FCPA Developments: The Threat Continues to Grow
The first of these two developments is the agreement of Baker Hughes and one of its subsidiaries to settle criminal and civil FCPA charges. News stories about the Baker Hughes agreement can be found here and here. The $44 million in fines and penalties under the agreement represent the largest amounts of combined fines and penalties ever imposed in a FCPA case. Baker Hughes’ subsidiary pled guilty to criminal charges and agreed to pay a $10 million criminal fine in connection with payments of $4.1 million in bribes paid to a consultant in order to secure and oil services contract with Kazakhoil, the state oil company of Kazakhstan, in the Karachaganak oil field. The contract generated more than $219 million in gross revenues from 2001 to 2006. A copy of the April 26, 2007 Department of Justice press release regarding the criminal matter can be found here.
Baker Hughes itself simultaneously agreed to pay $23 million in disgorgement and prejudgment interest and to pay a civil penalty of $11 million for violating a 2001 SEC cease-and-desist order in connection with a prior FCPA matter. The fines and penalties were assessed against the parent company in company in connection with the Kazakhstan bribe, as well as other charges that the company violated the books and records and internal control provisions of the FCPA in Nigeria, Angola, Indonesia, Russia and Uzbekistan. The SEC’s April 26, 2007 press release regarding the Baker Hughes matter may be found here, and the SEC’s complaint is here. An April 27, 2007 CFO.com article describing the Baker Hughes FCPA settlement may be found here.
The second of the two recent developments relates to the proliferation of publicity and action surrounding the burgeoning Siemens corruption investigation. Not only are the company’s top two executives leaving (refer here), but the company has warned that it expects a “significant increase” in the number of possible bribes identified in an internal investigation. This prospective increase is on top of the previously disclosed $544 million in suspected bribes. A prior D & O Diary post about the Siemens bribery investigation can be found here. In its April 26, 2007 filing on SEC Form 6-K (here), Siemens also reported that the SEC had “advised” the company that the SEC had “converted its informal inquiry into these matters into a formal investigation.” The Company previously disclosed that the U.S. Department of Justice is conducting an inquiry of possible criminal violations.
The company also noted in its 6-K filing that it will be obliged to make a number of tax asset and liabilities adjustments in future reporting periods, which could be “material.” The company also said that it “cannot exclude the possibility that criminal or civil sanctions may be brought,” as a result of which its “operating activities may also be negatively affected.” The company said that to date “no charges or provisions for any such penalties have been accrued as management does not yet have enough information to reasonably estimate such amounts.” The company did say that in its most recent fiscal quarter, it had spend 63 million euros (roughly $83 million) in connection with the investigation.
According to news reports (here), Standard and Poor’s has put Siemens on a watch for a possible downgrade.
Several things about these two cases reinforce my view that FCPA investigations will become an even greater concern in the months ahead. First, the sheer scope and magnitude of the concerns, both at Siemens and at Baker Hughes, suggest a larger problem that inevitably will attract increased prosecutorial interest and involve more companies. The enormous unlikelihood that these two companies alone were the only ones involved in this type and scale of activity will encourage investigators and regulators to search for similar activities elsewhere.
Second, a significant factor in the Baker Hughes subsidiary’s plea agreement, which included a deferred prosecution agreement and a three-year probationary period, was the Company’s self-reporting of the violation. The Department of Justice’s press release states that the agreement “reflects, in large part, the actions of Baker Hughes in voluntarily disclosing this matter.” The unmistakable message is that companies have a substantial incentive to self-report FCPA violations, as I have previously noted (here). The increased internal review compelled by the Sarbanes Oxley Act, together with the incentive to self-report, increases the likelihood of further FCPA investigations and enforcement actions. As a recent memo from the Gibson, Dunn & Crutcher law firm notes (here), more than three quarters of the FCPA enforcement actions in the last two years arose as a result of voluntary disclosures.
Third, Siemens’ 6-K discloses that in February 2007 it was sued as a nominal defendant in a New York state court shareholders derivative complaint “seeking various forms of relief relating to the allegations of corruption and related violations.” The complaint also names “certain current and former members of the Company’s Managing and Supervisory Boards.” As I have previously noted (here), the D & O risk arising from FCPA enforcement actions comes from this type of follow-on civil action; the FCPA fines and penalties themselves would not be covered under the typical D & O policy, but the threat of follow-on civil action creates substantial D & O risk. UPDATE: On May 4, 2007, a shareholders derivative suit was filed against Baker Hughes (as nominal defendant) and certain of its present and former directors and officers, alleging breach of fiduciary duties in connection with the FCPA violations described above.
Finally, the unprecedented level of international cooperation involved in the Siemens investigation further increases the likelihood that the various national authorities will provide information across borders that could support antibribery enforcement actions here and overseas.
As the SEC Actions blog noted (here) in its commentary on the Baker Hughes FCPA enforcement case, “it is clear that the number of FCPA cases being brought by the SEC and the DOJ are on the rise. This suggests prudent companies that do business abroad and their directors and officers carefully review their compliance systems in this area to avoid difficulties rather than later at the insistence of the SEC or the DOJ.” In any event, FCPA compliance undoubtedly will become an area of heightened scrutiny for D & O underwriters.
Internal Affairs Doctrine: The shareholders derivative complaint filed against Siemens could face substantial hurdles in the form of the “internal affairs doctrine.” Under New York legal principles that only one state should have the authority to regulate a corporation’s internal affairs, New York courts will refuse to allow actions to proceed against corporations from other jurisdictions if the shareholders have sufficient avenues to address management malfeasance under the laws of the corporation’s domicile.
A March 12, 2007 New York ruling where the court applied these principles to dismiss a shareholders derivative complaint that had been filed against directors and officers of ABN Amro Holdings NV may be found here. An interesting discussion and analysis of the ABN Amro case may be found on the With Vigour and Zeal blog, here.
An interesting article about the possible applicability of the internal affairs doctrine to the BP Alaska shareholders' derivative action, written by Francis Kean of the Barlow Lyde & Gilbert law firm, may be found here. Special thanks to Francis for providing a copy of this article.