White Collar and Securities: Daimler Reportedly Agrees to Global Settlement with U.S. over FCPA Violations

BusinessWeek magazine is reporting that Daimler AG has reached a global settlement with the U.S. over allegations that the company, during its incarnation as DaimlerChrysler, violated provisions of the Foreign Corrupt Practices Act ("FCPA"). The reported settlement will involve the payment of $200 million in civil penalties and criminal pleas by two Daimler subsidiaries.

The FCPA prohibits the bribery of foreign officials by American corporations. There are both criminal and civil enforcement tools in the FCPA. The Department of Justice has exclusive criminal jurisdiction. The Securities and Exchange Commission has jurisdiction to act civil in the area of civil enforcement.

The magazine reports that the matter revolves around bribery payments to foreign officials by Daimler subsidiaries. The SEC began its investigation in 2004 based on allegations by a then auditor at DaimlerChrysler that he was fired for objecting to supervisors about bribe payments. The whistleblower alleged in a lawsuit that DaimlerChrysler business units maintained secret bank accounts to use for bribe payments. Moreover, he claimed that practice of paying local officials was common. It was alleged that 40 secret accounts existed and were a necessary cost of doing business.

In a July 2005 filing to the SEC the company disclosed that it was conducting an internal investigation and would share its results with the Department of Justice and the SEC. In the annual report for 2005 the company reported that improper payments were made in a number of places, but primarily in Africa, Asia, and Eastern Europe.

In addition to disclosure to American authorities, at the time of the internal investigation DaimlerChrysler self reported potential tax liabilities to several jurisdictions. The tax liabilities stemmed from the mischaracterization of the bribe or gratuity payments for tax purposes.

In 2007 Daimler sold Chrysler LLC to Cerberus Capital Management, LP. Chrysler filed for U.S. bankruptcy protection in 2009. Chrysler sold most of its assets to Fiat SpA, a United Auto Workers union benefit trust and the U.S. and Canadian governments in June 2009.

A spokesman for Daimler confirmed to BusinessWeek that the company was in discussions with DOJ and the SEC about resolving the investigations. Both DOJ and the SEC refused to confirm the settlement agreement.

For the full article reporting the agreement, please see BusinessWeek, "Daimler Said to Agree to Pay $200 Million Over Probe of Bribes," February 13, 2010, www.businessweek.com/news/2010-02-13/daimler-said-to-agree-t0-pay-200-million-over-probe-of-bribes.html.

Qui Tam - Supreme Court Clarifies Intent in False Claims Act Suits

In Allison Engine Co., Inc., et al., v. United States ex rel. Sanders et al., the Supreme Court addressed the issue of the level of intent necessary for a False Claims Act ("FCA") action under 31 U.S.C. Sections 3729(a)(2) and (3). In Allison, the United States Navy signed contracts with two shipyards for the construction of a fleet of guided missile destroyers. The contracts required the building of generator sets for the production of electricity on the fleet. The shipyards subcontracted much of the work including the building of the generator sets. As part of this subcontracting the Allison Engine Company, Inc., received the subcontract for the building of the generator sets.

The primary contracts specified that every part of the destroyers be built according to the navy's specifications, which were incorporated into each subcontract. Moreover, each completed and delivered generator set had to be accompanied by a certificate of conformance, which certified manufacture in accord with the navy's specifications.

The relators in the case filed suit in federal district court alleging, inter alia, that the generator sets were defective and that the certificates of conformance were fraudulent.

At trial the relators introduced evidence that the certificates of conformance were false. However, they did not introduce the invoices submitted to the government for payment. As a result, the district court dismissed the complaint, holding that the proof was legally insufficient in the FCA context because the plaintiffs had not offered proof that the false claims had been submitted to the government.

The U.S. Court of Appeals for the Sixth Circuit reversed the lower court's decision. The Sixth Circuit held that Sections 3729(a)(2) and (3) of the FCA allow as a sufficient standard proof of intent to obtain payment for a false claim from a private party using government funds. The court's decision conflicted with the decision of the U.S. Court of Appeals for the District of Columbia in United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), cert. denied, 544 U.S. 1032 (2005).

The Supreme Court decided that under section 3729(a)(2) for recovery a defendant must make a false statement to get a false claim paid or approved for payment by the government. The Court distinguished between getting the government to pay a false claim and getting a false claim paid using government funds. Under section 3729(a)(2) the "defendant must intend that the [g]overnment itself pay the claim." However, this does not mean that the false record or statement must be submitted to the government as the district court had held. It is sufficient if a false statement or record were offered to induce the government to either pay or authorize payment of the false claim. Thus, a false statement by a subcontractor to a prime contractor with the intent that the prime contractor submit the fraudulent statement to the government to get paid would bring the subcontractor's action within the purview of section 3729(a)(2).

The Court continued with an abbreviated analysis of section 3729(a)(3). Using the same rationale as it employed in the discussion of section (a)(2), the Court said that under this conspiracy statute, the plaintiffs must show "that the conspirators had the purpose of 'getting' the false record or statement to bring about the [g]overnment's payment of a false or fraudulent claim.

Thus, the Supreme Court has set the standard of intent under sections 3729(a)(2) and (3) as an intent to induce the government to pay or authorize the payment of a false claim.