Writing sample: Attorney Client advise Memo

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Kumar Pallav
Writing Sample: Attorney Client advice Memo

PRIVILEDGED AND CONFIDENTIAL
ATTORNEY-CLIENT WORK PRODUCT

Memorandum

To: Mary Holland, Partner

From: Kumar Pallav, Attorney

Date: September 28, 2009

Re: Cydia Inc. – China Mobile Matter under the Foreign Corrupt Practices Act, 1977

(“FCPA”).

Question Presented

1. Applicability of the FCPA- A non-US citizen, Mr. Wang Zhang made three cash payments

under the direct order of two senior Vice-Presidents of Cydia based in China. Three cash

payments were made to “completely obtain and guarantee” the Cydia-CML deal. Do such cash

payments to “foreign officials” meet the legal elements of the offence under the anti-bribery

provisions of the Foreign Corrupt Practices Act, 1977 (“FCPA”) and impose civil and criminal

liability 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

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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. .

Facts

Our 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 .It

is to grant the exclusive rights to become the only seller of the e-phone .In exchange, wireless

carrier would share a portion of all revenue shared by e-Phones sales, subscriptions and monthly

fees. In 2008, Cydia tried to enter into the Chinese mobile phone market by reaching with an

agreement with Chine Mobile Limited (hereinafter “CML”), which is the world’s largest

wireless 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 not

come to an agreement.

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In May, 2008 negotiations led companies to reach an agreement that allowed Cydia to provide

the ePhone to Chinese costumers at an extremely low price. Afterwards agreement leads to the

most profitable to both the companies and exceeded $500 million .A few days before, our client

Mr. Jones found that such agreement between the companies was not the result of “clean

negotiations”. Cydia’s corporate officer based in China, Li Wang Zhang, was acting under direct

orders of the two vice presidents and made several payments to “ completely obtain and

guarantee” the Cydia-CML deal.

Mr. Wang Zhang made three cash payments on April 15, 2008.First cash payment of $ 500,000

was made to an individual A, president and CEO of CMCC .Individual A agreed to do

everything 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 videogame

software company), which currently run by individual B, the wife of individual A. A was willing

to 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 Children

and Teenagers’ Fund. In exchange of this, the Minister of the information Industry ministry

agreed to exempt Cydia – CML deal from certain telecom tariffs and to “expedite” regulatory

permission for the deal.

Our client Mr. Jones also noted that Cydia has an educational program against corrupt corporate

behavior. Before taking any administrative decisions, Mr. Jones asked us to investigate this

matter on behalf of the corporation and to find applicability of anti-bribery provisions of the

FCPA in this case. Furthermore, he wants to know if there is any criminal liability of Cydia or

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Mr. Wang Zhang in U.S. and seek our advice about what his next step should be in present

matter in hand.

Analysis

For now, our prime concern is to analyze the nature of three payments made to the foreign

officials and find the applicability of anti-bribery provisions of the FCPA which may impose

civil and criminal liability on Cydia or Mr. Wang Zhang.

Applicability of the FCPA

The 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 or

will assist (or is intended to assist) the payor in efforts to get or keep some business for or with

such “foreign officials.” Adler v. Federal Republic of Nigeria, 219 F.3d 869, 873 (9th Cir. 2000).

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Thus, the first question of statutory interpretation presented is whether all three payments made

to 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 is

proscribed by the FCPA.

1. Nature of the first cash payment

The first payment of $ 500,000 was made to an individual A , president and CEO of CMCC .The

objective behind the payment was to make Individual A agree to do everything to obtain and

secure the Cydia and CML deal in exchange of the payment.

1.1 Foreign officials

In the present context, prime issue is to find whether individual “A” is a “foreign official” for the

purpose of the FCPA or not. Because this term is important for applicability of the FCPA, the

memo will discuss it first. In U.S. v. Bodmer, 342 F. Supp. 2d 176,179 (S.D. N.Y. 2004), the

elements of the crime are under the FCPA are summarized. The term “foreign official” under the

FCPA means any officer or employee of a foreign government or any department, agency, or

instrumentality. 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 of

CMCC. 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’s

board of directors. This makes it under government control as an “agency”. Individual A, a CEO

is a “foreign official” as he is working for CMCC under the direct control of the government of

China. Court will believe that Individual A is a “foreign official” as an agent for the purpose of

the FCPA.

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1.2 Corrupt practice

Another prime issue is to analyze the nature of the first payment. “Corrupt practice” is the

important aspect for liability under the FCPA. The term "corruptly" should be interpreted in

order to determine the nature of the act of Cydia’s corporate officers based in China. Corporate

officer Li Wang Zhang was acting under direct orders of the two Vice presidents and made

several 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 be

intended to induce the recipient to misuse his official position in order to wrongfully direct

business 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 fully

consummated, 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 the

clear case with respect to the first payment that the intention for the payment was corrupt and

wrongful.

