Writing sample: Attorney Client advise Memo

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Foreign Corrupt Practices Act (USA).

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Writing sample: Attorney Client advise Memo

  1. 1. 1 Kumar Pallav Writing Sample: Attorney Client advice Memo PRIVILEDGED AND CONFIDENTIAL ATTORNEY-CLIENT WORK PRODUCT MemorandumTo: Mary Holland, PartnerFrom: Kumar Pallav, AttorneyDate: September 28, 2009Re: Cydia Inc. – China Mobile Matter under the Foreign Corrupt Practices Act, 1977 (“FCPA”).Question Presented1. Applicability of the FCPA- A non-US citizen, Mr. Wang Zhang made three cash paymentsunder the direct order of two senior Vice-Presidents of Cydia based in China. Three cashpayments were made to “completely obtain and guarantee” the Cydia-CML deal. Do such cashpayments to “foreign officials” meet the legal elements of the offence under the anti-briberyprovisions of the Foreign Corrupt Practices Act, 1977 (“FCPA”) and impose civil and criminalliability on Cydia or Mr. Wang Zhang? Short answer: Probably yes. The FCPA prohibits bribery to foreign officials for the purpose of obtaining or retaining business. After the
  2. 2. 2 Kumar Pallav Writing Sample: Attorney Client advice Memo examinations of the alleged three payments, a court probably would rule that these payments do fall within the ambit of FCPA. With respect to the first and the second payments, it is made to the “foreign officials” with the knowledge that it was a corrupt practice; hence the FCPA will apply here for these two cash payments as it is made to CEO of CMCC and Squaresoft China Ltd., which currently run by his wife as she is the chief managing officer in Squaresoft. Because CMCC is a 50% state-owned enterprise, this makes it under government control as an agency in China. The second payment was made with the corrupt intent to individual A, which is sufficient to constitute the offence under the FCPA. The examination of the third payment to the foreign government warrants no defense because the concern here is the motivation and intention behind the act of charity. This is bribe to foreign officials by several payments to “completely obtain and guarantee” for Cydia-CML deal. .FactsOur long- time corporate client, Mr. Paul Jones, is CEO of Cydia, Inc. (Cydia, NASDAQ: CYD).In 2006, Cydia entered the mobile phone market and adopted a profit sharing business model .Itis to grant the exclusive rights to become the only seller of the e-phone .In exchange, wirelesscarrier would share a portion of all revenue shared by e-Phones sales, subscriptions and monthlyfees. In 2008, Cydia tried to enter into the Chinese mobile phone market by reaching with anagreement with Chine Mobile Limited (hereinafter “CML”), which is the world’s largestwireless carrier. China mobile communication corporation ( hereinafter “ CMCC”) owes a 50%share in CML .But CML disliked the profit sharing business model, so CML and Cydia did notcome to an agreement.
  3. 3. 3 Kumar Pallav Writing Sample: Attorney Client advice MemoIn May, 2008 negotiations led companies to reach an agreement that allowed Cydia to providethe ePhone to Chinese costumers at an extremely low price. Afterwards agreement leads to themost profitable to both the companies and exceeded $500 million .A few days before, our clientMr. Jones found that such agreement between the companies was not the result of “cleannegotiations”. Cydia’s corporate officer based in China, Li Wang Zhang, was acting under directorders of the two vice presidents and made several payments to “ completely obtain andguarantee” the Cydia-CML deal.Mr. Wang Zhang made three cash payments on April 15, 2008.First cash payment of $ 500,000was made to an individual A, president and CEO of CMCC .Individual A agreed to doeverything to obtain and secure the Cydia and CML deal in exchange of the payment.Additionally, Second payment of $ 150,000 was made to Squaresoft China Ltd. (a videogamesoftware company), which currently run by individual B, the wife of individual A. A was willingto work with Cydia only if it entered into a transaction with Squaresoft for the iFinal X project,developed exclusively for the ePhone.Mr. Wang Zhang had made the third cash payment of $300,000 as a charity to China Childrenand Teenagers’ Fund. In exchange of this, the Minister of the information Industry ministryagreed to exempt Cydia – CML deal from certain telecom tariffs and to “expedite” regulatorypermission for the deal.Our client Mr. Jones also noted that Cydia has an educational program against corrupt corporatebehavior. Before taking any administrative decisions, Mr. Jones asked us to investigate thismatter on behalf of the corporation and to find applicability of anti-bribery provisions of theFCPA in this case. Furthermore, he wants to know if there is any criminal liability of Cydia or
  4. 4. 4 Kumar Pallav Writing Sample: Attorney Client advice MemoMr. Wang Zhang in U.S. and seek our advice about what his next step should be in presentmatter in hand.AnalysisFor now, our prime concern is to analyze the nature of three payments made to the foreignofficials and find the applicability of anti-bribery provisions of the FCPA which may imposecivil and criminal liability on Cydia or Mr. Wang Zhang.Applicability of the FCPAThe FCPA prohibits payments to foreign officials for purposes of: (i) influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage...in order to assist [the company making the payment] in obtaining or retaining business for or with, or directing business to, any person. 15 U.S.C. § 78dd-1(a) (1).The FCPA criminalizes these kinds of payments only if the result they are intended to produce orwill assist (or is intended to assist) the payor in efforts to get or keep some business for or withsuch “foreign officials.” Adler v. Federal Republic of Nigeria, 219 F.3d 869, 873 (9th Cir. 2000).
