Latest FCPA Trial Sheds New Light on State-Owned Companies

Executives at Lindsey Manufacturing gambled earlier this month by going to trial with the Justice Department over Foreign Corrupt Practices Act charges against the company. They lost.

On May 10, a federal district court jury convicted the company and two senior executives of bribing government officials in Mexico—the first time in the FCPA's 34-year history that a case has ever gone all the way to a jury verdict. In every other instance, the Justice Department has always settled charges before that.

In a statement after the verdict, Assistant Attorney General Lanny Breuer called the guilty verdicts “an important milestone” for FCPA enforcement efforts. “Lindsey Manufacturing is the first company to be tried and convicted on FCPA violations, but it will not be the last,” he said. The Justice Department declined to offer further comment.

The silver lining, however (at least, for companies other than Lindsey Manufacturing), is that the judge in the case also became the first to offer some much-needed judicial clarity around who is considered a “foreign official” under the law.

The case, U.S. v. Noriega, stemmed from charges brought against Lindsey and two of its senior executives for paying bribes to individuals at the Mexican state-owned utility company, Commission Federal de Electricidad (CFE) from 2002 to 2009.

The indictment accused privately held Lindsey Manufacturing; its president, Keith Lindsey; and vice president, Steve Lee, of paying a 30 percent sales commission to Enrique Aguilar, a Mexican national hired to represent the firm, as a way to cover roughly $5.9 million in bribes. According to the allegations, Aguilar used part of the commission to buy a CFE official a $297,500 Ferrari and a $1.8-million yacht, and to pay more than $170,000 of his credit card bills.

Lawyers say the trial provided a rare opportunity for the courts to clarify some of the central provisions of the FCPA, since most companies choose to settle or plead guilty. “The reluctance of companies to take these cases to trial really skews the interpretation of FCPA, because it has allowed the Justice Department to take some fairly aggressive positions,” says Jessie Liu, a partner of law firm Jenner & Block.

That said, the outcome could further dissuade companies from challenging FCPA allegations in court. After all, Lindsey did lose. “I would think this would be a warning sign to a lot of companies that it's just not worth it if you could negotiate a reasonable settlement,” says Liu.

“Until one decision finds in favor of the defense on the interpretation of foreign officials, you cannot expect to see many companies willing to take their case to trial,” agrees Sarah Wolff, a partner of law firm Reed Smith.

Defense Tactics

Prior to the trial, defense attorneys filed a motion to dismiss the charges, taking issue with the ambiguity around what constitutes an “instrumentality.” The FCPA prohibits U.S. companies and employees from paying bribes to foreign officials to obtain business abroad, but the law vaguely defines “foreign official” to mean an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.”

The defense argued that even if all the allegations were true, state-owned companies are not “instrumentalities” of foreign governments under FCPA—and therefore, payments made to CFE shouldn't fall within the scope of the law. They also said the language of FCPA doesn't explicitly say employees of state-owned enterprise are “foreign officials,” and that legislative history of FCPA suggests that Congress didn't intend to define state-owned companies as an instrumentality.

“It is the first time there has been clear judicial guidance around when employees of state-owned entities can be considered foreign officials under FCPA.”

—Rita Glavin,

Partner,

Vinson & Elkins

“Here, you have a case that was hard fought,” Liu says. “The defense counsel really pursued all the legal avenues they could come up with.”

Even with that defense, however, California U.S. District Judge Howard Matz denied Lindsey's motion to dismiss on April 1. Matz followed up with a written opinion on April 20 where he offered a non-exclusive list of illustrative criteria for determining whether a state-owned entity qualifies as a government instrumentality.

These include whether: 

The entity provides a service to the citizens of the jurisdiction.

The entity's key officers and directors are, or are appointed by, government officials.

The entity is largely financed through governmental appropriations, or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.

The entity is vested with and exercises exclusive or controlling power to administer its designated functions.

The entity is widely perceived and understood to be performing official (i.e., governmental) functions.

Because CFE shares all these characteristics, Matz said, it qualifies as an instrumentality of Mexico, and its employees are foreign officials.

“It is the first time there has been clear judicial guidance around when employees of state-owned entities can be considered foreign officials under FCPA,” says Rita Glavin, a partner of law firm Vinson & Elkins and former head of the Justice Department's Criminal Division.

LINDSEY CONVICTION

Below is an excerpt from the Justice Department's announcement regarding Lindsey Manufacturing:

Lindsey Manufacturing Company, an Azusa, Calif., company, two of its executives and a Mexican intermediary today were convicted by a federal jury on all counts for their alleged roles in a scheme to pay bribes to Mexican government officials at the Comisión Federal de Electricidad (CFE), a state-owned utility company.   The jury reached its verdict after one day of deliberations, following a five-week trial ...

... According to the evidence presented at trial, CFE is responsible for supplying electricity in Mexico, and contracts with Mexican and foreign companies for goods and services to help supply electricity services to its customers.   Enrique and Angela Aguilar were directors of Grupo Internacional de Asesores S.A. (Grupo), which purported to provide sales representation services for companies doing business with CFE.

According to evidence presented at trial, Lindsey Manufacturing hired Grupo to serve as its sales representative in Mexico and to obtain contracts for it from CFE.   Lindsey Manufacturing makes emergency restoration systems and other equipment used by electrical utility companies.   Many of Lindsey Manufacturing's clients were foreign, state-owned utilities, including CFE, which was one of the company's most significant customers.   Grupo received a percentage of the revenue Lindsey Manufacturing realized from its contracts with CFE.  

