On June 1, 2011, a federal court in Florida found that Costa Rica’s Instituto Costarricense de Electricidad (“ICE”),  a state-owned enterprise (“SOE”) which provides electrical power and telecommunication services, was not a victim of Alcatel-Lucent S.A.’s (“Alcatel-Lucent”) bribery, and was consequently not entitled to restitution.  Presiding Judge Marcia Cooke held that ICE was “essentially” in a “co-conspirator relationship” with Alcatel-Lucent in the bribery scheme Alcatel-Lucent designed to win lucrative telecommunications contracts from ICE.[1]  The ruling was subsequently upheld by the Eleventh Circuit Court of Appeals, which denied a petition for writ of Mandamus filed by ICE.[2]  The Eleventh Circuit held that the district court did not clearly err in holding that ICE was not a crime victim and that it “actually functioned as [a] co-conspirator” because of “the pervasive, constant, and consistent illegal conduct conducted by the ‘principals’ (i.e., members of the board of directors and management) of ICE.”

The case represented one of the first serious attempts by a foreign authority to claim victim status under US laws that provide restitution and other rights to parties harmed by criminal conduct.  

Case History

Settlement

As reported in our prior alert, on December 27, 2010, Alcatel-Lucent entered a three-year Deferred Prosecution Agreement (“DPA”) with the US Department of Justice (“DOJ”), under which it became obliged to pay a $92 million criminal penalty, cooperate with ongoing investigations, implement compliance program enhancements, and retain a compliance monitor.  DOJ will dismiss the criminal information upon expiration of the DPA provided that Alcatel-Lucent has complied with its terms.[3]  In a separate settlement with the Securities and Exchange Commission (“SEC”), Alcatel-Lucent agreed to disgorge $45.4 million of profits.  Three Alcatel-Lucent subsidiaries, Alcatel-Lucent France, Alcatel-Lucent Trade International, and Alcatel-Lucent Centroamerica, all filed plea agreements under which they each plead guilty to conspiring to violate the Foreign Corrupt Practices Act (“FCPA”).[4]

Corrupt Practices

The US government alleged that Alcatel-Lucent, a French telecommunications equipment and services provider, and several of its non-US subsidiaries made improper payments through third-party consultants to officials in Costa Rica, Honduras, Taiwan, Malaysia, and other countries between 2000 and 2006.  In exchange for the payments, Alcatel-Lucent obtained lucrative contracts, non-public information concerning public tenders, and other business advantages totaling $48.1 million.[5]

In Costa Rica, according to the settlement documents, Alcatel-Lucent funneled money as “commission payments” through its subsidiaries to three consulting firms, which then directed payments to five ICE officials in exchange for valuable telecommunications contracts.  Through its Costa-Rican consultants, Alcatel-Lucent paid more than $18 million in bribes to three ICE directors and two senior officials, and obtained ICE contracts valued at more than $400 million for wireless telecommunications equipment and maintenance services.

Charges and Jurisdiction

While the DOJ limited its charges against Alcatel-Lucent to criminal violations of the FCPA’s internal controls and books and records provisions,[6] the SEC charged the parent entity with violations of the FCPA’s anti-bribery provision for issuers, as well as its books and records and internal controls provisions.[7] 

The DOJ filed a separate criminal information against several non-US Alcatel-Lucent subsidiaries, including Costa-Rica based Alcatel CentroAmerica, S.A. (“Alcatel de Costa Rica”).  The DOJ charged these subsidiaries with conspiracy to violate the FCPA’s anti-bribery, books and records, and internal controls provisions.  The DOJ cited meetings, e-mails, and phone calls that Alcatel de Costa Rica personnel had with individuals in Miami, Florida, concerning improper third-party payments to show that “at least one of the co-conspirators committed or caused to be committed” various acts in the United States, in order to assert jurisdiction under 15 U.S.C. §17dd-3.  The DOJ alleged that each of the charged subsidiaries was a “person other than an issuer … or a domestic concern.”[8]

Arguments Before the Court

On May 3, 2011, ICE filed a motion with the federal District Court in Florida requesting the court to block Alcatel-Lucent’s settlement of charges with the US government under the FCPA.  ICE argued that the DPA and the plea agreements Alcatel-Lucent and its subsidiaries entered into with the DOJ violated ICE’s rights as a victim of the Alcatel-Lucent defendants.  In its petition for relief, ICE argued that it is entitled to the benefit of the Crime Victims’ Rights Act (“CVRA”), 18 U.S.C. § 3771, and the Mandatory Victims Restitution Act (“MVRA”), 18 U.S.C. § 3663A, which would protect ICE’s rights as a victim, including the right to receive restitution. [9]  The US government and defendant Alcatel-Lucent separately filed responses to ICE’s petition for victim status and restitution on May 23, 2011.  The submissions addressed the following key issues:

  • Whether ICE should be considered a victim under the relevant statutes;
  • If so, whether its rights were adequately protected by the US government; and
  • If so, whether restitution was appropriate.