1.3 Knowledge

A company will be held criminally liable for violation of the anti-bribery provisions if it makes

payments to third parties ''while knowing'' that the payments will be used by the third party as

bribes 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 is

aware that he or she is engaging in such conduct or if that person is aware that a violation is

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''substantially certain to occur,'' or that person ''has a firm belief that such circumstance exists or

that 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 its

officials as they are the acting agents of the corporation and can make liable to the corporation

from their wrongful acts. Transactions of transferring funds to the foreign official itself constitute

the knowledge element to be liable under FCPA. L. Brown, The Extraterritorial Reach of the

U.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) all

transactions be recorded in such a way as to comply with generally accepted accounting

principles 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 any

possible discrepancies. 15 U.S.C. § 78m (b) (2) (B) (i)-(iv) (1988). Thus, corporation will be

liable 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 the

FCPA's core of criminality was seen to be bribery of a foreign official to induce him to perform

an official duty in a corrupt manner. The indictment's paraphrasing the FCPA's business nexus

element passed the test for sufficiency, despite alleging no details regarding what business was

sought or how the results of the bribery were meant to assist. Therefore, with respect to the first

payment, a court could believe that the execution of the payment here would create liability for

Cydia under the FCPA.

2. Nature of the second cash payment

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Mr. Wang Zhang made the second payment of $150,000 to Squaresoft China Ltd., a videogame

software company currently run by Individual B, the wife of Individual A. The motive behind

this payment is amply clear that Individual A was willing to work with Cydia only if it entered

into a transaction with Squaresoft for its iFinal Fantasy X project, a role-playing game that

Squaresoft China Ltd. developed exclusively for the ePhone. We need to analyze that which

element 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 “foreign

official”, because payment was made to Squaresoft. Squaresoft company currently run by

Individual B. Individual B, who is wife of individual A. we can take defense that individual B

will not fall within the ambit of the term “foreign officials” for the purpose of the FCPA because

she is not the agent or officer of the government. 15 U.S.C. § 78dd-1(f) (1). But against our

argument, the most relevant case is on this issue affirmed that when evidence was sufficient to

sustain convictions of executive of business that sold military equipment and supplies, under 15

U.S.C. §§ 78dd-1 and 78dd-2, where in order to get foreign official to help in getting approval of

contracts, airline tickets were given to official's cousin ( close relative ) to be used on his

honeymoon; fact that cousin considered tickets to be "gift" is irrelevant to determination of

corrupt 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 the

airline tickets were given "corruptly." For example, Liebo (person who gave the bribe) gave the

airline tickets to Barke (person who was close relative of government official) shortly before the

third contract was approved. In addition, there was undisputed evidence concerning the close

relationship between Tiemogo (person who is the foreign official and bribe was given to him

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indirectly) and Barke and Tiemogo's important role in the contract approval process. There was

also testimony that Liebo classified the airline ticket for accounting purposes as a "commission

payment." This evidence could allow a reasonable jury to infer that Liebo gave the tickets to

Barke intending to influence the Niger government's contract approval process. Court concluded,

therefore, that a reasonable jury could find that Liebo's gift to Barke was given "corruptly."

Accordingly, sufficient evidence existed to support Liebo's conviction. On the facts we now

have, court would probably conclude that individual A and B are the close relative i.e. husband

and 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 these

circumstances would not distinguish this kind of payment out of the scope of the FCPA. In

relevant 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 United

States v. Montgomery, 819 F.2d 847, 851-52 (8th Cir. 1987). Therefore a court’s ruling with

respect to the second payment would be close one. However, based on the applicable case law, a

court probably would find the second payment as a violation of the FCPA.

3. Nature of the third cash payment

Mr. 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 Ministry

agreed 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

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Minister’s personal “pet” project. Third payment was made with the motive to obtain favor from

the Information Industry Ministry in the Cydia-CML deal. Primarily, the third payment was not

made to the Minister directly but to the China Children and Teenagers’ Fund. However Minister

of the Information Industry Ministry is a “foreign official” for the purpose of the FCPA. 15

U.S.C. § 78dd-1(f) (1).

One significant fact here is to examine that the third payment was act of charity and not a direct

bribe 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 fide

charity affiliated with a government official violated the FCPA. In SEC v. Schering-Plough

Corp., No. 04-0945 (D.D.C. June 9, 2004), donations made by Schering-Plough’s Polish

subsidiary to a charitable foundation headed by a Polish government official. The SEC alleged

that these payments were made to induce the official to purchase Schering-Plough’s

pharmaceutical products for his region’s health fund. Although the donations were made without

the 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 for

the inaccurate records kept by its foreign subsidiary.

