Show notes for This Week in FCPA-Episode 15, for the week ending July 29, 2016 include:

1) Miller & Chevalier — FCPA Summer Review 2016 – 7-28-16
http://www.millerchevalier.com/Publications/MillerChevalierPublications?find=176112;

2) NY Law Journal — Does the New FCPA Leniency Program Threaten Due Process? By Nicholas M. De Feis and Philip C. Patterson from De Feis O’Connell & Rose
http://www.newyorklawjournal.com/id=1202763823657/Does-the-New-FCPA-Leniency-Program-Threaten-Due-Process?slreturn=20160629065418;

3) Incentivising companies to self-report: Different approaches in different jurisdictions, but the outcomes are broadly the same — Georgina Jones, Laura Manson and David McCluskey at Taylor Wessing
http://www.lexology.com/library/detail.aspx?g=ada2fc97-57d5-407b-9238-2ee468e7b10c;

4) A video blog from Paul Weiss where A-C & FCPA Pilot Chairs Alex Oh & Farrah Berse look at FCPA Pilot Program – New Guidance for Self-Reporting
https://www.paulweiss.com/practices/litigation/anti-corruption-fcpa/videos/fcpa-pilot-program-new-guidance-for-self-reporting.aspx?id=22271;

5) From the FCPA Blog – Richard Bistrong interviews Frank Brown, from The Center for International Private Enterprise – (CIPE). Frank speaks about going from Newsweek Bureau Chief in Moscow to now fighting A-C supply chain risks;

6) Mike Volkov, furthers a conversation he had with me earlier in the week about The Power of a Justice Department Declnation
http://www.lexology.com/library/detail.aspx?g=e07d7b77-5edf-4a7e-8878-b4fc2985b3d6;

7) And once more in the breech where myself and Roy Snell go Unfair and Unbalanced on the recent US Open and handling of Dustin Johnson being assessed a 1 stroke penalty
http://fcpacompliancereport.com/2016/07/unfair-unbalanced-episode-9-us-open-edition/;

8) Reports on the LATAM FCPA enforcement action. The can be found at http://wp.me/p6DnMo-2FL and http://wp.me/p6DnMo-2FH; and

9) Report on the Petrobras shareholder lawsuit, available at http://wp.me/p6DnMo-2FZ.

Shareholder LawsuitYesterday I wrote about what may well be the next great bribery and corruption scandal across the globe involving the Venezuelan state oil company Petroleos de Venezuela SA (PDVSA). However, the current largest corruption scandal, involving the Brazilian energy behemoth Petrobras, is still alive and kicking. Just as PDVSA may involve corruption at the highest reaches of the company, it may well turn out to have been the same at Petrobras, with executives and even directors using the company as a cash withdrawal machine for their personal benefit.

The investor class has taken it on the chin in recent shareholder actions for companies embroiled in claims based upon the Foreign Corrupt Practices Act (FCPA). Recently shareholders from both Wynn Resorts and Wal-Mart had their appeals from the trial courts’ dismissal of their underlying lawsuits denied by two separate Courts of Appeal. Generally speaking, it is difficult to reach a Board of Directors because rarely does evidence of bribery and corruption reach the Board level. Indeed, as the Wal-Mart plaintiffs found out, it is usually most difficult to even make sufficient allegations, which will pass procedural muster.

However, there is one upcoming shareholder case that may change these dynamics. It is the shareholder action in the federal court for the Southern District of New York against Petrobras and is being heard by Judge Jed Rakoff. Trial is set for the case on September 19, 2016 and is expected to last for up to eight weeks. According to an article in Forbes.com by Kenneth Rapoza, entitled “Brazil’s Petrobras Trial Date Set, As U.S. Pension Funds Seek ‘Tens of Billions’ In Losses”, the plaintiffs claim “that Petrobras also violated its own Code of Ethics, as its employees and executives were routinely accepting bribes from certain construction companies.” The Complaint goes on to allege that “Petrobras’ own internal controls over financial reporting were ineffective, according to Pomerantz’s [lead plaintiffs’ counsel] claim, and as a result Petrobras’ public statements were materially false and misleading “at all relevant times.””

Things are so bad for Petrobras that the plaintiffs have filed a Motion of Partial Summary Judgment (MSJ) on liability before Judge Rakoff, alleging that there is no dispute the company was involved in bribery and corruption. Joe Leahy, writing in a Financial Times (FT) article entitled “Scandal-hit Petrobras reels as corruption claims persist”, quoted the plaintiffs’ counsel Jeremy Lieberman that “The only issue to go to trial would be the level of damages.” In its MSJ, the plaintiffs’ said, “Petrobras raised tens of billions of dollars from investors during the class period under the pretence that it would be used to improve the company, but instead knowingly doled out the money to insiders and politicians.”