  5. 5. 5 Kumar Pallav Writing Sample: Attorney Client advice MemoThus, the first question of statutory interpretation presented is whether all three payments madeto foreign officials to obtain Cydia-CML deal can ever fall within the scope of the FCPA, i.e.,whether the illicit payments made to obtain a deal can constitute the kind of bribery that isproscribed by the FCPA.1. Nature of the first cash paymentThe first payment of $ 500,000 was made to an individual A , president and CEO of CMCC .Theobjective behind the payment was to make Individual A agree to do everything to obtain andsecure the Cydia and CML deal in exchange of the payment.1.1 Foreign officialsIn the present context, prime issue is to find whether individual “A” is a “foreign official” for thepurpose of the FCPA or not. Because this term is important for applicability of the FCPA, thememo will discuss it first. In U.S. v. Bodmer, 342 F. Supp. 2d 176,179 (S.D. N.Y. 2004), theelements of the crime are under the FCPA are summarized. The term “foreign official” under theFCPA means any officer or employee of a foreign government or any department, agency, orinstrumentality. 15 U.S.C. § 78dd-1(f) (1).With respect to the first payment, it is made to the“foreign officials”; hence the FCPA will apply here for this payment as it is made to CEO ofCMCC. China Mobile Communications Corporation (CMCC), a 50% state-owned enterprise,owns a 50% interest in CML. The government has the power to appoint the majority of CMCC’sboard of directors. This makes it under government control as an “agency”. Individual A, a CEOis a “foreign official” as he is working for CMCC under the direct control of the government ofChina. Court will believe that Individual A is a “foreign official” as an agent for the purpose ofthe FCPA.
  6. 6. 6 Kumar Pallav Writing Sample: Attorney Client advice Memo1.2 Corrupt practiceAnother prime issue is to analyze the nature of the first payment. “Corrupt practice” is theimportant aspect for liability under the FCPA. The term "corruptly" should be interpreted inorder to determine the nature of the act of Cydia’s corporate officers based in China. Corporateofficer Li Wang Zhang was acting under direct orders of the two Vice presidents and madeseveral payments to “ completely obtain and guarantee” the Cydia-CML deal. The word"corruptly" is used in order to make clear that the offer, payment, promise, or gift must beintended to induce the recipient to misuse his official position in order to wrongfully directbusiness to the payor or his client. The word "corruptly" connotes an evil motive or purpose,intent to wrongfully influence the recipient. It does not require that the act be fullyconsummated, or succeed in producing the desired outcome. S. Rep. No. at 114, (1977). Thus,the payment must be intended to induce the wrongful exercise of official influence. This is theclear case with respect to the first payment that the intention for the payment was corrupt andwrongful.1.3 KnowledgeA company will be held criminally liable for violation of the anti-bribery provisions if it makespayments to third parties while knowing that the payments will be used by the third party asbribes or for purposes contrary to the intent of the FCPA. See 15 U.S.C. § 78dd (a) (3), 15 U.S.C.§ 78dd-2(a) (3).For purposes of this knowing standard, knowledge is imputed to a person if that person isaware that he or she is engaging in such conduct or if that person is aware that a violation is
  7. 7. 7 Kumar Pallav Writing Sample: Attorney Client advice Memosubstantially certain to occur, or that person has a firm belief that such circumstance exists orthat such result is substantially certain to occur. 15 U.S.C. § 78dd-1(f) (2) (A) 9, 15 U.S.C. §78dd-2(b) (3) (A).Hence, officers and CEO of Cydia were not aware of the payment transaction made by itsofficials as they are the acting agents of the corporation and can make liable to the corporationfrom their wrongful acts. Transactions of transferring funds to the foreign official itself constitutethe knowledge element to be liable under FCPA. L. Brown, The Extraterritorial Reach of theU.S. Government’s Campaign against International Bribery, 22 Hastings Int’l & Comp. L. Rev.407,522 (1999). The FCPA also require that (i) all transactions be authorized; (ii) alltransactions be recorded in such a way as to comply with generally accepted accountingprinciples and to maintain accountability for assets; (iii) any access to assets be authorized; and(iv) the books and records be periodically checked against existing assets to determine anypossible discrepancies. 