John SaundersJohn Saunders died last week. He was a reporter at ESPN and the host of the Sunday talking heads show, the Sports Reporters. The tributes for Saunders came from far and wide. By all accounts, he was one of the most beloved on-air talents at the network. Saunders also brought something else to the table as he was a black man from Canada. His perspective on American society was drawn from this diverse background. He did not often choose to bring this perspective to his commentary but when he did it was compelling and powerful. His voice will be missed.

Last week witnessed the conclusion of the Key Energy, Inc. (Key Energy) Foreign Corrupt Practices Act (FCPA) enforcement action, which I will review over the next couple of blog posts. Today I want to consider the background facts and allegations. Tomorrow, I will review the lessons to be learned from this enforcement action.

The Key Energy matter concluded with the filing of a Cease and Desist Order (Order) in a Securities and Exchange Commission (SEC) administrative proceeding. Key Energy had previously announced it had received a declination to prosecute from the Department of Justice (DOJ) in an April, 8K filing, which read, “Key has been informed by the Department of Justice that the Department has closed its investigation and that it has decided to decline prosecution of the Company.” The Order reported that Key Energy agreed to profit disgorgement of $5,000,000.

These basic facts lead the compliance practitioner to several interesting lessons learned from the FCPA enforcement action which can be used to improve a compliance program as well as lessons in the steps to take if your company finds itself in a FCPA investigation. Additionally, the case has implications for other companies or indeed industries which now find themselves in an economic downturn such as the energy industry because while the amounts of profit Key Energy obtained through bribery and corruption were not insignificant, the Order noted, “On September 4, 2015, Key Energy announced that for 30 consecutive trading days the price for Key’s common shares was below the minimum $1.00 per share requirement for continued listing on the NYSE. Key Energy’s common shares have continued to trade below $1.00 since that time. Between December 2014 and October 2015, Moody’s downgraded Key Energy’s bonds three times and changed its outlook to “negative.””

The corruption was in the company’s Mexican subsidiary, which “consisted of Key Energy Services de Mexico S. de R.L. de C.V., and a service payroll company, Recursos Omega S. de R.L. de C.V., which is the legal employer of Key Energy’s employees in Mexico” and they collectively referred to as “Key Mexico” in the Order. Key Mexico made illegal payments to an “employee at Petróleos Mexicanos (“Pemex”), the Mexican state-owned oil company, to induce him to provide Pemex inside information as well as advice and assistance on contracts with Pemex and amplifications or amendments to those contracts.” These payments were funded through an un-named Consulting Firm.

The corruption scheme was also interesting in that Key Mexico was paying for insider information, made available earlier than public announcements, in addition to using the Consulting Firm for ‘influence’. With the exception of four payments totaling $6,400, there was no evidence presented of either direct payments from Key Mexico to Pemex employees for contracts or even payment amounts through the third party Consulting Firm. Finally, Key Mexico apparently used the Consulting Firm to increase components to contracts “through a series of amendments of “amplifications”” one of which was a $60MM increase in contract value.

Key Mexico hired the Consulting Firm in 2010. The firm was not subjected to the company’s requirement for due diligence. The Mexico country manager never disclosed to Key Energy that the “Consulting Firm had ties to the Pemex employee and that payments to the Consulting Firm were used to funnel Key Mexico funds to the Pemex employee in exchange for his assistance with obtaining Pemex business”. Lastly, this entire arrangement was not even reduced to writing in a contract.

All of the nefarious actions by Key Mexico did not absolve Key Energy of its responsibilities under the company’s anti-corruption compliance program. At some point, the Key Energy legal department became aware of the relationship, yet allowed it to continue and indeed flourish. The Order stated, “Although the consulting arrangement with the Consulting Firm violated Key Energy compliance policies because it had been entered without pre-approval from Key Energy legal, because no due diligence had been conducted on the Consulting Firm and because no written contract had been entered with the firm, Key Energy allowed the relationship and payments to continue, and Key Mexico allowed payment of the invoices from the Consulting Firm despite a lack of sufficient documentation supporting the purported services and the ties between the Consulting Firm and the Pemex employee.”

The Consulting Firm sent to Key Mexico emails with attachments which included, “Pemex internal memoranda concerning certain new contracts that Pemex intended to put out for tender”. There were also emails referenced in the Order “which contained detail of internal Pemex deliberations”. This information was forwarded from Key Mexico to the US corporate headquarters “but the recipients at Key Energy apparently did not question how or why the country manager was in possession of and sharing such communications.”

Moreover (and rather amazingly), the Key Energy senior Vice President (VP) immediately sought a contract uplift of $90MM. This was communicated back down the line into Key Mexico, eventually to the Consulting Firm. As the Order stated, “One week later, on February 23, the Pemex employee, again from his Pemex e-mail account, forwarded the Key Mexico country manager an unexecuted internal Pemex memo, under which Pemex personnel recommended an increase of $60 million to the funds available to pay Key Mexico under Contract No. 8861. The Pemex employee wrote in the cover e-mail to the country manager: “I am sending this to you so you can see I am working.” On March 24, 2011, a little more than a month later, Key Mexico and Pemex executed an amendment to Contract No. 8861 increasing the contract amount by approximately an additional $60 million.” [emphasis supplied]

The Consulting Firm was rewarded handsomely for its efforts, “Between August 16, 2010 and May 7, 2014, Key Mexico made 58 payments to the Consulting Firm totaling approximately $561,000. Of that amount, at least $229,000 were payments made through April 2013 in connection with consulting services that were described in Key Mexico’s accounting system as “Expert advice on contracts with the new regulations of Pemex/Preparation of technical and economic proposals/Contract Execution.” Additionally, and for reasons not made clear in the Order, the Key Mexico country manager also made four direct wire transfers from his personal bank account into the personal bank account of Pemex official who awarded the contract and uplifts to Key Mexico. These four payments totaled $6,400.

Tomorrow I will consider what Key Energy did to obtain the result it achieved and highlight the lessons to be learned from this enforcement action.

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

0 comments