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Thursday, Jun 1, 2023

Feds Think Small In Bribery Trial

Business groups and legal observers nationwide are closely monitoring a small family-owned Azusa company caught up in a foreign bribery trial that could be lethal for it and precedent-setting for others.

Executives at Lindsey Manufacturing Co. have been charged by U.S. prosecutors with paying off officials at a state-run electric utility in Mexico in order to win sales for their products.

Such cases historically were seldom brought against such small companies. And most end up being settled, but Lindsey has decided to fight and have its case heard by a jury. It is the first of about a half-dozen cases expected to reach trial this year since the government stepped up enforcement of the Foreign Corrupt Practices Act, which regulates U.S. companies overseas.

Analysts say if Lindsey executives are convicted in the trial, which has opening arguments set for Tuesday in Los Angeles federal court, it would put even the smallest companies on notice that they must keep close tabs on overseas operations.

“It’s being watched by folks all across the country,” said Bethany Hengsbach, a partner at downtown law firm Sheppard Mullin Richter & Hampton LLP specializing in FCPA-related matters; she is not involved in the Lindsey case. “I think the outcome is going to be important to determine whether it’s possible to succeed against the government in an FCPA case.”

The company’s president, Keith Lindsey, and chief financial officer, Steve Lee, face felony charges for allegedly authorizing sales reps to buy a Ferrari and a $1.8 million yacht for Nestor Moreno, director of operations for Mexico’s state-run electric utility, a client of Lindsey.

Lindsey’s attorney Jan Handzlik, of Greenberg Traurig LLP, said company executives admit paying their sales reps substantial money, but they deny having any knowledge in how it was used. Lindsey sales reps in Mexico also have been charged, and one is being tried here on felony charges with separate representation.

The main issue centers on the difference between a government official and a private-sector executive. In other countries, the two often blend because many companies are owned by the state.

Among the interested observers is the U.S. Chamber of Commerce, which is arguing that the government is too broadly interpreting what’s defined as a “foreign official.” That’s a point of contention in the Lindsey case since it involves a utility executive at a government-owned company. The chamber is complaining that the new aggressive prosecution is hurting competitiveness of U.S. companies doing business overseas.

“We are certainly familiar with that case and looking at some of the briefs submitted,” said Harold Kim, senior vice president at the chamber’s Institute for Legal Reform. “There’s been significant concern in the business community over how current interpretations of the FCPA statute are creating uncertainty and ambiguity in the law.”

Kim is working with a team of all-star lobbyists, including recently hired former U.S. Attorney General Michael Mukasey, a President George W. Bush appointee, to push Congress to adopt amendments that would limit the scope of the FCPA.

In fact, Lindsey’s defense attorneys have asked U.S. District Court Judge A. Howard Matz to dismiss the case, arguing Moreno doesn’t qualify as a foreign official. Matz has yet to issuee a ruling on the request.

Another reason the case is important: Should either side appeal the jury’s outcome to the Ninth Circuit Court of Appeals, precedent could be set on the issue.

Handzlik said that more than half of all prosecutions related to the FCPA, which has been on the books since 1977, involve state-run companies, but the issue has never been resolved.

“This is something that’s gone unchallenged for 33 years,” he said.

Small company

Whatever the outcome, analysts say the Lindsey case is a red flag for small companies operating overseas.

“Any company that’s doing business in a foreign country, that’s touching a foreign government, should take note of the FCPA,” said Mary Carter Andrues, a former federal prosecutor and an attorney in the downtown L.A. office of Arent Fox LLP; she is not involved in the Lindsey case.

Founded in 1947 by L.E. Lindsey, the father of current President Keith Lindsey, the company has 110 employees, more than 90 percent of whom work in assembly. The company sells transmission towers that can be erected quickly to help restore electricity in emergencies along with related equipment and services. It has sold to utility companies in more than 30 countries.

Handzlik said the company’s recent legal troubles have nearly put it out of business. Since the October indictment of its executives, the company’s lenders are withholding credit, suppliers are withholding materials, and potential customers are backing off.

“If this drags on for much longer there won’t be a Lindsey Manufacturing,” he said.

The type of prosecution Lindsey is entangled in has been a priority for the U.S. Department of Justice and the Securities and Exchange Commission in recent years. The two agencies combined for 74 enforcement actions last year, up from 40 in 2009 and just five in 2003, according to a report by law firm Gibson Dunn & Crutcher LLP. In the 12 months ended November 2010, the Department of Justice levied more than $1 billion in foreign corruption fines, an all-time high.

“As our track record over the last year makes clear, we are in a new era of FCPA enforcement; and we are here to stay,” Assistant Attorney General Lanny Breuer said at a conference in November.

Each Lindsey executive faces six counts of FCPA-related violations. Each count carries a maximum prison term of five years and a six-figure fine.

An SEC spokesperson declined to comment on the agency’s enforcement of the law. But last year it formed a nationwide FCPA enforcement division, including a new unit in its San Francisco office.

In response, the U.S. chamber released a paper arguing that the law’s vagueness and prosecutors’ aggressiveness have left U.S. businesses unsure how to operate overseas. The paper called for specific reforms, including a narrower definition of a foreign official, limiting a company’s liability for the actions of a subsidiary, and allowing a compliance defense for companies with strong anticorruption programs.

“I think the basic premise of the FCPA that corrupt business transactions are unethical and undermine the free market system remains as true today,” the chamber’s Kim said. “But the statute is long overdue for reform. We’re in a very different global economy and there are significant changes in our global marketplace compared to what it was back in 1977.”

In his November speech, Breuer responded to criticism that stepped-up enforcement is bad for business, saying bribery in international business transactions weakens economic development, undermines confidence in the marketplace and distorts competition.

What’s more, analysts see even more enforcement actions in the near future. Last year’s Dodd-Frank financial reform law includes a provision that provides financial rewards to FCPA whistleblowers.

Among those hardest hit could be small and midsize companies, which might be less attuned to regulations dealing not only with bribery but also accounting transparency.

“It’s going to be a continued upward trajectory,” said Hengsbach, the Sheppard Mullin partner.

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