All three parties’ major arguments are discussed below.

Should ICE Be Considered a Victim Under the Relevant Statute?

In its petition for relief, ICE argued that it was victimized and damaged by the corrupt conduct of Alcatel-Lucent, and the dishonesty of ICE’s own employees. ICE alleged that it suffered massive losses as a result of Alcatel-Lucent’s corrupt activities, including: “money furnished to consultants for bribes, profits of Alcatel-Lucent, overpayments of contracts, defective equipment and services, lost business, services and profits, interest paid remediation expenses, and lost opportunity costs.”[10]  ICE claimed that because it immediately terminated the five corrupt employees who accepted payments in return for exerting their influence within ICE to ensure that Alcatel-Lucent obtained approval for the contracts, and because it supported and participated in the prosecution of these employees by the Costa Rican government, that it could not fairly be treated as a co-conspirator in Alcatel-Lucent’s criminal behavior.

On the other side, the DOJ argued that a person or organization directly involved in criminal conduct cannot claim victim status.  The government pointed to the high level of corruption embedded at ICE over almost a decade as evidence that ICE as an organization was directly involved in Alcatel-Lucent’s criminal behavior. The government contended that ICE as an organization had a deeply ingrained culture of corruption, as evidenced by the number of years ICE officials received bribes, the involvement of multiple board members who accepted illegal payments both from Alcatel-Lucent and its competitors, and audit reports that detected serious deficiencies in ICE’s internal control mechanisms.  The government argued that the combination of these factors provided the organization with warning signs of ICE’s rampant corruption, and precluded it from claiming victim status.[11]

The district court emphatically agreed with the government and Alcatel-Lucent that ICE was not a victim, stating “the behavior of the quote-unquote victim and the behavior of the defendant here are closely intertwined . . . from the pervasiveness of the illegal activity, the constancy of the illegal activity and the consistency over a period of years . . . that basically it was ‘Bribery Is Us.’” 

If ICE Is a Victim, Did the Government Fail to Protect ICE’s Rights as Such?

ICE alleged that the DOJ failed to carry out its responsibilities to the victims of the corruption scheme by failing to assure the protection of their rights, including restitution, and failing to consult and inform the victims of all court proceedings.  According to the motion, the DOJ never attempted to gather information from ICE regarding the harm it suffered or for general evidence in the case.  ICE maintained that it contacted both the SEC and the DOJ within months of the announcement of the government’s settlement agreements with Alcatel-Lucent in February 2010 in order to establish its position as a victim and to participate in required procedures for the distribution of unfairly obtained profits, including the establishment of a “Fair Fund,” which the SEC has the ability to create to benefit investors harmed by a company’s securities violations.

ICE further alleged that Alcatel-Lucent violated the terms of its settlement agreement with the DOJ when its counsel, Alejandro Batalla, denied the company’s criminal responsibility in the Costa Rican courts.  Pursuant to its settlement agreement, Alcatel-Lucent is prohibited from making any public statement that contradicts the acceptance of responsibility by Alcatel-Lucent for the facts set forth in the DOJ allegations.

The DOJ argued that the federal District Court was not required to decide ICE’s victim status because ICE was accorded every enumerated right under the CVRA including timely notice of every public hearing, the opportunity to testify at each hearing, confer with the government’s counsel, the opportunity to pursue restitution, and timely resolution as provided by law.  According to the DOJ, the CVRA’s provision that victims have a reasonable right to confer with the government in a case does not require the government to include the victim in plea negotiations because, technically, there does not yet exist a case before charges are formally filed.[12]

The court again agreed with the government on this point, holding that, although it had no obligation to do so, the government treated ICE “with appropriate informational respect in regard to this case.” 

If ICE Is a Victim, Is Restitution Appropriate?

Was ICE a Co-Conspirator, and thus Precluded from Restitution?

Both the government and Alcatel-Lucent argued that because ICE participated in Alcatel-Lucent’s criminal conduct, it is akin to a co-conspirator or co-participant in Alcatel-Lucent’s criminal act of bribing ICE officials, and co-conspirators cannot be victims or receive restitution payments under the MVRA or the Victim and Witness Protection Act (“VWPA”), 18 U.S.C. §3663.   Alcatel-Lucent separately argued that the MVRA does not apply to ICE’s claim because it requires a “crime against property,” and no court has held that a violation of or conspiracy to violate the FCPA constitutes a “crime against property.”[13]

ICE responded that it was not a co-conspirator in Alcatel Lucent’s criminal behavior because the five “rogue” employees who accepted bribes from Alcatel-Lucent acted solely for their individual benefit, and not to advance ICE as an organization, which prevents their actions from being imputed to ICE under agency law.[14]

Can Restitution Be Calculated, and Is Its Calculation Unduly Burdensome?

