began by asking about the FCPA Pilot Program’s goals, to which Caldwell responded “[w]e know that FCPA violations are frankly rampant around the world. We also know that there’s a lot of FCPA activity that we never hear about. And a lot of times [companies have] commissioned an internal investigation, and that internal investigation has been done by an outside law firm. That outside investigation has taken some remedial steps: fired some people, changed some compliance processes. [They've] put that investigation on the shelf and they hoped that’s the end of it. If we ever hear about it through other means, they will then tell us about their investigation and they’ll cooperate with us about what they did two years ago, three years ago. So, part of the goal is to get at the vast amount of information that we know exists about FCPA violations by giving companies a more concrete incentive to self-report.” Caldwell also confirmed that the FCPA Pilot Program dovetails with the DOJ’s Individual Accountability Policy, stating that another of the FCPA Pilot Program’s goals is to “get evidence that might otherwise be very hard for us to get about the individuals who were responsible for the FCPA violation … [The FCPA Pilot Program] implements the Yates memo, the individual culpability memo, to come up with an operational way to get at that information about individuals that we know is out there.”
When asked by the reporter whether, to date, there have been “any takers” i.e., corporate participants in the FCPA Pilot Program, Caldwell said that “[w]e certainly have companies that have already self-reported who are eligible for the program. Some companies that self-reported are getting the benefits—including in one case a declination of prosecution—because of the way they handled the violations.” Caldwell stressed that the DOJ is not interested in prosecuting “discreet, small violations such as a one-time bribe to a customs official in name-that-country to get a shipment into that country earlier than they otherwise would have” and that instead the FCPA Pilot Program is intended to root out “self-reports where there is a significant violation of the FCPA.” When asked which corporations she believed would participate in the FCPA Pilot Program, Caldwell reflected that “I think that a company with a really big program might be more worried about the possibility of discovery through other means and that might also motivate self-reporting. I could see where a smaller company or a big company with a smaller problem might be willing to take their chances. But you know that they should realize that there are a lot of people out there who are aware of the FCPA and we’re working with governments in other countries who are sharing information with us. I think the risk of getting caught goes up every day.”
In re Wal-Mart Stores, Inc. Delaware Derivative Litigation: On May 13, 2016, Delaware Chancery Court Judge Andre Bouchard dismissed the shareholder derivative litigation brought in that state against the board of directors (Board) of Wal-Mart Stores Inc. (Wal-Mart) in connection with the Board’s alleged inadequate investigation and cover-up of FCPA violations by a subsidiary in Mexico. Judge Bouchard’s 58-page opinion went into great detail about the underlying facts of the case, but to quickly recap, in April 2012 The New York Times published an article describing the cover-up by the Board of an alleged bribery scheme at Wal-Mart subsidiary Wal-Mart de Mexico. The article prompted 15 lawsuits to be filed shortly thereafter by Wal-Mart stockholders in Arkansas federal court (where Wal-Mart is headquartered) and Delaware chancery court (where Wal-Mart is incorporated) asserting derivative claims on behalf of Wal-Mart. Key to Judge Bouchard’s ruling, the shareholders in both states had filed the actions as derivative suits on behalf of the corporation, alleging “demand futility” due to the claimed inability of the Board to adequately exercise independent and disinterested business judgment in evaluating the shareholders’ claims.
The Delaware and Arkansas courts consolidated the complaints that had been filed in their respective jurisdictions (the Delaware derivative litigation and the Arkansas derivative litigation, respectively). The shareholders in the Delaware derivative litigation successfully pushed for access to Wal-Mart’s books and records pursuant to Section 220 of the Delaware General Corporation Law in a contentious fight that went all the way up to the Delaware Supreme Court, and filed an amended derivative complaint in May 2015 based on information learned in the corporate books and records about the alleged Mexican bribery cover-up by the Board. Meanwhile, the shareholders in the Arkansas derivative litigation proceeded without first seeking to obtain the Wal-Mart books and records on their own or waiting for the outcome of the Delaware shareholders’ Section 220 fight. In March 2015, the federal court in Arkansas dismissed the Arkansas derivative litigation for “failure to adequately allege demand futility” because, based on the evidence (or lack thereof) presented, there was no basis to infer that the majority of the Board had actual or constructive knowledge of the Mexican bribery scheme or cover-up, and thus no basis to infer that the Board could not exercise independent and disinterested business judgment in evaluating the claims. The Board then filed the motion to dismiss the Delaware derivative litigation that was the subject of Judge Bouchard’s ruling, alleging that issue preclusion (i.e., the legal principle that stops a party who litigated an issue in one jurisdiction from later re-litigating the same issue in another jurisdiction) prevented the re-litigation of demand futility in the Delaware derivative litigation.
