Private Equity Alert February 2008 Ignorance of the FCPA is No Excuse Weil News By Chip Roh ([email protected]), Joe Tortorici ([email protected]) n Weil Gotshal won Private Equity and Joseph Johnson ([email protected]) Team of the Year at the 2008 Legal Business Awards for the firm’s Private equity sponsors and hedge funds are increasingly investing in emerging involvement in advising Terra Firma markets, including through dedicated investment funds. The risk of corrupt on the $6.4 billion take private bid of EMI Group plc payments is higher in those markets than in most developed markets and U.S. investors are subject to the U.S. Foreign Corrupt Practices Act (FCPA) in connection n Chambers recommended seven of with those investments. Recently, the U.S. government has become more aggressive our European private equity partners in its 2008 Chambers in enforcing the FCPA. In addition, as evidenced by the ongoing Siemens inquiry, Europe directory: Gerhard Schmidt European governments have also become more aggressive in pursuing FCPA-style in Frankfurt, Marco Compagnoni corruption investigations. Private equity sponsors and hedge funds investing and Mark Soundy in London, David outside the U.S., especially those that invest in emerging markets, should be Aknin, Frederic Cazals and Emmanuelle Henry in Paris and proactive in ensuring that they and their representatives take appropriate actions David Dederick in Central & in connection with those investments to avoid or reduce the risk of civil or even Eastern Europe criminal liability under the FCPA. n Weil Gotshal advised Thomas H Lee Partners in connection with The FCPA the acquisition of approximately The FCPA prohibits bribery of foreign government officials, candidates for office 63% of the equity securities of MoneyGram International, Inc. by and officials of political parties. It is framed and interpreted very broadly to prohibit affiliates of Thomas H Lee Partners not just actual direct bribes, but virtually any way a company might directly or and Goldman Sachs & Co. through agents or joint ventures improperly influence foreign government officials, n Weil Gotshal advised Capital Z candidates for office and political parties. The FCPA applies not only to U.S. Investment Partners in connection nationals and to companies organized under US laws (wherever the individuals or with a management buyout of its companies are located), but also to foreigners or foreign companies with a hedge fund sponsorship business connection to the United States. Both the substantive law and its coverage are n Weil Gotshal advised Union Square given a very broad interpretation, well beyond what is customary for most non- Partners in connection with its Americans. Paying for entertainment or arranging a cushy job for a current or investment in MountainView former government official or his or her relative could all be considered a bribe. Capital Holdings, LLC, a specialty financial services company Private equity sponsors and hedge funds can have a problem under the FCPA even n Weil Gotshal advised American if the bribery occurred prior to their acquisition and not on their watch. A U.S. Capital Strategies in connection private equity or hedge fund that buys a foreign company that has been violating with its sale of Exstream Software, the FCPA not only inherits the liability of that company for its past actions, but may LLC to Hewlett-Packard Co. find that the fund itself is liable for ignoring the ongoing nature of the bribes, even n Weil Gotshal advised American if there is no evidence that the fund or its officers directly knew of the bribery. The Capital Strategies in connection potential liability for public companies is still greater, since the mere fact of filing with its sales of Ranpak Inc. to Odyssey Investment Partners reports with the SEC is enough to make a company liable under the FCPA, and the issuers face additional responsibilities in terms of books and records controls. n Weil Gotshal advised Genstar Capital, LLC in connection with its acquisition The FCPA can also adversely affect exit opportunities for U.S. private equity of TravelClick Holdings, Inc. sponsors and hedge funds regardless of whether the Department of Justice (DOJ) Private Equity Alert February 2008 commences an investigation of connection with these recent pleas, Cherington, following completion of bribery by a portfolio company or its Vetco Gray UK Ltd. agreed to the its purchase of Pacific Consolidated agents. If a portfolio company or its appointment of an independent Industries, apparently discovered agents has engaged in illegal or monitor, to undertake further investi- records of suspicious payments made questionable behavior under the gations, and agreed to monitoring and to the Ministry of Defense during its FCPA, that may make it difficult to compliance obligations that would post-acquisition audit. Pacific Consoli- take the company public in the U.S. bind any future purchaser. dated Industries voluntarily referred or to sell the