The private equity trap: How global anticorruption can ensnare the unwary private equity professional

Journal of Private Equity

Volumn 17, Issue 1, 2013, Pages 50-63

  Wong, Michael Li Ming ^a   Davis, Thad Alan ^a   Austin, Kelly S ^b  

^a Gibson Dunn and Crutcher LLP   (United States)

^b Gibson Dunn and Crutcher LLP   (Hong Kong)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84904444318     PISSN: 10965572     EISSN: None     Source Type: Journal    
DOI: 10.3905/jpe.2013.17.1.050     Document Type: Article

References (48)

1. David Glovin, Bourke Convicted of Bribery in Azerbaijan Oil Deal, Bloomberg, July 11, 2009.
2. Executive Guilty of Conspiracy in Foreign Bribery Case, N.Y. Times, July 11, 2009, at B2.
3. See 2012 Year-end FCPA Update (Gibson Dunn, Los Angeles, Cal.), Jan. 2, 2013, available at http://www.gibsondunn.com/publications/Documents/ 2012YearEndFCPAUpdate.pdf ("By comparison to the blistering pace set in recent years, FCPA prosecutions were down in 2012 (though still far higher than in any of the first 30 of the statute's 35-year existence)").
4. In 2009, the DOJ and SEC brought enforcement actions against 33 individuals and 11 organizations, the most for any year since Congress passed the FCPA in 1977. See Richard L. Cassin, 2009 FCPA Enforcement Index, The F CPA Blog (Dec. 31, 2009 at 3:15am), http://www.fcpablog.com/blog/2009/12/31/2009- fcpa-enforcement-index.html.
5. Subsequent years have produced a leveling off: In 2010 the agencies brought actions against 49 individuals and 23 companies, collecting $1.8 billion, the highest amount yet; in 2011, they brought actions against 39 individuals and 15 companies, collecting $509 million; in 2012, it was 21 individuals and 12 companies, collecting $259 million. Richard L. Cassin, 2010 FCPA Enforcement Index, The F CPA Blog (Jan. 3, 2011 at 7:02am), http://www.fcpablog.com/blog/2011/1/3/2010-fcpa-enforcement-index.html;
6. Richard L. Cassin, 2011 FCPA Enforcement Index, The F CPA Blog (Jan. 2, 2012 at 7:18am), http://www.fcpablog.com/blog/2012/1/2/2011-enforcement-index. html;
7. Richard L. Cassin, 2012 FCPA Enforcement Index, The F CPA Blog (Jan. 2, 2013 at 4:32am), http://www.fcpablog.com/blog/2013/1/2/2012-enforcement-index. html.
8. On April 19, 2010, a U.S. District Court in Virginia imposed an 87-month sentence on Charles Paul Edward Jumet of the Ports Engineering Consulting Corporation for conspiring to bribe Panamanian officials, the longest prison sentence ever imposed for an FCPA violation. Press Release, DOJ, Virginia Resident Sentenced to 87 Months in Prison for Bribing Foreign Government Officials, Apr. 19, 2010, available at http://www.justice.gov/opa/pr/2010/April/ 10-crm-442.html. The agencies' current approach is politically supported and appears likely to continue.
9. See Lauren J. Resnick & Marco Molina, Why Private Equity Firms, Investment Funds & Their Managers Should Beware of the Foreign Corrupt Practices Act, 17 Wall St. Lawyer-Sec. in the Elec. Age 5, at *2 (2013) ("Last year, then-Secretary of State Hillary Clinton endorsed the DOJ and SEC's aggressive approach against international corruption, reaffirming that the current administration is 'unequivocally opposed to weakening the Foreign Corrupt Practices Act.' ").
10. Adam S. Hoff inger, Robert Salerno and Demme Doufekias, DOJ Turns FCPA Spotlight on Financial Services Sector as Enforcement Efforts in Latin America Continue, Client Alert (Morrison & Foerster, San Francisco, Cal.), May 15, 2013, at 1, available at http://www.mofo.com/files/Uploads/Images/130515-DOJ- Turns-FCPA-Spotlight.pdf. However, DOJ's 10 announced FCPA enforcement actions in 2013 (and the SEC's four) involve no financial companies.
11. See Sec. and E xch. Comm'n, SEC Enforcement Actions: FCPA Cases, http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml (last updated May 29, 2013);
12. Dep't of Justice, FCPA and Related Enforcement Actions, http://www.justice.gov/criminal/fraud/fcpa/cases/2013.html (last accessed June 11, 2013).
