FIFAThe U.S. Department of Justice’s blockbuster announcement in late May that U.S. prosecutors have indicted fourteen defendants on corruption charges involving activities of the International Federation of Football (FIFA) and related regional member organizations captured news headlines around the world. The story has continued to dominate the news, as new details about the scandal have continued to emerge. But while the press coverage has been comprehensive, it has not always been entirely precise. Among other things, contrary to the suggestion in many domestic U.S. press reports, the DoJ’s massive criminal indictment does not include any charges under the Foreign Corrupt Practices Act (FCPA). However, at least according to some commentators, based on the allegations made to date, certain companies could find themselves facing FCPA-related scrutiny.

 

The Department of Justice’s May 27, 2015 press release concerning the indictment can be found here. The government’s 161-page indictment itself can be found here. The Wall Street Journal’s May 28, 2015 front page article describing the allegations in the indictment and related government court filings can be found here.

 

Part of the confusion about the possible involvement of FCPA-related allegations has to do with the fact that the core misconduct alleged is the making of improper payments to FIFA officials by representatives of sports marketing companies.   According to the DoJ’s press release, the criminal defendants are alleged to have “systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.”

 

But though the FIFA corruption-related indictment includes improper payment allegations, the criminal action is not a FCPA prosecution, as the Southern Illinois Law School Professor Mike Koehler points out in a June 1, 2015 post on his FCPA Professor blog (here). Rather, as the DoJ summarized in its press release about the indictment, the criminal action involves charges of racketeering, wire fraud and money laundering conspiracies. Some of the defendants were charged with obstruction of justice and tax evasion.

 

As Professor Koehler notes, the FCPA does not apply to every type of bribe. The FCPA’s anti-bribery provisions apply only to bribe payors and not bribe recipients. In addition, in order for there to be an offense within the ambit of the FCPA, the improper payment must have been made (or attempted to be made) to a “foreign official.” The FIFA officers involved do not, according to Koehler, appear to meet the statute’s definition of foreign official.

 

While the prosecutors are not relying on the FCPA, they relying a weapon that if they are able to use successfully here could broaden the U.S. authorities’ power to pursue corruption claims globally. As Wayne State Law Professor Peter Henning discusses in a June 1, 2015 post on his White Collar Watch blog on the New York Times website (here), the U.S. prosecutors’ indictment, made largely in reliance on the Racketeering Influenced and Corrupt Organizations (RICO) Act, will test the extent to which the U.S. law can be applied to conduct much of which took place outside of the U.S.

 

RICO, according to Professor Henning, gives the prosecutors “the firepower to bring all the defendants together in a single case by asserting that there was a pattern of rampant corruption tying the defendants together into a larger scheme.” The prosecutors are essentially alleging that the indicted individuals were using FIFA as a criminal enterprise.

 

As Professor Henning notes, the lower U.S. courts have struggled since the U.S. Supreme Court issued its 2010 decision in Morrison v. National Australia Bank to determine whether or not Congress intended RICO to apply extraterritorially. The criminal defendants will likely challenge the U.S. authorities’ ability to rely on RICO. As Henning notes, “If RICO can be added to a case involving multiple defendants to claim that they engaged in a pattern of misconduct, then the Justice Department will indeed have a very big stick to attack corruption almost anywhere.”

 

And even though the allegations thus far may not support FCPA-related allegations, the conduct alleged could, Professor Koehler notes, “result in FCPA scrutiny for certain companies.”

 

In particular, the government’s indictment includes allegations of bribery involving an unnamed U.S. sportswear company. According to the Wall Street Journal, the company referred to in these “barely veiled references” is Nike, Inc. Nike is not named in the indictment and neither it nor any of its executives have been charged with wrongdoing. However, as the Wall Street Journal detailed in a June 4, 2015 front page article (here), the indictment and related charging documents allege that up to $30 million from the sponsorship pact the clothing company signed in 1996 with the Brazilian soccer federation was paid through a side deal between the company and a middleman. The middleman used part of that money to pay bribes, according to the indictment. Jose Hawill, the owner of the middleman, Traffic Brazil, has admitted to crimes including money laundering, fraud and extortion.

 

These allegations relating to Nike, as more fully detailed in the FCPA Professor blog post linked above, could, according to Professor Koehler, “potentially implicate the FCPA’s books and records and internal controls provisions.”