Typically the problem is that, as in the Wynn Resorts matter, there is no evidence that the Board was involved in bribery or corruption or as in the Wal-Mart case, the plaintiffs are denied discovery that would even allow them to make the requisite allegations of illegal actions. However, in the Petrobras case, Brazilian prosecutors have done most of the spadework needed to get the plaintiffs’ past the defense procedural motions to dismiss and at trail before a judge and jury.

Leahy reported that Brazilian prosecutors have alleged that corrupt former Petrobras Directors were recipients of bribes and directed monies away from the company for illegal purposes. He wrote, “Prosecutors claim Paulo Ferreira, a former treasurer of Brazil’s erstwhile ruling Workers’ party, took money originally destined for a research and development centre for Petrobras’s ultra-deepwater oilfields and used it to pay a samba queen a monthly stipend.” Spelling it out in greater detail, in a Brazilian filing outlining Ferreira’s arrest, “At the request of Paulo Ferreira, there were made diverse payments to the non-governmental organisation Sociedade Recreativa e Beneficente Estado Maior da Restinga, a samba school, and people linked to it, such as Viviane Rodrigues da Silva, the battery queen”.

These allegations by Brazilian prosecutors lend weight to the plaintiffs’ claims that “Petrobras raised tens of billions of dollars from investors during the class period under the pretence that it would be used to improve the company, but instead knowingly doled out the money to insiders and politicians.” If these actions were engaged in at the corporate Director or Board level, it could certainly portend a different result than in Wal-Mart or the Wynn Resorts matters.

Reuters had previously reported that, in a huge victory for the plaintiffs, Judge Rakoff had granted class action status for the litigation. In an article entitled “Brazil’s Petrobras must face U.S. group lawsuits over corruption: judge”, Jonathan Stempel and Nate Raymond reported that the Judge certified two classes of plaintiffs, saying their claims are similar enough to be pursued as groups. One class bought various Petrobras securities from January 2010 to July 2015 and will be led by Universities Superannuation Scheme of Liverpool, England. The other bought debt securities from offerings in 2013 and 2014, and will be led by North Carolina’s treasurer and the Employees’ Retirement System of Hawaii. In his written decision, Judge Rakoff said, “Petrobras was a massive company with investors around the globe. Notwithstanding Petrobras’s size and its numerous and far-flung investors, the interests of the class members are aligned and the same alleged misconduct underlies their claims.”

Obviously the most straight-forward difference between the Petrobras matter and the Wynn Resorts and Wal-Mart cases is that the latter two were not alleged to have taken bribes but were sued for their failure to stop alleged bribery and corruption. At Petrobras, there is no disputing that senior executives received bribe payments to award contracts. Petrobras has tried to claim that it is a victim in the entire corruption scandal. The FT piece cited to Petrobras Chief Executive Pedro Parente, who said “last month the company was a victim of fraud, estimated to have cost it about $2.5bn in losses directly related to corruption.” However if the corruption reaches above the senior executive level and up to the Director level, it may be the company was a fraud closer akin to Enron and WorldCom.

Leahy ended his piece with the following, “In the meantime, with the Petrobras investigations continuing, investors will be left wondering what new surprises they might uncover about what past directors were doing with the company’s money.” Indeed.

 

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, 2016

Red FlagsAs the Petrobras corruption scandal seems to be going strong, we turn our attention to what may be the most corrupt of all the national energy companies, the Venezuelan state oil company Petroleos de Venezuela SA (PDVSA). Business Insider ran a Reuters article, entitled “Red Flags everywhere: A sweetheart deal in Venezuela has gone too far”, by Alexandra Ulmer and Girish Gupta.

The crux of the piece was that a $4.5bn contract to develop over 600 producing wells was awarded to a little known Colombian trucking and trading firm which had no experience in oil and gas development. The company was called Trenaco and was headquartered in Switzerland (no doubt for tax purposes). Even more amazingly Trenaco was so certain that it would win the open, public bidding process that it began hiring staff and purchasing the necessary equipment some six months before the contract was even publicly tendered.

However, the clearly corrupt deal was squelched “In an unprecedented rebellion” by the foreign services companies, such as Halliburton, Weatherford and Schlumberger, “which would have had to work with Trenaco as PDVSA’s joint venture partners” and who “protested that the company was vastly underqualified and undercapitalized”. The same companies also “feared that getting involved in a massive public project anchored by a small and obscure contractor would expose themselves to regulatory scrutiny back home.” There were red flags everywhere, “said one foreign joint venture partner in Caracas.”

The article noted what has been long known in the international energy industry, that PDVSA is one of the most corrupt national energy companies around, “Reuters reviewed company documents and interviewed dozens of foreign and local oil executives, current and former PDVSA employees, union leaders, lawyers and politicians. The sources described a culture of corruption that ranges from the trivial – giving a gift to a secretary to land a meeting with a top PDVSA executive – to the systemic, such as funneling kickbacks in return for large contracts.”