The case is significant in suggesting that payments to a bona fide charity could violate the FCPA

if made to influence the actions of a government official. Although the SEC did not state that

these payments were bribes within the meaning of the FCPA, in charging the FCPA accounting

violations for these payments, the SEC strongly signaled that it believes that charitable donations

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could violate the FCPA if made at the direction of a government employee to induce official

action.

In Kay, 359 F.3d at 738, the instant court concluded that the FCPA's core of criminality was seen

to be bribery of a foreign official to induce him to perform an official duty in a corrupt manner.

The indictment's paraphrasing of the FCPA's business nexus element passed the test for

sufficiency, despite alleging no details regarding what business was sought or how the results of

the bribery were meant to assist.

In exchange for the contribution to this charity, the Minister of the Information Industry Ministry

agreed to exempt the Cydia – CML deal from certain telecom tariffs. Therefore, with respect to

the third payment, a court may believe that the execution of the payment here would, in and of

itself, 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 payments

do fall within the ambit of the applicability of the FCPA. Directors and officers who willfully

violate the anti-bribery provisions may be fined up to $100,000 each and imprisoned for up to

five years. Corporations may be liable for fines up to $2 million, subject to the Federal

Sentencing Guidelines. 15 U.S.C. § 78dd-2(g)(2) .When a corporation has foreign affiliates, such

as subsidiaries, venture partners, employees, the company may be held liable for the affiliate's

illegal conduct. Possibilities for liability arise if the company knowingly participates, authorizes

the activity, or if the affiliate can be considered the company's agent. Authorization occurs when

the 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

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China, 7 J. Int'l Bus. & L. 13, 47 (2008). Furthermore, if the foreign affiliate could be considered

to be the company's agent, the company may be vicariously liable even without knowledge of the

conduct. Liability may result if the company exercises enough control over the affiliate so as to

be considered the action of one unit.

Additionally, if a company learns that a controlled affiliate has made an illegal payment, the

company has the same responsibility it would have in the situation were such activity performed

by its own employee. In one case, a court ruled that if a corporation learns of an unauthorized act

by someone undertaken on the company's behalf and does not repudiate it within a reasonable

time, 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 shall

be liable for the act of its foreign officials under the FCPA.

Conclusion

Civil and criminal liability will arise if any of the three payments fall within the ambit of the

FCPA. The Act's anti-bribery provisions criminalize any payments that are “corruptly" made to

foreign officials, which are possibly done in all three payments. With respect to the first and the

second payment, they were made to the “foreign officials”. The FCPA will apply here for these

two payments as they were made to CEO of CMCC and Squaresoft China Ltd., which currently

run by his wife. Because CMCC is a 50% state-owned enterprise, this makes it under

government control as an agency in China. The examination of third payment to the foreign

government which this case requires is intrusive enough to warrant no defense because the

concern here is the motivation and intention behind the act of charity, which is bribe to foreign

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officials by several payments to “completely obtain and guarantee” for Cydia-CML deal. After

examinations of the alleged three payments, a court would conclude that these acts of payments

create civil and criminal liability under the FCPA.

Practical advice

Under 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 promoting

the recent settlement trend as there are many instances that U.S. based companies agreed to settle

the case with the settlement agreement.

We advice you to enter into a settlement agreement with the Department of Justice (“DOJ”) and

follow the compliance plan. The DOJ has entered into several non-prosecution (or deferred

prosecution) agreements with the companies in the past. The DOJ agreed not to prosecute those

companies in exchange for, among other things, proof of continuing compliance. Non-

prosecution agreements contain elements similar to plea agreements, including fines and

monitoring. Cydia should adopt an FCPA compliance program and internal controls designed to

prevent future violations.

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In the present case, litigation may cause high cost of law suit. Cydia should voluntarily disclose

to 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 will

prevent FCPA violations by their foreign subsidiaries.

Appendix ‘A’

Compliance plan

Features of comprehensive FCPA compliance program:

• Implementing appropriate disciplinary mechanisms in Cydia for violations or failure to detect

violations;

• Adopting corporate procedures in Cydia, including a recorded due diligence inquiry, to ensure

that 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 discretionary

authority to individuals with a propensity to engage in illegal activities;

• Including in all contracts with agents, consultants, joint venture partners, and other

representatives, warranties that no payments of money or anything of value will be offered,

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promised or paid, directly or indirectly, to any foreign official, foreign political party, party

official, or candidate for foreign public or political office to induce such officials to use their

influence with a foreign government or instrumentality to obtain an improper business advantage

for the Cydia;

In addition, company review of potential charitable donations abroad should now include an

inquiry as to whether the donation is made at the suggestion or behest of any foreign government

official and whether the charity, even if bona fide, is connected in any way to any foreign

government official. Lisa H. Randall, Multilateralization of the Foreign Corrupt Practices Act, 6

Minn. J. Global Trade 657, 659 (1997).

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Writing sample: Attorney Client advise Memo

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Writing sample: Attorney Client advise Memo