Greasy Palms

By Thomas Brom
     
So it's come to this. In June, the Republic of Iraq sued some 50 companies--from Chevron to Boston Scientific--for kickbacks allegedly paid to Saddam Hussein's representatives to facilitate their participation in the U.N.'s defunct Oil-for-Food program. Calling that program "the largest financial fraud in human history," the parens patriae action claims violations of the Foreign Corrupt Practices Act (FCPA) and seeks more than $10 billion in damages for the alleged victims--the people of Iraq.
      Curiously enough, there is no private right of action under the statute. But that hasn't stopped foreign governments and plaintiffs attorneys from filing "tag along" civil litigation once an enforcement action becomes public. Since Congress enacted the FCPA (15 U.S.C. §§ 78dd-1-78ff) in 1977, the number of FCPA-related suits has grown steadily, fed by a jump in government investigations and the intensity of competition for global business.
      In 2007, for instance, the Department of Justice (DOJ) and the SEC filed 38 enforcement actions--more than double the number of cases filed the previous year. And the pace hasn't slowed. "More cases have been filed in the first half of 2008 than in the first half of 2007," says Christopher J. Steskal, a partner in the San Francisco office of Fenwick & West and chair of the firm's White Collar/Regulatory Group.
      Steskal says the FCPA originally was intended to curtail bribery by companies hoping to gain access to Middle Eastern oil. "Now," he says, "the statute is applied somewhat woodenly to any sovereign entity." After decades of going it alone, the United States in 1997 convinced European nations to pass parallel anti-bribery legislation.
      Collateral FCPA litigation received a huge boost from provisions of the Sarbanes-Oxley Act (SOX) of 2002. SOX-mandated internal controls, certification of financials, and auditor oversight increased the exposure of public companies to violations under the FCPA's accounting and internal-control requirements, the so-called books and records provisions. Violations of those requirements can show up in securities class actions as allegations that shareholders were defrauded, or as derivative actions brought by the company against individuals ac-cused of harming it.
      "If you are a public company, the Number One concern is still the regulators--the DOJ and the SEC, plus the auditors," says Steskal. "Still, follow-on civil litigation in FCPA-related investigations is increasingly common."
      For example, says Richard Grime, a partner in the Washington, D.C., office of O'Melveny & Myers, "plaintiffs might sue on the announcement of a government investigation, and then file an amended complaint incorporating details released in the settlement agreement. Not all civil litigation falls on dusty ground."
      In the past year Willbros Group, an oil-services company, settled a class action for $10.5 million after restating accounting results and increasing reserves to cover potential FCPA-related penalties. Immuncor Inc. reached a $2.5 million settlement with plaintiffs who claimed the company had misled investors about business practices and internal controls. And in June FARO Technologies, after agreeing to pay nearly $3 million in fines to the DOJ and SEC for FCPA violations by its Chinese subsidiary, gave preliminary approval to a $6.875 million settlement of a section 10(b) fraud suit by purchasers of FARO stock.
      But collateral FCPA civil litigation is no slam dunk. "A private plaintiff will have a very difficult time proving a fiduciary breach or a fraud by the mere fact that books and records were in error without a more detailed showing of detrimental reliance or harm," says David M. Lisi, partner in the East Palo Alto office of Howrey.
      Steskal adds, "Typically, companies settle investigations without admitting wrongdoing. They may even prepare a factual proffer to the government with an eye toward what their civil liability might be."
      "The worst thing is to be shut down or stayed by the DOJ," says plaintiffs attorney Patrick J. Coughlin, chief trial counsel at Coughlin Stoia Geller Rudman & Robbins in San Diego. "Once a criminal investigation takes over, you can't do much. And if you wait to file, it's over."
      In February plaintiffs lawyers actually struck first. A legal team that included attorneys at Akin Gump Strauss Hauer & Feld filed a RICO suit against Alcoa on behalf of the government-owned aluminum company of Bahrain. The complaint alleged a 15-year conspiracy involving kickbacks and overcharges, and sought $1 billion in damages. Three weeks later the DOJ and SEC filed a motion to stay, accepted by the parties, pending conclusion of the agencies' investigations.
      With so few FCPA-related cases reaching trial, very little case law exists for guidance. That may change this year in California. In June the Ninth Circuit U.S. Court of Appeals heard oral arguments in the appeal of a section 10(b) fraud suit dismissed for failure to properly allege a strong inference of scienter. The suit was brought against executives of InVision Technologies, a manufacturer of airport security equipment, who allegedly knew of unlawful bribes paid to officials in China, Thailand, and the Philippines but failed to disclose the FCPA violations before the company's acquisition in 2004 by General Electric. (In re InVision Techs. Inc. Sec. Litig., 2006 U.S. Dist LEXIS 76458 (N.D. Cal. 2006) appeal docketed, No. 06-16899 (9th Cir.).)
      Two aspects of the increase in FCPA investigations are troubling for defense counsel: The shift toward enforcement actions against high-tech companies, and the hazards of doing business in countries where bribery is common.
      Joe Zier, West Coast leader of FCPA investigations for Deloitte Financial Advisory Services, says tech companies in the United States are at particular risk. "They are under constant pressure to reduce costs, they have a bare minimum of internal controls, and they need to act fast," Zier says. "Plus, their appetite for risk is extraordinary. It's a recipe for disaster."
      But Steskal estimates that roughly half of his Silicon Valley clients have never even heard of the FCPA. "There's still a lot of education to be done," he says.
      Now even Congress seems to be paying attention to the FCPA. At least two anti-bribery bills are in committee: HR 3405 would require persons to certify that they have not violated the FCPA before being awarded government contracts. And, just to level the playing field, HR 6188 would amend the FCPA to provide plaintiffs a limited private right of action--so long as the defendants are "foreign concerns."
      The Republic of Iraq should make sure it has clean hands.
     
     

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