 

These allegations not only, according to the Journal, “cast a long shadow” over Nike, but they also raise questions – rightly or wrongly — about other sponsorship companies. Let me emphasize here that insofar as I know, there has been no suggestion whatsoever that any other sponsorship companies have been involved in any misconduct. Nevertheless, as the Journal put it, the allegations in the FIFA scandal are “a big headache” for the several companies that have in recent years paid millions of dollars for marketing rights at the FIFA-sponsored soccer events. According to the Journal, six companies — Adidas, Coca-Cola, Emirates, Hyundai, Sony and Visa – paid nearly $190 million to FIFA to be official marketing sponsors for the 2014 World Cup. A second tier of sponsors paid an additional $171 million in connection with the World Cup. A May 28, 2015 Business Insider article detailed in the sponsors reactions to the news of the scandal can be found here.

 

There are yet other firms that have found themselves unfortunately associated with the unfolding FIFA scandal, including in particular the banks that are alleged to have funneled the cash associated with the improper payments. A detailed section of the indictment captioned “The Centrality of the U.S. Financial System” states that the “the defendants and their co-conspirators relied heavily on the United States financial system in connection with their activities,” adding that “this reliance was significant and sustained and was one of the central methods and means through which they promoted and concealed their schemes.”

 

According to the indictment, bribes ranging in the millions of dollars allegedly found their way between accounts at Citibank, JPMorgan, HSBC, Barclays and other banks. According statements of the U.S. Attorney for the Eastern District of New York, where the indictment was filed, as quoted in a May 28, 2015 International Business Times article (here), the banks are being probed as part of the continuing investigation, adding that “It’s too early to say whether there is any problematic behavior, but it will be part of our investigation.” According to a May 28, 2015 Daily Mail article about the allegations involving the banking institutions (here), Britain’s Serious Fraud Office is looking into whether any of the alleged corruption took place on British soil or involved any UK firms or individuals.

 

Another organization that has found itself associated with the unfolding FIFA scandal is KPMG, the global accounting and auditing firm. KPMG acted as FIFA’s auditor. FIFA also audits a number of the regional member organizations that operate under FIFA’s umbrella. According to an interesting June 5, 2015 Marketwatch article entitled “FIFA Auditor KPMG Totally Missed the Soccer Scandal” (here),  by Francine McKenna, the author of the re: The Auditors blog (here), KPMG also prepares an audited summary at the end of each of the four-year World Cup cycles. In addition KPMG represented both the Russian and the Qatari organizing committees (although Qatar switched to E&Y in 2011). McKenna’s article quotes several commentators as stating, among other things, that KPMG should have caught and called out the illegal activities. A June 3, 2015 CFO.com article (here) raises many of the same questions concerning KPMG.

 

While many observers are shocked by the wrongdoing alleged in the FIFA scandal, others have been more outraged by the prosecution itself. For example, in a statement on the Kremlin website, Russian President Vladimir Putin charged that the criminal allegations are part of a U.S. conspiracy for world dominion; accused the U.S. of “persecution;” and asserted that criminal prosecution was “just one more brazen attempt [by the U.S.] to spread its jurisdiction to other states.” Putin also asserted with respect to the individual defendants named in the indictment that “aren’t U.S. citizens, and if anything happened, it didn’t happen on the territory of the U.S.”

 

However, as Professor Koehler notes, that while the indictment does refer to conduct outside the U.S., much of the conduct is also alleged to have taken place inside the U.S. or to involve U.S.-affiliated individuals and entities:

 

As to the core alleged bribery scheme, three of the defendants are U.S. citizens; various of the regional soccer associations implicated have offices in the U.S.; several of the intermediate sports marketing companies have headquarters, offices or affiliates in the U.S.; and the indictment contains several allegations concerning use of U.S.-based bank accounts, phone calls from the U.S.; and in-person meetings in the U.S. in furtherance of the alleged bribery scheme.

 

One might argue not only that Putin has challenged the criminal prosecution out of concern for where it might lead with respect to the 2018 World Cup, now scheduled to take place in Russia, but also that  he clearly prefers a world in which bribes can be paid and received with impunity and without scrutiny.

