In a December post I asked readers how they would rule in an FCPA-related case recently before U.S. federal trial judge Melinda Harmon. As judge Harmon was required to do when deciding the case, readers were asked to assume the following was true: The chief executive of Hyperdynamics Corporation, a Houston-based oil exploration company, had established “American Friends of Guinea,” an NGO, in 2006 after the Guinean government had threatened to revoke the company’s oil concession, its sole asset; and shortly after “Friends” was created, the government approved a renegotiated concession. In 2007, when the government again threatened its concession, “Friends” made a substantial contribution of medicines to care for Guineans stricken with cholera, and in 2009, after the government again reaffirmed the concession, Hyperdynamics donated company stock to “Friends.” Finally, in 2011 the firm itself gave government ministries some $30,000 worth of computer equipment.
Well, readers, what do you think? Do the above allegations, if true, state a plausible violation of the FCPA? That is, could a reasonable jury, or judge sitting as a finder of facts, infer from them that one or more of the donations was actually a bribe Hyperdynamics paid to Guinean government officials in return for allowing it keep its oil concession?
I would certainly have thought so The closeness in time between the creation of the NGO and approval of a renegotiated concession and the donation of Hyperdynamics stock to the NGO just after the concession was reaffirmed both suggest to me that the contributions were disguised pay offs. Absent more information about “Friends” — who decided where it spent its money and on whom and what association it had with Guinean government officials and in particular to those with power over the country’s oil concessions did it have – my suspicion that the contributions were bribes was only heightened.
Judge Harmon, on the other hand, thought differently. In her August 25, 2015, decision she ruled that in effect that no reasonable person could infer from the facts above that the contributions were actually bribes in disguise. She reasoned that neither Hyperdynamics’ direct donations to the government and nor the contributions from “Friends” were made “to a foreign official for purposes of . . . influencing any act or decision” by the official (emphasis in original). Hence they could not be violations of the FCPA. She cited the discussion on charitable giving in the 2012 Department of Justice/SEC FCPA guide to support her ruling. The guide clearly states, she wrote, that the act “does not bar a company from giving anything of value [sic] to a foreign government, as opposed to a foreign official personally, or to a third party such as a nonprofit in order to generate corporate goodwill. . . .”
With due respect to Judge Harmon, I think she errs in two respects. For one, she seems to dismiss even the possibility that the contributions could be disguised bribes by stressing that they did not go directly to a foreign official. But this puts form in command of substance. What if a “gift” is given to a foreign official’s spouse? Does that foreclose the possibility that it was really a bribe directed to the official? If that is to be the law, the FCPA would be eviscerated, for a bribe payer would have to be awfully stupid not to dress up its bribes as “gifts” to the recipient’s spouse.
Second, although the judge cited the DoJ/SEC FCPA resource guide, she did not pay it the attention it is due. While, to be sure, the guide is careful to say that the FCPA does not outlaw corporate philanthropy, it does not stop there. It goes onto suggest that analysis is required to distinguish genuine contributions from bribes masquerading as charity. As Part I of this post explained, the guide recommends that that analysis begin by asking five questions about the payment: 1) why was it made; 2) did it comport with company guidelines for charitable giving; 3) was it made at the request of a government official; 4) what association, if any, does the official have with the charity; and 5) was the contribution conditioned on receiving something in return? Certainly, the context surrounding the creation of “Friends” and the Hyperdynamics payments suggest that answers to such questions might well have revealed that the intent behind the donations was anything but charitable.
The title of this post asks if charitable giving is a way around the FCPA, and if other courts follow Judge Harmon’s decision, the answer would be an unqualified “yes.” On the other hand, there are good reasons other courts are likely to disagree with her ruling. For one thing, as this post has tried to point out, its reasoning is weak and thus not likely to persuade other courts to adopt it. More importantly, her opinion arose in circumstances that blunt its precedential value.
Her decision came in an action by Hyperdynamics’ shareholders for securities fraud. The shareholders claimed i) that the company had failed to disclose facts in its SEC filings that bore on how investors valued its shares, ii) that had these facts been disclosed, the shares would have sold at a lower price, and iii) the company should thus compensate shareholder-plaintiffs for overpaying for their shares. Among the non-disclosures shareholders cited were the charitable contributions.
Judge Harmon’s decision can perhaps be explained as a reaction to what on its face is rather strained logic: that had Hyperdynamics disclosed that the payments were bribes, or more accurately that an enforcement agency might deem them bribes, and that had it also disclosed the other important facts shareholders claimed the company fraudulently hid, its share price would have been lower. Her opinion could be read as finding not that the allegation the donations were in fact bribes was implausible but that the chain of reasoning linking their nondisclosure to an inflated share price was implausible and hence not meriting further consideration by the court. That would appear to be a fair reading based on the last paragraph of her decision:
“Plaintiffs chose to invest in a wildcat well in Guinea with an inexperienced operator having full knowledge of the geological, operational, and regulatory risks. [The securities law] does not entitle them to a return on this investment.”
A postscript. As Richard Cassin reports over at the FCPA Blog, in September Hyperdynamics resolved SEC allegations that it had violated the FCPA by paying $75,000. The SEC complaint made no mention of the charitable donations, alleging only that $130,000 in payments for public relations consultants and lobbyists were improperly recorded on the company’s books. That the SEC was willing to settle for such a small amount suggests there may be more to the case than meets the public eye. Given Guinea’s rough and tumble politics, perhaps Hyperdynamics was the victim of extortion instead of the perpetrator of a bribery scheme. Rather than bribes, the contributions could well have been payments to keep what the company was lawfully entitled to: its oil concession. If so, the payments would meet the classic definition of extortion.