Judge Bouchard agreed, and granted the Board’s motion to dismiss, finding that the Delaware shareholders were in privity with the Arkansas shareholders and thus the issue of demand futility in the Delaware derivative litigation was indeed precluded. Judge Bouchard began his analysis by stating that the basic test for issue preclusion under Arkansas law—the applicable law in this matter—was “easily satisfied.” However, given that Arkansas courts had not to date addressed issue preclusion in the context of shareholder derivative suits, which context would require a determination as to whether “two different stockholder plaintiffs asserting derivative claims on behalf of the same corporation in separate cases are in privity,” Judge Bouchard stated that “this case presents the challenge of having a Delaware trial court predict how a court in Arkansas likely would resolve an open question of Arkansas law.” Judge Bouchard concluded, “consistent with the clear weight of authority from other jurisdictions,” that an Arkansas court would find the two groups of shareholders to be in privity in this situation. The Judge also found that the Arkansas plaintiff shareholders were “adequate representatives” of the corporation even though they launched the derivative litigation without first pursuing Wal-Mart’s corporate books and records. Thus, given the findings both of privity and of adequate representation, Judge Bouchard held that “the plaintiffs in this case are barred from re-litigating demand futility and their complaint must be dismissed.”
Securities filings: Disclosures in securities filings with the SEC can be a font of information into the status of the government’s global FCPA enforcement efforts, and the filings for the first quarter of 2016 were no exception. Here are a couple of recent disclosures that caught our eye.
- Hedge fund Och-Ziff Capital Management Group (Och-Ziff) disclosed in a securities filing on May 3, 2016 that it had reserved $200 million for potential criminal and civil settlements with the DOJ and SEC involving the government’s investigation, initiated in 2011, into FCPA violations in Libya. Och-Ziff stated that the $200 million reserve was the “minimum” amount of the potential settlement and that the final amount could well exceed $200 million. The firm also said that it had incurred $15.9 million in professional fees during the preceding quarter. On April 12, 2016,Reuters (citing the Wall Street Journal) reported that federal authorities were attempting to get Och-Ziff to plead guilty to the FCPA violations with a possible DPA and that the government was seeking over $400 million in penalties.
- Houston-based oilfields services company Key Energy Services LLC (Key Energy) disclosed in a securities filing on April 28, 2016 that it had received a letter from the DOJ informing it that the DOJ was declining to bring an enforcement action against Key Energy in connection with its FCPA investigation into Mexican bribery allegations. Key Energy further disclosed that it had reached a “settlement agreement in principle” with the SEC over the same Mexican bribery allegations for which it had accrued $5 million. Key Energy first disclosed the government’s FCPA investigation into the Mexican bribery allegations in 2014 in connection with its self-disclosure of possible bribery of government officials by employees of its Mexican operations.
See here to read the DOJ’s 5/10/16 press release entitled “Deputy Attorney General Sally Q. Yates Delivers Remarks at the New York City Bar Association White Collar Crime Conference.”
See here to read the 5/12/16 Recorder article by Ross Todd entitled “DOJ Crime Chief Wants to Make a Deal.”
See here to read the 5/13/16 Delaware Chancery Court opinion in In re Wal-Mart Stores, Inc. Derivative Litigation.
See here to read the Form 10-Q filed with the SEC by Och-Ziff Capital Management Group on 5/3/16 under “Risk Factors” and here to read the 4/12/16 Reuters article by Bhanu Pratap entitled “U.S. authorities aim for guilty plea from Och-Ziff over bribery allegations—WSJ.”
See here to read the Form 8-K filed with the SEC by Key Energy Services LLC on 4/28/16 under “Other Events” andhere to read the 4/28/16 press release issued by Key Energy Services LLC entitled “Key Energy Services Provides Foreign Corrupt Practices Act Investigation Update.”