In April 2009, the Department of Justice ("DOJ") announced that six former executives of a California-based valve company were criminally charged for their participation in a foreign payment scheme to obtain and retain business. The indictment identifies the valve company merely as "Company A" (a company involved in the design and manufacture of control valves for use in the nuclear, oil and gas, and power generation industries worldwide). However, various media reports have identified Company A as Control Components, Inc.
The individuals (all former employees of Company A) charged are: (i) Stuart Carson (former Chief Executive Officer), (ii) Hong Carson (former Manager / Director of Sales for China and Taiwan), (iii) Paul Cosgrove (former Executive Vice President / Head of Worldwide Sales), (iv) David Edmonds (former Vice President of Worldwide Customer Service), (v) Flavio Ricotti (former Vice President and Head of Sales for Europe, Africa, and the Middle East), and (vi) Han Yong Kim (former President of the Korea office).
According to the indictment, the defendants allegedly caused Company A to pay, directly or indirectly, approximately $5 million in improper payments to officials of foreign-state-owned companies in violation of the FCPA and to pay, directly or indirectly, approximately $2 million in improper payments to officers and employees of foreign and domestic privately owned companies in violation of the Travel Act. The indictment alleges that the improper payments helped Company A secure or retain contracts resulting in approximately $46.5 million in net profits for the company.
As to the FCPA charges, the DOJ alleges that many of Company A's foreign customers in China, Korea, Malaysia and the United Arab Emirates were state-owned, and thus a department, agency or instrumentality of a foreign government within the meaning of the FCPA, and that employees of these state-owned entities (such as Engineering Managers, Procurement Managers, and Purchasing Officers) were "foreign officials" under the FCPA.
According to the indictment, defendants conspired and caused Company A to make improper payments to the foreign officials, who had authority to award contracts or influence the technical specifications of an order in a manner that would favor Company A, for the purpose of obtaining and retaining business for Company A. The indictment alleges that Company A made inflated commission payments to sham "consultants" who were retained for the purpose of acting as pass-through entities and engaged consultants who were actually employees of the state-owned entity Company A was targeting for business. Also, among other improper payments, the indictment alleges that certain defendants: (i) participated in and arranged "overseas holidays" to places such as Disneyworld and Las Vegas for employees of the state-owned entities under the "guise of training and inspection trips," when the actual purpose of the trips was to reward the foreign officials for causing their employers to do business with Company A; (ii) participated in and arranged for "extravagant vacations" for the foreign officials where all expenses, including first-class airfare, five-star hotel accommodations, charter boat trips and similar luxuries, were charged to the company; (iii) caused the company to pay the U.S. college tuition for the children of at least two-executives of state-owned customers for the purpose of securing business; and (iv) hosted lavish sales events, including the payment of greens fees for golf, to entertain current and potential state-owned customers for the purpose of securing business.
According to the indictment, certain of the defendants concealed and provided false information to Company's A's internal auditors investigating the payments in an attempt to mislead the internal auditors. Further, Defendant Hong Carson was also charged for allegedly destroying relevant documents by flushing them down the toilet prior to her interview by Company A's counsel, which was conducting an internal investigation into the payments.
Earlier in 2009, Richard Morlok (the former Finance Director for Company A) and Mario Covino (the former Director of Worldwide Factory Sales for Company A) pleaded guilty to conspiracy to violate the FCPA for their role in the above-described payment scheme. Pursuant to the plea agreements, Morlok and Covino face a maximum of five years in prison and they are cooperating in the DOJ's ongoing investigation.