Collateral Damage: FCPA-Related Non-Prosecution Agreement for Hewlett-Packard Leads to Civil RICO Lawsuit

hp logoA non-prosecution agreement is a wonderful thing. But it may not mean the end of the woes for a company under government investigation.

Hewlett-Packard (HP), the California-based technology firm, and its Mexican subsidiary, HP Mexico, entered into an NPA with the Department of Justice in April 2014. The NPA arose out of allegations of HP’s foreign bribery in Mexico.

The NPA included a fairly lengthy statement of facts to which HP agreed. The facts in the NPA relate to Mexico but the NPA also references

related agreements between the Department and HP Co. or its subsidiaries concerning FCPA violations in Russia and Poland.
Eight months later, that statement of facts is the basis of a civil RICO lawsuit. In an interesting turn of events, the plaintiffs are the companies that received the “influencer fee” paid by HP.

The Complaint

In December 2014, two Mexican corporations, Petróleos Mexicanos and Pemex Exploración y Producción (collectively, Pemex), angry at HP’s practices, filed an eight-count complaint against HP.

The eight-count complaint includes claims for substantive RICO violations, conspiracy to commit RICO violations, unfair competition, aiding and abetting unfair competition, fraudulent concealment and tortious interference with contracts.

The complaint describes HP as an “origin of corruption and bribery in different countries” that erected a “global labyrinth” aimed at concealing the underhanded nature of its deals.

Beyond the hyperbole, here’s how the complaint summarizes the claims:

During 2008 and 2009, Defendants, together with other members of HP’s criminal enterprise, secured valuable contracts to sell Plaintiffs business technology optimization (“BTO”) products and services by causing the corruption of officials who worked for Pemex through payments of an “influencer fee” to entities with ties to these officials. The contracts for these BTO products were for approximately $6 million. The Defendants received approximately $2,527,750 in net benefits from these contracts.

As a result of Defendants’ scheme, Plaintiffs suffered millions of dollars of harm from the acceptance of harmful contractual terms and the payment of significant cost overcharges. Plaintiffs bring this action to seek restitution, to recover damages, and to enjoin further wrongdoing.

The Mexican Bribery Schemes

The complaint describes bribery schemes in Poland, Russia and Mexico. Most relevant is the scheme in Mexico.

Most of the Mexican HP subsidiary’s efforts were aimed at illicitly securing and maintaining contracts with Pemex. In particular, HP Mexico focused on Manuel Reynaud Aveleyra.

At the time the bribery began, Mr. Aveleyra was both the CEO and CIO of Pemex, and seemed an obvious choice as the recipient of HP Mexico’s bribes. In an attempt to secure a 2006 contract worth approximately $6 million, HP Mexico treated Mr. Aveleyra to a number of trips, dinners and events in places like Orlando, Florida, Monaco, and (where else?) Las Vegas.

Nevertheless, the dinners and trips were not enough. To be sure they would be awarded the Pemex contracts, HP Mexico also needed to funnel cash into organizations that had close ties to Mr. Aveleyra. To this end, they retained the services of Intellego, S.C., a Mexican technology company for which Mr. Aveleyra at one time served as principal. HP Mexico understood that if it wanted to do any business with Pemex, Intellego would have to be involved.

Mexican law prohibited any overt inclusion of Intellego, however. Pemex was a state-owned enterprise. As such, its contracts could only be secured though approved partners. To circumvent this law, HP Mexico used a state-approved partner to secure the Pemex contract while allegedly funneling a 25% “influencer fee” to Intellego. All told, HP Mexico’s alleged payments totaled more than $1.6 million.

Pemex Discovers the Bribery

According to the complaint, the current managers of Pemex had no knowledge of the bribes that went to their former CEO/CIO or his former company, Intellego. They allege that HP kept the payments hidden on its books and records.

Defendants concealed the payment of bribes by falsely recording these bribes and payments to Intellego as payments for legitimate services or commissions, when the true purpose of these payments was to make corrupt payments to Pemex officials to obtain business.

Sidenote: these allegations not only try to make HP look bad by hiding the payments but also serve to avoid a statute of limitations problem. The statute of limitations for RICO is generally four years, and the supplemental state law claims are likely shorter than that.

Pemex’s supposed wake-up call came when HP Mexico entered into the NPA with DOJ, and the DOJ issued its corresponding press release. In the course of the agreement, HP Mexico admitted to paying the “influencer fee.”  HP paid sizable penalties to the U.S. federal government ($108 million total, according to the DOJ press release). HP then secured the DOJ’s agreement to forgo prosecution.

Inadequate Compliance Program?

Pemex alleges that HP’s lax internal controls allowed these global bribery schemes to exist and flourish.

HP’s internal controls and policies were insufficiently implemented at HP, HP Mexico, HP Russia, and HP Poland and allowed for the circumvention of internal accounting controls and the falsification of HP’s books and records. The inadequacy of HP’s internal controls and the occurrence of the bribery schemes are inextricably intertwined.

Going further, Pemex claims that the bribery undercut the competitive nature of the business market. As a result, Pemex contends that they are entitled to damages for the loss they incurred by accepting a noncompetitive bid for its contractor.

The Future of Non-Prosecution Agreements

None of this means that NPAs are going away. They are much too valuable to companies facing a serious government investigation. It’s one thing to pay a civil judgment for wrongful conduct; it’s another to be criminally charged for it. A criminal charge (or conviction) has serious consequences for public relations, for shareholder relations and for government contracting work, depending on the industry.

Companies will have to weigh the unquestioned benefit of an NPA against the strong likelihood of a follow-on civil suit. The desire for an NPA will win, no doubt.

RICO cases are difficult to win but they are a boon for plaintiffs who seek to take advantage of provisions allowing for treble damages and attorney’s fees. There have also been lawsuits filed by shareholders upset at learning of their company’s FCPA wrongdoing (see, e.g., Wal-Mart).

Companies can and should prepare for civil litigation after an NPA—by limiting the factual summary in the NPA to whatever degree possible, warning its board and shareholders of the possible collateral civil consequences, reserving for legal fees for a civil case and so forth.

What Will Happen In the HP Case?

On February 10, the HP defendants (represented by Wachtell Lipton) filed a motion to dismiss on grounds of extraterritoriality, statute of limitations and failure to plead a pattern of racketeering.

These are complicated legal issues that will take the court some time to decide.

In an interesting twist, the key issue in discovery (if it progresses that far) is not whether HP made improper payments (it admitted paying an “influencer fee” in the NPA). Rather, the key issue will turn the tables on the plaintiffs—did others at Pemex know about the HP payments? This could get uncomfortable for the plaintiffs.

This entry was posted in civil case, FCPA, Non-Prosecution Agreement, RICO and tagged . Bookmark the permalink.

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