This report is yet one more example of the Foreign Corrupt Practices Act (FCPA) issues that have arisen for companies doing business with PDVSA. In October 2015 both the Wall Street Journal (WSJ) and New York Times (NYT) ran articles that focused on the US government’s investigation into the corrupt goings on of PDVSA and its senior management. The WSJ article, by José De Córdoba and Juan Forero, was entitled “U.S. Investigates Venezuelan Oil Giant”, and the NYT article, by William Neuman, was entitled “U.S. Graft Inquiries Turn to Venezuelan Oil Industry”. Interestingly, the articles focused on different aspects of the investigation but both articles together send a very strong message to the Chief Compliance Officer (CCO) or compliance practitioner who might have business with PDVSA or even with the Venezuelan government or other state owned enterprise in the country.

The WSJ article focused on the conduct of Rafael Ramírez, the former President of PDVSA, and that of his cousin Diego Salazar in facilitating a worldwide and decade long scheme to have companies do business with PDVSA. Ramírez is now the Venezuelan ambassador to the United Nations (UN) and did not comment on the article.

The WSJ article reported that “directors of one of Spain’s leading construction companies were delighted to land an appointment with Rafael Ramírez”, but when they arrived they were met by Salazar. The article stated, “Mr. Salazar got right to the point, they say: The Spaniards would have to pay at least $150 million in kickbacks to be in the running. “If not,” Mr. Salazar told the businessmen, according to one person, “you should return to the airport.”” This and other conduct led the US government to launch “a series of wide-ranging investigations into whether Venezuela’s leaders used PDVSA to loot billions of dollars from the country through kickbacks and other schemes, say people familiar with the matter. The probes, carried out by federal law enforcement in multiple jurisdictions around the U.S., are also attempting to determine whether PDVSA and its foreign bank accounts were used for other illegal purposes, including black-market currency schemes and laundering drug money, these people say.”

To demonstrate how corrupt PDVSA is alleged to have become and how pervasively the bribery was instilled in the DNA of the company, the article said, “A former official from an Asian oil services company says he routinely paid hundreds of dollars in cash in recent years or provided gifts like watches just to secure meetings with midlevel PDVSA officials.” When you have to give a Rolex as a gratuity just to get a meeting, you are dealing with one corrupt institution. Corruption in the company was so systemic that “The result was that up to $3 billion of the $15 billion in services and equipment that PDVSA contracted for annually represented overcharges that flowed back to top company executives, government officials and businessmen as kickbacks, say people knowledgeable about the alleged crimes.”

The NYT article focused on the US government investigation of PDVSA as part of a worldwide investigation into illegal drug trade and money laundering. The article reported that the investigation gained speed in March when US Treasury Department officials accused a bank in the small European country of Andorra as a conduit for the money laundering schemes of PDVSA as well as organized crime groups. Government sources reported that more than $4bn in corrupt funds passed through the Andorran bank as a part of the bribery schemes. The article also said, “the money launderers used shell companies, fake contracts, mischaracterized loans and over-invoiced imports and exports to camouflage their actions.”

Rather amazingly not only did some of this money have a US nexus but the NYT article reported on a US based hedge fund which “paid at least $30MM in bribes to PDVSA officials to steer at least $100MM in pension money into his hedge fund and to give him access to profitable bond and currency transactions from 2006 to 2010.” Moreover, there is another direct US connection to PDVSA. It owns the US entity Citgo. Neither article mentioned the US Company and there is no evidence at this point that Citgo is under investigation. However this US situs for Citgo could well provide an additional basis for US based conduct.

Of course there was also the indictments and guilty pleas here in Houston of two individuals for FCPA violations around their corrupt dealings with PDVSA. According the a Department of Justice (DOJ) Press Release, in March 2016 Abraham Jose Shiera Bastidas (Shiera) pled guilty to violating the FCPA and in June 2016 Roberto Enrique Rincon Fernandez (Rincon) pled guilty to one count of conspiracy to violate the FCPA. Both men “worked together to submit bids to provide equipment and services to PDVSA through their various companies. Rincon admitted that beginning in 2009, he [Rincon] and Shiera agreed to pay bribes and other things of value to PDVSA purchasing analysts to ensure that his and Shiera’s companies were placed on PDVSA bidding panels, which enabled the companies to win lucrative energy contracts with PDVSA. Rincon also admitted to making bribe payments to other PDVSA officials in order to ensure that his companies were placed on PDVSA-approved vendor lists and given payment priority so that they would get paid ahead of other PDVSA vendors with outstanding invoices.” The Press Release also stated, “Rincon is the sixth individual to plead guilty as part of a larger, ongoing investigation by the U.S. government into bribery at PDVSA.”

If you are the CCO of a US company that did business with PDVSA or Citgo over the past 10 years or so; now might be a very propitious time to review all of your business dealings with those entities.

 

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, 2016