13. Mara V.J. Senn & Jennifer Hogan, Recent Enforcement Trends Indicate Increased FCPA Peril for Private Equity Firms, Bloomberg L. Pract itioner Contributions, http://about.bloomberglaw.com/practitioner-contributions/ fcpaperil-for-private-equity-firms/ (last visited June 8, 2013).
14. The perception that ostriches stick their head in the sand to hide likely originated with the Roman historian Pliny the Elder, who wrote "[ostriches] imagine, when they have thrust their head and neck into a bush, that the whole of their body is concealed." Karl S. Kruszelnicki, Ostrich Head in Sand, ABC S cience (Nov. 2, 2006), available at http://www.abc.net.au/science/articles/2006/11/02/1777947.htm. Although the image serves as a useful and "evocative" metaphor when applied to humans, ostriches do not in fact stick their heads in the sand. Id.;
15. see Birds: Ostrich (Zoological Society of San Diego, San Diego, Cal.), available at http://www.sandiegozoo.org/animalbytes/t-ostrich.html (last visited June 8, 2013) ("Ostriches do not bury their heads in the sand! When an ostrich senses danger and cannot run away, it flops to the ground and remains still, with its head and neck flat on the ground in front of it. Because the head and neck are lightly colored, they blend in with the color of the soil. From a distance, it just looks like the ostrich has buried its head in the sand, because only the body is visible.")
16. Criminal D iv. U .S. D ep't of Justice & E nforcement D iv. U .S. S ec. & E xch. Comm'n, A Resource Guide to the U.S. Foreign Corrupt Practices Act (2012) ("FCPA Resource Guide"), available at www.justice.gov/ criminal/fraud/fcpa.
17. See, e.g., Irina Sivachenko, Corporate Victims of "Victimless Crime": How the FCPA's Statutory Ambiguity, Coupled with Strict Liability, Hurts Businesses and Discourages Compliance, 54 B.C. L. Rev. 393, 395-96 (2013) ("The 120-page Resource Guide provides little new information and most pages simply describe the FCPA statute, related substantive laws, and earlier decisions and opinions.") (citations, footnotes, and quotation marks omitted);
18. Mike Koehler, Grading the Foreign Corrupt Practices Act Guidance, White Collar Crime R eport, (Bloomberg, New York, N.Y.), Dec. 14, 2012, at 2, available at http://ssrn.com/abstract=2189072 ("The portions of the Guidance that can accurately be described as guidance represent little new information to those previously knowledgeable about the FCPA and its enforcement.").
19. Charles P. Wallace, The Pirates of Prague, Fortune Magazine, Dec. 23, 1996.
20. Peter Elkind, The Incredible Half-Billion-Dollar Azerbaijani Oil Swindle, Fortune Magazine, Mar. 6, 2000.
21. Louis Uchitelle, Three Indicted for Bribery in Oil Scheme in Azerbaijan, N.Y. Times, Oct. 7, 2005.
22. See Jury Charge, United States v. Frederic Bourke, Jr., 1:05-cr-00518-SAS-2 (S.D.N.Y.).
23. See generally Robert H. Mnookin and Lewis Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, 88 Yale L. J. 950 (1979) (developing a framework in which legal rules and decisions affect parties' bargaining outside the courtroom).
24. S. Rep. 111-176, at 111. This figure excludes the recent $1 million payment to whistleblowers in SEC v. Pequot Capital Mgmt., Inc., et al., SEC Litigation Release No. 21601 (July 23, 2010).
25. Edward Wyatt, For Whistle-Blowers, Expanded Incentives, N.Y. Times, Nov. 15, 2010, at B1.
26. Sec. and E xch. Comm'n, Annual Report on the Dodd-Frank Whistleblower Program, Fiscal Year 2012 10 (Nov. 2012), available at http://www.sec.gov/about/ offices/owb/annual-report-2012.pdf. The SEC made its first award to a whistleblower under the new program on August 21, 2012, providing 30% of its collected sanctions; the individual has currently received nearly $50,000 (see above figure), although the amount will increase if the SEC can collect more of the $1 million in sanctions levied against the company (it has currently collected only $150,000).
27. Eric Lichtblau & Carter Dougherty, Siemens to Pay $1.34 Billion in Fines, N.Y. Times, Dec. 15, 2008.