 

One question I have received over the past few days has to do with what the potential D&O insurance implications might be from these events. The short answer, without further information about what D&O insurance protection the various organizations might carry (if any), is that it is just hard to tell. A typical domestic U.S. D&O insurance policy will include within the definition of a covered “Claim” the initiation of a criminal action following indictment. However, the 14 individuals who were named in the recent indictment represented a variety of different organizations and institutions, only some of which are domiciled in the U.S.

 

Nine of the indicted individuals are current or former officers or directors of FIFA or CONCACAF, the regional confederation for North America, South America, and the Caribbean. Several of the individuals were officers or directors of both FIFA and CONCACAF. FIFA is an international body and entity registered under Swiss law and headquartered in Zurich. CONCACAF is incorporated in Nassau, Bahamas, with its current headquarters location in Miami, Florida. (Before 2012, it was headquartered in New York). Because any D&O insurance policy FIFA might carry likely was issued in Switzerland, it is a little more difficult for me to assess what its terms might provide. Any separate coverage CONCACAF might carry likely would have been issued in the U.S. In any event, a challenging issue that will face those who were officers or directors of both FIFA and CONCACAF, is which policy (if any) should respond to the allegations that have been made against them.

 

In addition to the nine current or former FIFA or CONCACAF officials, the indictment also named five other individuals, four who were employed by sports marketing firms located in Argentina, Brazil and the U.S., while a fifth individual was employed by broadcasting-related firms. These individuals will have to look to their respective corporate employer’s D&O insurance policies (if any). The extent of protection available to these individuals may well depend on where the policies were issued, as terms and conditions often vary by country. Typically, however, private company D&O insurance policies include the initiation of a criminal action by an indictment within the definition of a covered Claim.

 

All of the individual defendants are alleged to have engaged in intentional criminal misconduct. The typical D&O policy will contain an exclusion precluding coverage for criminal or fraudulent misconduct. However, most modern D&O policies will provide that the precluded conduct must be established by an “adjudication” in order for the exclusion to be triggered. As long as the allegations are merely alleged but unproven, the exclusion will not be triggered. However, a conviction or even a guilty plea would likely trigger the exclusion.

 

As a result, all of these individuals will face the potential problem that if they are convicted (or even if they plead guilty), their respective D&O insurers would, depending on the nature of the charge for which they were convicted,  likely have the right to seek recoupment from them of any amounts the insurers have paid in their defense (as I discussed in a recent post, here). In that regard, it is worth noting that in addition to the fourteen individuals who were named as defendants in the recent indictment, the DoJ’s press release also refers to four individuals and two entities that between 2013 and 2015 each pled guilty charges presented against them in a criminal information. There is no way to tell whether these individuals, affiliated with FIFA, CONCACAF and sports marketing firms, sought to have their respective organizations’ carriers pay for their criminal defenses. To the extent the carriers did pay any amount, and to the extent the criminal pleas triggered any potentially applicable policy exclusions, the carriers may have the right to seek to recoup those amounts.

 

A more interesting question from a D&O insurance standpoint will be whether or not there will be any follow on civil litigation. Because FIFA and CONCACAF are themselves membership organizations rather than commercial stock corporations, it is not immediately apparent who the potential claimants might be (except perhaps their respective affiliated membership organizations). The possibility of either criminal proceedings or civil litigation involving the various sponsors, banks and accounting firms who have been drawn into this scandal presents a different set of issues. While the possibility of these firms getting drawn into the legal proceedings at this point seems unlikely, the possibility at least raises a D&O insurance underwriting issue for the firms in question.

 

I will say this, that while the allegations in the U.S. indictment do not relate directly to the selection of World Cup sites for 2018 and 2022, and while much of the investigation has yet to play out (including in particular the ongoing investigation in Switzerland of the site selections for the 2018 and 2022 World Cups), if you wanted an example of how a corrupt process can produce distorted results, you wouldn’t need to look much further than the selection of Qatar as the site for the 2022 cup. Almost from the moment it happened, the Qatar site selection has been mired in controversy owing (among many other things) to questions about the suitability of the site for the event. In particular, the sheer impossibility of holding the event in Qatar during the summer months has caused innumerable problems, as a result of which the event has now been shifted from its traditional June and July time frame to a mid-November to mid-December time frame – which will of course wreak havoc with the schedule of most of the domestic soccer leagues.

