Thursday, July 19, 2007

Corrupt Practices: Corporate Risk on an International Scale

In prior posts (most recently here), I have noted the threat of Foreign Corrupt Practices Act (FCPA) investigations as a growing area of corporate risk. Several recent reports substantiate this concern and help explain why this area of risk continues to grow, and also highlight some of the barriers to antibribery enforcement.

A June 26, 2007 memorandum prepared by the Shearman & Sterling law firm entitled “Recent Trends and Patterns in FCPA Enforcement”(here) reports that “there has been a dramatic increase in new investigations” and that “both the DOJ and the SEC have become increasingly aggressive.” According to the memorandum, there are now 55 open FCPA investigations (at least that have been publicly reported by the companies under investigation).

Part of the reason for the increased investigative activity is the increase in governmental resources devoted to foreign bribery investigations. According to a July 16, 2007 Law.com article entitled “Why Are More Companies Self-Reporting Overseas Bribes?” (here), the SEC has “added about 700 staffers to help enforce all compliance laws,” and the DOJ and the FBI have both added substantial staff focused exclusively on FCPA investigations.

The more important factor for the growth of FCPA cases may potential corporate defendants desire for leniency under federal sentencing guidelines. A corporation’s cooperation can produce substantial benefits; the Law.com article linked above describes in detail the substantial efforts to cooperate that Baker Hughes recently undertook in connection with its ongoing FCPA investigation (about which see my prior post, here), as a result of which Baker Hughes apparently avoided paying “an additional $27 million in fines.”

These kinds of incentives have motivated companies to come forward and self-report (as I have previously noted, here). According to the Shearman & Sterling memo, during the period 2005 to 2007, some 23 of 26 new FCPA cases were self-reported. The memo notes that these numbers “underscore the trend toward companies taking on the onus of reporting or accountability and may indicate that companies now perceive the act of self-reporting to be favorable to the ultimate outcome of the investigation.” An interesting additional statistic the memo notes is that many of the voluntary disclosures came after violations were unearthed in the due diligence process for a merger or acquisition. (The memo cites the recent ABB, InVision and Titan Corporation investigations as examples.) As the M & A pace continues, there may be more of these M & A related self-disclosures.

The international scope of the crackdown on corrupt practices is documented on the 2007 Progress Report (here) of Transparency International (here) on enforcement of the Convention on Combating Bribery of Foreign Public Officials (here) of the Organization for Economic Co-Operation and Development (OECD) (here). The OECD Convention, first established in 1997, is a compact of now 37 countries (including the United States) to adopt and enforce antibribery laws. The Report shows that while there has been some progress in the battle against bribery and corruption, “there has been little or no enforcement in twenty countries, demonstrating significant lack of political commitment by over half the signatories.”

The Report specifically cites the UK’s termination of its investigation of bribery allegations against BAE Systems on the Al Yamamah arms project in Saudi Arabia (see my prior post here) as a “serious threat to the convention,” and states that the UK’s “national security concern” explanation for terminating the investigation “opens a dangerous loophole that other parties could assert when investigations may offend powerful officials in important countries.” Because of these concerns, the Report notes that the Convention may be “at a crossroads.”

Despite these concerns, the Report does also note that during the prior year foreign bribery investigations were brought in twenty countries out of then thirty-four active signatory countries, as opposed to only seventeen out of thirty-one countries the preceding year. In addition, during the prior year there were bribery prosecutions bourght in sixteen of the thirty-four then-active signatories.

These numbers, as well as the growing number of Convention signatories, suggest that notwithstanding troublesome setbacks and lapses in political will, enforcement of antibribery laws remains an important factor in the global business marketplace. As I have noted previously (here), this exposure represents a substantial area of D & O risk, particularly with respect to the threat of follow on civil litigation based on antibribery investigations. These recent reports suggest that this could become even more significant in the months ahead.

Special thanks to a loyal reader for the link the Law.com article. Hat tip to the SOX First blog (here) for the link to the Transparency International report.

A Backdating Case Dismissal: In an order dated July 16, 2007 (here), in the consolidated options backdating related Ditech Networks derivative litigation, Judge Jeremy Fogel of the Northern District of California granted (with leave to amend) the individual defendants’ motion to dismiss based on the insufficiency of the plaintiffs’ pleading. The Opinion states:
As currently pled, the Complaint alleges fraudulent conduct by labeling various grants as backdated and describing them as having been made at low points within certain defined periods….While counsel for Plaintiffs represented at oral argument that the statistical likelihood of the options having been granted properly is very low, that theory is not alleged in the Complaint or in a document that the Court may consider on this motion. Even assuming that the factual allegations of the Complaint are true, many explanations other than options backdating exist for the coincidence of the grants and a low share price. The following factual detail likely would strengthen the Complaint: the degree to which the options were granted at the discretion of the compensation committee or the board, versus at fixed, preestablished times; the actual grant dates of the options and the appropriate price of the options; the date that the options were exercised; whether required performance goals were met before the options were granted; the presence or absence of other major corporate events, such as an acquisition, at the time of the grants; and the results of any request by Plaintiff for information.
Because of the inadequacy of the plaintiff’s allegations, Judge Fogel noted that it would be “premature” to address federal statute of limitations and Delaware state law demand futility issues. (It should be noted that the Ditech opinion is designated as “not for publication” and “may not be cited.”)

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for the link to the Ditech Networks opinion.

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