From approximately February 2002 until March 2009, according to evidence presented at trial, Lindsey Manufacturing, Lindsey, Lee and others orchestrated a scheme in which Enrique Aguilar was paid a 30 percent commission on all the goods and services Lindsey Manufacturing sold to CFE, even though this was a significantly higher commission than previous sales representatives for the company had received.   According to evidence presented at trial, Lindsey and Lee understood that all or part of the 30 percent commission would be used to pay bribes to Mexican officials in exchange for CFE awarding contracts to Lindsey Manufacturing.   The costs of goods and services sold to CFE allegedly were increased by 30 percent to ensure that the added cost of paying the bribes was absorbed by CFE and not by Lindsey Manufacturing.

According to evidence presented at trial, fraudulent invoices were submitted from Grupo to Lindsey Manufacturing for 30 percent of the CFE contract price.  Lindsey and Lee then caused the money requested in the fraudulent invoices to be wired into Grupo's brokerage account, knowing that the invoices were fraudulent and that at least part of the funds were being used as bribes.

The evidence at trial established that in the months leading up to the hiring of Enrique Aguilar, Lindsey and Lee learned that Enrique Aguilar had a corrupt relationship with a top CFE official.   In fact, according to evidence presented at trial, Lindsey and Lee complained to CFE about the way in which contracts were being awarded.   The month after their complaint was rebuffed, Lindsey and Lee hired Enrique Aguilar.   An employee of Lindsey Manufacturing testified at trial that in 2000, prior to hiring Enrique Aguilar, the employee and Lee discussed Aguilar's possible representation of the company.  The employee said he told Lee, “if we cannot defeat the enemy, might as well join the enemy.”   The evidence at trial established that within months of hiring Enrique Aguilar, Lindsey Manufacturing began receiving contracts from CFE and over the course of the next seven years received more than $19 million in CFE business.   The evidence also showed that Keith Lindsey and Lee wired approximately $5.9 million of that money directly to Grupo.  

Evidence established that Angela Aguilar authorized money in the Grupo account to be used to buy a CFE official a $297,500 Ferrari Spyder and a $1.8 million yacht, as well as to pay more than $170,000 towards the official's credit card bills.   She also authorized the transfer of $500,000 to the brother and mother of another CFE official.    

Angela Aguilar was arrested on Aug. 10, 2010, on a criminal complaint when she travelled to Houston from Mexico.   She was ordered detained and removed to the Central District of California, where she remains in custody pending sentencing.

Sentencing for Lindsey Manufacturing, Lindsey and Lee is scheduled for Sept. 16, 2011.   Angela Aguilar's sentencing is scheduled for Aug. 12, 2011.   The defendants face a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost on the FCPA conspiracy charge.  Each of the five FCPA counts carries a maximum penalty of five years in prison and a fine of the greater of $100,000 or twice the value gained or lost.  The money laundering conspiracy count carries a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the transaction.   The government is seeking forfeiture against all defendants.

Source: DoJ Press Release on Noriega/Lindsey.

Matz's clarification could help defense efforts in future FCPA cases involving state-owned entities. Lindsey Manufacturing may have lost its argument that state-owned companies are not “instrumentalities” of foreign governments under FCPA, “but they did lay the groundwork for companies in future cases to argue why their employees may not fall under that definition,” Liu says.

The ruling highlights the risk U.S. companies face when doing business abroad and the need for companies “to be aware that people you may not typically consider a foreign official would actually fall under the statute's definition of that term,” Liu says. In cases involving countries such as China, for example, courts have found that any enterprises controlled by a government is an instrumentality of that government, even if its employees are not considered government officials under local law.

Future Battles

Where Lindsay failed, others hope to prevail. In two similar cases filed around the same time as Noriega, defense teams are arguing the instrumentality question. The are hoping different venues and juries may provide a different result.

The second case, U.S. v. O'Shea, pending in the Central District of Texas, also stems from alleged bribes made to CFE. In that case, a former general manager of the ABB Group was charged in November 2009 in an 18-count indictment with conspiracy, FCPA violations, international money laundering, and falsifying records. That case is scheduled to go to trial shortly.

The third case, U.S. v. Carson, presents a much more challenging set of facts. That case stems from the indictment of six former employees of California-based Control Components Inc. The April 2009 indictment accuses the employees of paying more than 200 bribes from 2003 through 2007 to a variety of businesses in China, Malaysia, South Korea, and the United Arab Emirates, including companies that the government defined as Chinese “state-owned customers.”

Following a May 9 hearing on Carson, the judge in that case said he would take the defendants' motion on instrumentality under submission, with a final ruling to be issued at a later date.

Additional hearings are also expected in Noriega. Jan Handzlik, a partner of law firm Greenberg Traurig and a defense lawyer in the case, has filed a motion to dismiss the indictment against Lindsey Manufacturing and Lee on grounds that the “investigation, prosecution, and trial of this case has been fatally infected by prosecutorial misconduct,” according to the allegations. The defense claims an FBI investigator deliberately omitted material information during a grand jury inquiry into the case. 

Matz is expected to hear arguments on the motion to dismiss the indictment on June 27. Handzlik is also seeking to have the verdict thrown out and a new trial granted.

Sentencing for Lindsey Manufacturing and Lee is scheduled for Sept. 16. Each faces up to five years in prison for each of the five FCPA violations and an additional five years for conspiring to violate FCPA. Aguilar is scheduled to be sentenced on Aug. 12.