28. SEC Charges Siemens AG for Engaging in Worldwide Bribery, SEC Litigation Release No. 2008-294 (Dec. 15, 2008) (Siemens paid $350 million in disgorgement to settle the SEC's charges, and a $450 million fine to the U.S. Department of Justice to settle criminal charges, that it made payments worth at least $1.4 billion to foreign officials to obtain or retain business, and that it intentionally violated the FCPA's internal controls and books and records provisions).
29. Joe Palazzolo, After Dodd-Frank, SEC Getting at Least One FCPA Tip a Day, Wall. S t. J., Sept. 30, 2010, http://blogs.wsj.com/corruption-currents/2010/ 09/30/after-doddfrank-sec-getting-at-least-one-fcpa-tip-a-day/.
30. Sec. and E xch. Comm'n, Annual Report on the Dodd-Frank Whistleblower Program, Fiscal Year 2012 4, Appendix A (Nov. 2010), available at http://www.sec.gov/about/offices/owb/annual-report-2012.pdf. Although (as of the end of 2012) the SEC has not yet compensated a whistleblower for an FCPA claim, there is precedent for a federal agency following through on its promises and delivering an enormous financial reward, namely, the IRS' $104 million payment to Bradley Birkenfeld.
31. See Richard L. Cassin, Birkenfeld's Bounty Will Boost FCPA Enforcement, The F CPA Blog (Sept. 11, 2012 at 4:36pm), http://www.fcpablog.com/blog/2012/9/ 11/birkenfelds-bounty-will-boost-fcpaenforcement.html.
32. See Richard L. Cassin, Six Lessons from the SEC's First Whistleblower Reward, The FCPA Blog (Sept. 5, 2012), http://www.fcpablog.com/blog/2012/9/5/ six-lessons-fromthe-secs-first-whistleblower-reward.html (observing that the first whistleblower to be compensated in 2012 "asked to remain anonymous and the SEC respected the request").
33. See, e.g., Patricia Brown Holmes & Valarie Hays, Corporate Officials Beware: Knowledge May No Longer Be Required for FCPA Liability, Bloomberg Law Reports: Risk & Compliance, Vol. 3 No. 4, Apr. 2010, available at http://www.schiffhardin.com/binary/hays-holmes-bloomberg-april2010.pdf.
34. See e.g., Donohue v. Consol. Operating Prod. Corp., 982 F.2d 1130 (7th Cir. 1992);
35. Metge v. Baehler, 762 F.2d 621 (8th Cir. 1985);
36. Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir. 2000);
37. Adams v. Kinder-Morgan, Inc., 340 F.3d 1083 (10th Cir. 2003);
38. Cf. Laperriere v. Vesta Ins. Group, Inc., 526 F.3d 715 (11th Cir. 2008) (reserving judgment as to whether the power to control general affairs means abstract power or the actual exercise of power).
39. See, e.g., Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir. 1998);
40. Rochez Bros. v. Rhoades, 527 F.2d 880 (3d Cir. 1975);
41. Carpenter v. Harris, Upham & Co., 594 F.2d 388 (4th Cir. 1979).
42. But see Moerman v. Zipco, Inc., 302 F. Supp. 439, 447 (E.D.N.Y. 1969), aff'd per curiam, 422 F.2d 871 (2d Cir. 1970) ("The conclusion is inescapable that persons who act as directors are in control of the corporation.").
43. See Burgess v. Premier Corp., 727 F.2d 826, 832 (9th Cir. 1984).
44. NSP paid a civil penalty of $600,000, while Faggioli and Huff each paid a civil penalty of $25,000. SEC Charges Nature's Sunshine Products, Inc. with Making Illegal Foreign Payments, SEC Litigation Release No. 21162, July 31, 2009.
45. Michael McGovern & Steven Goldschmidt, Snaring 'Control Person' Executives in FCPA Liability, N.Y. L. J., Feb. 8, 2010.
46. See generally TRACE Global Enforcement Report 2010, available at https://secure.traceinternational.org/documents/ TRACEGlobalEnforcementReport2010.pdf.
47. For a more in-depth discussion of the specific features of effective compliance programs, see Decoding FCPA Enforcement: The U.S. Government Issues Comprehensive Guidance on the Foreign Corrupt Practices Act (Gibson Dunn, Los Angeles, Cal.), Nov. 19, 2012, 16-20, available at http://www.gibsondunn.com/ publications/Documents/DecodingFCPAEnforcement-USGovernment- ComprehensiveGuidance.pdf (describing nine elements relevant to a program's effectiveness).
48. David Glovin, Bourke Gets One Year in Prison in Azerbaijan Bribery Case, Bloomberg News, Nov. 11, 2009.