15 U.S.C. § 78m (b) (2) (B) (i)-(iv) (1988). Thus, corporation will beliable for the act of the officials as knowledge element of the transaction is present.Similarly in United States v. Kay, 359 F.3d 738,756 (5th Cir. 2004), the court concluded that theFCPAs core of criminality was seen to be bribery of a foreign official to induce him to performan official duty in a corrupt manner. The indictments paraphrasing the FCPAs business nexuselement passed the test for sufficiency, despite alleging no details regarding what business wassought or how the results of the bribery were meant to assist. Therefore, with respect to the firstpayment, a court could believe that the execution of the payment here would create liability forCydia under the FCPA.2. Nature of the second cash payment
  8. 8. 8 Kumar Pallav Writing Sample: Attorney Client advice MemoMr. Wang Zhang made the second payment of $150,000 to Squaresoft China Ltd., a videogamesoftware company currently run by Individual B, the wife of Individual A. The motive behindthis payment is amply clear that Individual A was willing to work with Cydia only if it enteredinto a transaction with Squaresoft for its iFinal Fantasy X project, a role-playing game thatSquaresoft China Ltd. developed exclusively for the ePhone. We need to analyze that whichelement under FCPA may inflict liability for the second payment.The first element is to examine the applicability of the FCPA is to interpret the term “foreignofficial”, because payment was made to Squaresoft. Squaresoft company currently run byIndividual B. Individual B, who is wife of individual A. we can take defense that individual Bwill not fall within the ambit of the term “foreign officials” for the purpose of the FCPA becauseshe is not the agent or officer of the government. 15 U.S.C. § 78dd-1(f) (1). But against ourargument, the most relevant case is on this issue affirmed that when evidence was sufficient tosustain convictions of executive of business that sold military equipment and supplies, under 15U.S.C. §§ 78dd-1 and 78dd-2, where in order to get foreign official to help in getting approval ofcontracts, airline tickets were given to officials cousin ( close relative ) to be used on hishoneymoon; fact that cousin considered tickets to be "gift" is irrelevant to determination ofcorrupt act. United States v Liebo, 923 F.2d 1308, 1313 (8 th. Cir. 1991).In the present case, sufficient evidence existed from which a reasonable jury could find that theairline tickets were given "corruptly." For example, Liebo (person who gave the bribe) gave theairline tickets to Barke (person who was close relative of government official) shortly before thethird contract was approved. In addition, there was undisputed evidence concerning the closerelationship between Tiemogo (person who is the foreign official and bribe was given to him
  9. 9. 9 Kumar Pallav Writing Sample: Attorney Client advice Memoindirectly) and Barke and Tiemogos important role in the contract approval process. There wasalso testimony that Liebo classified the airline ticket for accounting purposes as a "commissionpayment." This evidence could allow a reasonable jury to infer that Liebo gave the tickets toBarke intending to influence the Niger governments contract approval process. Court concluded,therefore, that a reasonable jury could find that Liebos gift to Barke was given "corruptly."Accordingly, sufficient evidence existed to support Liebos conviction. On the facts we nowhave, court would probably conclude that individual A and B are the close relative i.e. husbandand wife. The payment of $150,000 to Squaresoft China Ltd will also influence individual A.However, a gift or mere a business deal to make payment of $150,000 to Squaresoft China Ltd.Individual B is chief managing officer the Squaresoft China Ltd. The court under thesecircumstances would not distinguish this kind of payment out of the scope of the FCPA. Inrelevant cases, court reaffirmed that a gift or gratuity does not violate the Act unless it is given"corruptly." United States v. Wagner, 884 F.2d 1090, 1096 (8th Cir. 1989); See also UnitedStates v. Montgomery, 819 F.2d 847, 851-52 (8th Cir. 1987). Therefore a court’s ruling withrespect to the second payment would be close one. However, based on the applicable case law, acourt probably would find the second payment as a violation of the FCPA.3. Nature of the third cash paymentMr. Wang Zhang made a third payment of $300,000 to the China Children and Teenagers’ Fund.In exchange for the contribution to this charity, the Minister of the Information Industry Ministryagreed to exempt the Cydia – CML deal from certain telecom tariffs over a period of years and to“expedite” regulatory permissions for the deal in key administrative agencies. This charity is the