The DOJ also argued that restitution is limited to provable actual loss caused by the defendant’s criminal actions.  According to the government, restitution damages cannot be based on the amount paid in bribes, or the amount the defendant gained through the corrupt payments.  The government argued that ICE’s loss is entirely speculative and cannot be subject to a reasonable approximation because the corruption within ICE existed over an extended period of time and there is evidence that Alcatel-Lucent’s competitors also paid bribes to ICE officials.  According to the DOJ, both these factors made it impossible to determine which companies would have received the specific ICE contracts and at what price had Alcatel-Lucent not engaged in the criminal conduct.[15]

According to both the government and the defendant, evaluating ICE’s claims would have required a factually complex and time-consuming evaluation which was not justified by an urgent need for restitution.  The DOJ and Alcatel-Lucent argued that ICE’s civil contract claims are not directly connected to Alcatel Lucent’s charged offense.  Both parties further contend that the Costa Rican court’s recent denial of ICE’s damage claims without reaching an evaluation of their merits, ICE’s pursuit for redress through multiple other avenues, and the $10 million reparations payment Alcatel-Lucent France already made to the Costa Rican government undermine the need for restitution in this case.[16]

ICE responded that the government’s “complexity” argument does not bar ICE’s entitlement under the MVRA, relying on case law to argue that restitution amounts are not required to be determined exactly, and that courts have awarded restitution based on approximations in much more complex cases.  ICE further argued that it submitted proximate damages resulting from Alcatel Lucent’s criminal behavior, based on reasonable estimates and expert testimony, and that this would alleviate any burden or delay.  ICE maintained that even if restitution delayed sentencing, it did not outweigh the need for the remedy. [17]

Again, the court agreed with the government and the defendant, stating that “to put a nail in this coffin,” it would be too complex to calculate restitution in this matter. 

ICE Lacks Standing to Challenge the Government’s Deferred Prosecution Agreement with Alcatel-Lucent

Alcatel-Lucent independently argued that ICE lacked standing to challenge the DPA between the DOJ and Alcatel-Lucent because a victim is only allowed restitution under the VWPA and the MVRA when a defendant has been convicted of a crime.  Under the terms of Alcatel-Lucent’s three-year DPA with the DOJ, the company did not plead guilty and was not convicted of a crime.  Therefore, according, to Alcatel-Lucent, ICE lacks standing to challenge the DPA.[18]  Notably, this argument does not apply to the plea agreements between Alcatel-Lucent’s subsidiaries, which did agree to plead guilty to criminal charges in their plea agreements with the DOJ.

Analysis

The federal court’s rejection of ICE’s argument that it was a victim of Alcatel-Lucent’s corruption scheme provides guidance on when an organization is precluded from having victim status when members of the same organization have participated in the corrupt conduct.

The court does not set forth a clear, bright-line rule as to when individual criminal conduct reflects not only the liability of those individuals, but also inculpates the organization on whose behalf the employees acted.  Instead, the court accepts the government’s argument, which considers a multitude of factors to determine whether the organization is precluded from claiming victim status, including:

  • the period of time over which bribes were accepted within the organization,
  • the rank of the employees who accepted bribes within the organization,
  • the pervasiveness of accepting bribes in company culture, and
  • evidence that the corruption or internal controls deficiencies were identified within the organization. 

Notably, the government explicitly stated that a ministry or SOE is not always prohibited from claiming victim status where a foreign official associated with that organization has solicited and been paid bribes.  Therefore, the court’s ruling does not necessarily preclude any future organization, or foreign government body, from claiming victim status where its employees were direct participants in the corruption.  Where the solicitation or extortion does not involve high-level officials of the organization, or reflects the actions of a true “rogue” employee, the prospects for victim status would appear to be considerably stronger even under the reasoning of the Florida district court.  Of course, courts in other circuits could take a different view of the law, but it seems unlikely US courts will be eager to reward corrupt foreign government bodies with restitution. 

In addition, as alluded to in all filings, related but separate litigation in other US courts as well as Costa Rican courts highlights the ever-increasing bodies of litigation surrounding FCPA enforcement actions.  Indeed, in addition to the penalties paid to US authorities, Alcatel paid $10 million to the government of Costa Rica for its conduct.  The web of lawsuits reflects a growing trend of follow-on litigation from FCPA enforcement actions, including litigation in other countries, which this ruling is unlikely to stem.

Third, as noted earlier, several issues regarding ICE’s standing to even raise a claim were raised.  As a technical matter, as a DPA does not result in a conviction, it seems logical that restitution for an “offense of conviction” could not be mandated against companies entering into DPAs (or for that matter other settlement tools used by DOJ, such as non-prosecution agreements).[19]   Further, one wonders if the Costa Rican government, and not merely one of its state-owned enterprises, would have been a better “victim” in principle.  However, given that Costa Rica’s president at the time, Miguel Angel Rodriguez, has recently been sentenced to five years in jail for receiving bribes in connection with this scheme, it is likely that, at least in this case, the Costa Rican government would likely not be considered a victim, either.  In addition, the Costa Rican government may have asset recovery rights under international treaties such as the United Nations Convention Against Corruption, to the extent the proceeds of corruption have found their way into other jurisdictions.