Take Me Out to the (FCPA) Ballgame

It is September and the pennant races are taking hold. The Yankees and Red Sox just completed a 3 game series with great baseball; dramatic home runs, retaliatory beanings and the inevitable scuffles. So the National Pastime is rounding into its most enjoyable time of the year. However, for shear entertainment this year nothing can beat the Herculean struggle that is the battle between Major League Baseball (MLB) and the Los Angeles Dodgers.

Let’s briefly recap, in April MLB took control of the Dodgers and assumed day-to-day operations of the club, from owner Frank McCourt. In June McCourt countered by placing the Dodgers in bankruptcy. There have been various legal maneuverings and machinations typical to bankruptcy courts which are better suited to the E Entertainment network than ESPN. But something occurred yesterday which would even interest the Foreign Corrupt Practices Act (FCPA) practitioner.

In a September 1 article, in the Los Angeles Times, Bill Shaikin reported that a group headed by Bill Burke offered to purchase the Dodgers for a MLB record of $1.2bn, all in cash. The interesting part of this, from the FCPA perspective,  is that some unstated portion of the funding was by Chinese investors, who were only said to be “certain state-owned investment institutions of the People’s Republic of China”. Does that sound like a government owned Sovereign Wealth Fund (SWF) to you? Shaikin’s article did not report on how much of the $1.2bn bid was funded by this governmental entity as he reported that in addition to the SWF money, there were other ‘unidentified American investors.” So what are the consequences if over 50% of the “all in cash” bid comes from “certain state-owned investment institutions of the People’s Republic of China”?

As reported by the FCPA Professor in a blog entitled, “House Hearing-Overview and Observations”, former Attorney General Mike Mukasey’s testimony focused on this issue of ownership. According to Mukasey, “majority ownership is the most plausible threshold” for whether a state-owned or state-controlled enterprise constitutes a foreign government “instrumentality.” So if SWF puts up more than 50% of the money to purchase the Dodgers, are the Dodgers now an instrumentality of the Chinese government? If so are Dodger employees now “foreign officials” under the FCPA?

With that question in mind I wish a happy Labor Day Weekend to all. Watch some great baseball and ponder the following: Is that extra $5 you slip a Dodger employee for a better parking slot at Dodger Stadium next year a facilitation payment or is it a bribe paid to a foreign governmental official?

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

SEC Sweeps Sovereign Wealth?

Ed. Note-today we host a Guest Blog from our Colleague Mary Shaddock Jones, Assistant General Counsel and Director Of Compliance at Global Industries, Ltd.

I recently read an article by Cadwalader, Wickersham & Taft, LLP regarding the Security and Exchange Commission’s (“SEC”) delivery of letters of inquiry to at least 10 hedge funds, banks and private equity funds requesting information about the firms’ interactions with sovereign wealth funds.  From all accounts, the SEC may be looking into whether or not the financial institutions interaction with the sovereign wealth funds was conducted in accordance with the Foreign Corrupt Practices Act (“FCPA”).

By now, no one paying attention to the FCPA should be surprised by yet another industry wide investigation.  Beginning in 2007 we saw industry wide investigations in the oil and gas industry with both the U.N. Oil for Food Program in Iraq and the use of an international freight forwarding company in West Africa.  In addition, the Medical Device and Pharmaceutical industries have both been part of an industry wide sweep.  Every industry, every company, every individual and every board member that operates internationally must WAKE UP!

Since the Sarbanes-Oxley (“SOX”) Act became law on July 30, 2002, U.S. reporting companies have to investigate and self report any potential violations of U.S. law, including the FCPA.  On top of all of this the Dodd-Frank legislation has broad application across industries based on the authority granted to the Securities and Exchange Commission (SEC) and applies to all SEC registrants as well as entities regulated by the Commodities Futures Trading Commission (CFTC). The Dodd-Frank Act permits whistleblower awards of 10-30 percent of the amount of monetary sanctions in cases where they exceed $1 million. To receive the monetary award, the information provided must be “original,” essentially meaning that it must be obtained from the whistleblower’s independent knowledge or analysis only and not known to the Commission from any other source.  The information can apply to any type of securities law violation including insider trading, fraudulent financial reporting, and Foreign Corrupt Practices Act (FCPA) violations. It is well published that in the last several years FCPA fines and penalties have as large as hundreds of millions of dollars for an individual case.  10-30 percent of hundreds of millions is a lot of money!

What does all of this mean to every industry, every company and every individual and every board member of a public company that operates internationally?  Don’t wait for the SEC and/or DOJ to come knocking at your door with their broom.  Start at the top: review your risks, review your compliance program, and review your internal controls.  Do you have a clean house?   If not, spring cleaning should be on the top of your to-do list!

There was an excellent article written on February 8, 2011 by Elizabeth Ising and Amy Goodman from the law firm of Gibson Dunn & Crutcher, LLP in Boardmember.com reflecting the top 11 Legal and Regulatory Tips for Board of Directors in 2011.  Not surprising, the top three tips were: (1) Understand the company’s business and industry and be active in strategic planning; (2) Engage in regular risk oversight; and (3) Encourage robust compliance programs that have adequate resources.

During hard economic times, companies are looking to be as efficient in their operations as possible.  There is nothing wrong with this strategy- in fact it is admirable.  However, don’t lose sight of the fact that an FCPA investigation, much less any fine or penalty, will cost your company millions of dollars. I work in the energy industry and I have experienced what happens to companies during these sweeps. If you do not have a robust compliance policy and procedure in place and/or can not document it, you may be in for a long and costly ride. So put your money to good use and invest upfront in a solid compliance program before the dust storm enters your house.

Mary Shaddock Jones is Assistant General Counsel and Dir. Of Compliance at Global Industries, Ltd. Mary can be reached at maryj@globalind.com. The views and opinions expressed here are her own and not necessarily those of her employer.