  10. 10. 10 Kumar Pallav Writing Sample: Attorney Client advice MemoMinister’s personal “pet” project. Third payment was made with the motive to obtain favor fromthe Information Industry Ministry in the Cydia-CML deal. Primarily, the third payment was notmade to the Minister directly but to the China Children and Teenagers’ Fund. However Ministerof the Information Industry Ministry is a “foreign official” for the purpose of the FCPA. 15U.S.C. § 78dd-1(f) (1).One significant fact here is to examine that the third payment was act of charity and not a directbribe to the foreign official. But in a high profile enforcement action under the FCPA, the U.S.Securities and Exchange Commission (“SEC”) found that charitable contribution to a bona fidecharity affiliated with a government official violated the FCPA. In SEC v. Schering-PloughCorp., No. 04-0945 (D.D.C. June 9, 2004), donations made by Schering-Plough’s Polishsubsidiary to a charitable foundation headed by a Polish government official. The SEC allegedthat these payments were made to induce the official to purchase Schering-Plough’spharmaceutical products for his region’s health fund. Although the donations were made withoutthe knowledge or approval of any employee in the United States, the SEC charged that the U.S.parent company’s internal controls were inadequate to prevent or detect the improper payments.It also charged the parent company with violations of the FCPA’s recordkeeping provisions forthe inaccurate records kept by its foreign subsidiary.The case is significant in suggesting that payments to a bona fide charity could violate the FCPAif made to influence the actions of a government official. Although the SEC did not state thatthese payments were bribes within the meaning of the FCPA, in charging the FCPA accountingviolations for these payments, the SEC strongly signaled that it believes that charitable donations
  11. 11. 11 Kumar Pallav Writing Sample: Attorney Client advice Memocould violate the FCPA if made at the direction of a government employee to induce officialaction.In Kay, 359 F.3d at 738, the instant court concluded that the FCPAs core of criminality was seento be bribery of a foreign official to induce him to perform an official duty in a corrupt manner.The indictments paraphrasing of the FCPAs business nexus element passed the test forsufficiency, despite alleging no details regarding what business was sought or how the results ofthe bribery were meant to assist.In exchange for the contribution to this charity, the Minister of the Information Industry Ministryagreed to exempt the Cydia – CML deal from certain telecom tariffs. Therefore, with respect tothe third payment, a court may believe that the execution of the payment here would, in and ofitself, create FCPA liability for Cydia, even it was an act of charity.After the examination of the alleged three payments, a court may rule that these acts of paymentsdo fall within the ambit of the applicability of the FCPA. Directors and officers who willfullyviolate the anti-bribery provisions may be fined up to $100,000 each and imprisoned for up tofive years. Corporations may be liable for fines up to $2 million, subject to the FederalSentencing Guidelines. 15 U.S.C. § 78dd-2(g)(2) .When a corporation has foreign affiliates, suchas subsidiaries, venture partners, employees, the company may be held liable for the affiliatesillegal conduct. Possibilities for liability arise if the company knowingly participates, authorizesthe activity, or if the affiliate can be considered the companys agent. Authorization occurs whenthe company has knowledge and approves the conduct, either explicitly or implicitly. Eric M.Pedersen, The Foreign Corrupt Practices Act and its application to U.S. business operations in