company to a U.S. public this matter to the DOJ and fully company or other buyer that performs Investors should not bury their cooperated in its subsequent investi- rigorous FCPA diligence. The private head in the sand and ignore gation. It is not known whether equity sponsor or hedge fund may Cherington Capital will incur any fines also have potential liability to the any potential problems or or penalties in connection with this buyer under FCPA-specific or hope they go away. FCPA violation. compliance with laws representations There are dangers in trying to draw and warranties in the sale agreement. Also in 007, Omega Advisors agreed too many lessons from the very to pay $500,000 as a civil penalty as Recent FCPA-Related Actions limited record available, but these part of its non-prosecution agreement examples demonstrate that private Some recent FCPA enforcement where it acknowledged that a fund equity sponsors and hedge funds can actions illustrate the risks under the officer had been aware, prior to the have potential exposure under the FCPA for private equity sponsors and investment, that there was bribery FCPA even if they had no direct part hedge funds. In early 007, the DOJ involved in a transaction in which in the alleged illegal conduct. announced that three Vetco Interna- Omega invested, and that the officer tional Ltd. subsidiaries pled guilty to had entered into these investments on Dos and Don’ts for Investors violating the anti-bribery provisions behalf of Omega with the understanding The cases referenced above illustrate of the FCPA and had agreed to pay that he was taking advantage of these only a few of the many ways FCPA $6 million in fines and penalties. arrangements. The DOJ indicated that issues may arise before or after a Vetco Gray UK Ltd., one of these three it exercised leniency toward Omega private equity sponsor or hedge fund subsidiaries, had previously pled because of Omega’s past and guilty in 004 to related violations. continuing cooperation with the completes an acquisition. Investors Around that time, a group of private investigation, its implementation of active in emerging markets need to equity investors sought to acquire that remedial measures, including an FCPA make sure they are taking steps to company. In anticipation of the acqui- compliance program, and the absence ensure compliance with the FCPA, sition, those investors conducted an of prior similar conduct by Omega. especially as an acquisition of a extensive compliance review and The former Omega officer pled guilty company does not necessarily requested an opinion release from the to charges of conspiracy to violate and eliminate exposure to past violations. DOJ. In response to this request, the violation of the FCPA in 004. Private equity sponsors and hedge DOJ issued an opinion indicating it funds should consider the following In a third example in 007, Leo did not intend to undertake actions to avoid or reduce any potential Winston Smith, a former executive against the acquirers or acquired liability under the FCPA: vice president and director of sales and company for violations that may have marketing for Pacific Consolidated n Do have an effective FCPA occurred prior to the acquisition. Industries, was indicted for allegedly compliance program for your fund, However, the opinion was premised conspiring to provide bribe payments including periodic training of on the institution of an extensive to an official in the U.K. Ministry of employees to be sensitive to FCPA compliance program and indicated Defense for the purpose of obtaining and related issues that it did not encompass prospective contracts. Pacific Consolidated conduct. When the payment of n Do a thorough due diligence review Industries was a privately-owned various illegal bribes continued after of a potential acquisition target for Californian company, which was the acquisition and until April 005, potential FCPA violations, particu- acquired by Cherington Capital, a the DOJ brought new enforcement larly where red flags are uncovered. private equity group, in 003, after the actions, ultimately resulting in the Examples of red flags include a events that ultimately resulted in the 007 guilty pleas and fines. In 007 indictment of Mr. Smith. history of corruption in the Weil, Gotshal & Manges LLP Private Equity Alert February 2008 particular countries where the target true” due to superior access to or With the increasing investments by company does business, weak or accommodations by government private equity sponsors and hedge poorly enforced FCPA compliance officials. Bribery may be one reason funds in emerging markets, those policies by the target company, why that investment opportunity investors need to proactively ensure weak or non-transparent accounting seems like such a sure bet and U.S. that they and their representatives policies, procedures and records in authorities may not be sympathetic take appropriate actions in connection the target company, a failure by the to pleas by U.S.