 

This is all too bad, because as the 2014 event in Brazil showed, the World Cup is one of the world’s great spectacles. As a soccer fan, I find all of this news and controversy truly dismaying.

 

More About the 2008 Beijing Olympics: As long as I am passing along interesting links to the FCPA Professor blog, I though I should add one more link pertinent to an item I posted last week about the allegedly corrupt sponsorship activities in which BHP Billiton was implicated in connection with the 2008 Beijing Olympics. While in my blog post I suggested – and quoted others as saying — that the SEC’s enforcement action against BHP Billiton represented an aggressive use of the agency’s enforcement authority under the FCPA, Professor Koehler takes a different view. In a June 4, 2015 blog post (here), he writes that “while the BHP Billiton action is problematic on a number of levels… the enforcement approach in BHP Billiton was hardly unique.  The SEC often charges or finds books and records and internal controls violations in the absence of anti-bribery charges or findings.” Koehler promises to provide a future post in which he will further detail his reasoning.

 

More About SEC Chair Mary Jo White: In my blog post last week in which I detailed Senator Elizabeth Warren’s scathing letter criticizing SEC Chair Mary Jo White, I noted that many of the charges Warren raised failed to take into account the fact that several of the specific items for which Warren criticized White are only within the purview of the Commission as a whole, and not within authority of the SEC Chair acting alone.

 

A front-page June 4, 2015 article in the Wall Street Journal article entitled “SEC Bickering Stalls Mary Jo White’s Agenda” (here) highlights how sharp political divisions among the various individual SEC Commissioners has not only poisoned the atmosphere at the agency but undermined White’s agenda and produced gridlock – the very gridlock for which Senator Warren lambasted White. A June 5, 2015 New York Times article (here) details how political divisions at the Commission nearly capsized the agency’s enforcement action against Computer Sciences Corporation. In a very interesting June 4, 2015 post on his TheCorporateCounsel.net blog (here), Broc Romanek asks, in a question that was not meant to be rhetorical, “Is Partisan Politics Destroying the SEC?”

 

Whether or not criticisms of White are warranted, I think it is patently unfair to question her leadership without acknowledging the contentious dynamic that has undermined her efforts. Senator Warren’s failure to acknowledge the problems arising from the agency’s sharp partisan divides is all the more surprising given that the Democratic Senator from Massachusetts in in the same political party as the President who appointed White.

 

More About Proxy Put Litigation: In an earlier post (here), I wrote about how the presence of provisions in corporate loan agreements requiring the acceleration of the debt maturity in the event of a management change has been producing D&O litigation. A June 5, 2015 memo from the Fried Frank law firm (here) takes at looks at these kinds of provisions – often called “proxy puts” – as well as the recent litigation that has surrounded the provisions.

 

According to the memo, all too often insufficient care is taken to distinguish between two kinds of corporate loan provisions, a simple “proxy put” and what the memo calls a “dead hand proxy put.” Both kinds require the acceleration of the debt maturity in the event of a change in control of the borrower’s board. A “dead hand” provision adds the additional requirement that any director elected as a result of an actual or threatened proxy contest will be considered a non-continuing director for purposes of the proxy put. The memo states proxy put provisions have frequently been used without controversy. Dead hand proxy puts, however, are now being challenged. While the memo contends that both proxy puts and dead hand proxy puts can be appropriate, the memo suggests that companies consult with their counsel, and identifies the factors that company’s should take into account, including in particular the motivations and interests of the lending  bank involved.

 

Warren Buffett’s Management Model: Warren Buffett’s investment style and philosophy have been admired and emulated for many years. But as my good friend and George Washington University Law Professor Larry Cunningham contends, Buffett’s management style is also worthy of study and emulation. In an interesting recent Wake Forest University Law Review article entitled “Berkshire’s Disintermediation: Buffett’s New Managerial Model” (here), Cunningham argues that “While Buffett’s legacy to date has been to lead two generations of value investors, Berkshire’s radically ingenious disintermediation has the potential to shape the next two generations of value managers.”

 

Cunningham is the author of the recent book “Berkshire Beyond Buffett: The Enduring Value of Values,” which I reviewed here.