  12. 12. 12 Kumar Pallav Writing Sample: Attorney Client advice MemoChina, 7 J. Intl Bus. & L. 13, 47 (2008). Furthermore, if the foreign affiliate could be consideredto be the companys agent, the company may be vicariously liable even without knowledge of theconduct. Liability may result if the company exercises enough control over the affiliate so as tobe considered the action of one unit.Additionally, if a company learns that a controlled affiliate has made an illegal payment, thecompany has the same responsibility it would have in the situation were such activity performedby its own employee. In one case, a court ruled that if a corporation learns of an unauthorized actby someone undertaken on the companys behalf and does not repudiate it within a reasonabletime, the corporation becomes liable for the act. In Re R. Martin-Trigona, 760 F.2d 1334, 1341(2d Cir. 1985).In the light of abovementioned discussion, court would conclude that Cydia shallbe liable for the act of its foreign officials under the FCPA.ConclusionCivil and criminal liability will arise if any of the three payments fall within the ambit of theFCPA. The Acts anti-bribery provisions criminalize any payments that are “corruptly" made toforeign officials, which are possibly done in all three payments. With respect to the first and thesecond payment, they were made to the “foreign officials”. The FCPA will apply here for thesetwo payments as they were made to CEO of CMCC and Squaresoft China Ltd., which currentlyrun by his wife. Because CMCC is a 50% state-owned enterprise, this makes it undergovernment control as an agency in China. The examination of third payment to the foreigngovernment which this case requires is intrusive enough to warrant no defense because theconcern here is the motivation and intention behind the act of charity, which is bribe to foreign
  13. 13. 13 Kumar Pallav Writing Sample: Attorney Client advice Memoofficials by several payments to “completely obtain and guarantee” for Cydia-CML deal. Afterexaminations of the alleged three payments, a court would conclude that these acts of paymentscreate civil and criminal liability under the FCPA.Practical adviceUnder all circumstances, Cydia should consider as next steps:Cydia should consider non-Prosecution (or deferred Prosecution) agreements with the U.S.Department of Justice and Securities and Exchange Commission. It is recommended promotingthe recent settlement trend as there are many instances that U.S. based companies agreed to settlethe case with the settlement agreement.We advice you to enter into a settlement agreement with the Department of Justice (“DOJ”) andfollow the compliance plan. The DOJ has entered into several non-prosecution (or deferredprosecution) agreements with the companies in the past. The DOJ agreed not to prosecute thosecompanies in exchange for, among other things, proof of continuing compliance. Non-prosecution agreements contain elements similar to plea agreements, including fines andmonitoring. Cydia should adopt an FCPA compliance program and internal controls designed toprevent future violations.
  14. 14. 14 Kumar Pallav Writing Sample: Attorney Client advice MemoIn the present case, litigation may cause high cost of law suit. Cydia should voluntarily discloseto the SEC or DOJ and follow the internal investigation under the guidelines of the SEC or DOJ.Cydia should take care to implement a comprehensive FCPA compliance program that willprevent FCPA violations by their foreign subsidiaries. Appendix ‘A’Compliance planFeatures of comprehensive FCPA compliance program:• Implementing appropriate disciplinary mechanisms in Cydia for violations or failure to detectviolations;• Adopting corporate procedures in Cydia, including a recorded due diligence inquiry, to ensurethat the Cydia forms business relationships with reputable agents, consultants, representatives,and joint venture partners;• Adopting corporate procedures to ensure that Cydia do not delegate substantial discretionaryauthority to individuals with a propensity to engage in illegal activities;• Including in all contracts with agents, consultants, joint venture partners, and otherrepresentatives, warranties that no payments of money or anything of value will be offered,
  15. 15. 15 Kumar Pallav Writing Sample: Attorney Client advice Memopromised or paid, directly or indirectly, to any foreign official, foreign political party, partyofficial, or candidate for foreign public or political office to induce such officials to use theirinfluence with a foreign government or instrumentality to obtain an improper business advantagefor the Cydia;In addition, company review of potential charitable donations abroad should now include aninquiry as to whether the donation is made at the suggestion or behest of any foreign governmentofficial and whether the charity, even if bona fide, is connected in any way to any foreigngovernment official. Lisa H. Randall, Multilateralization of the Foreign Corrupt Practices Act, 6Minn. J. Global Trade 657, 659 (1997). ------------------

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