Barack Obama’s Justice Department is prosecuting more overseas bribery cases involving US companies than any previous administration’s. No gaming operator or executive has yet been charged. But it does cast the highly publicized feud between Wynn Resorts and Kazuo Okada in a dangerous light.
The directors of Wynn Resorts were keenly aware of the long arm of American law way before things unraveled with Mr Okada over the Philippines. Now, with the pachinko king in hot water over millions of dollars in alleged bribes funneled to a Filipino fixer through a US company he controls, it appears Wynn was smart to sever ties with its co-founder, the man who provided a big chunk of the seed money behind Wynn Macau and Wynn Las Vegas—“my partner and my friend,” Steve Wynn once hailed him with affection.
As for where the company itself stands amidst the wreckage of that relationship, that could depend on how authorities in the States interpret a prosecutorial WMD called the Foreign Corrupt Practices Act.
The Act’s criminal provisions have swept up more than 170 individuals and entities, foreign and American both, just in the last dozen or so years— owners, CEOs, presidents, CFOs, directors,treasurers, general managers, employees, joint venture partners, trust fund managers, contractors, translators, even Hollywood producers—mostly in connection with actual or purported schemed to bribe foreign government officials to obtain business or secure some kind of commercial or financial advantage. At least 29 men and women have lost some measure of their physical freedom as a result of FCPA convictions or guilty pleas. More than US$3 billion in fines and other monetary penalties have been exacted. A Louisiana congressman convicted of bribery in a 2009 jury trial that included FCPA charges is doing 13 years. In 2010, a corporate vice president got 87 months after pleading guilty to paying bribes to secure maritime contracts in Panama.
And the Act is being enforced more vigorously now than at any time in its history, something Wynn’s lawyers would not have failed to note as relations with Mr Okada got uglier, and from the board’s standpoint increasingly worrisome, over his plans to develop a resort-scale casino in Manila in competition with his own company. Or so it’s portrayed in Wynn’s 2012 lawsuit charging the Japanese billionaire with “breach of fiduciary trust”.
As Justice Department records show, almost half of all enforcement actions initiated under the FCPA or related statutes have occurred since Barack Obama took office in 2009—92 to date—more than under any president going back to Jimmy Carter, who signed the FCPA into law—more than under the 16 years of the Bush and Clinton administrations combined.
In the casino industry one hears about the Foreign Corrupt Practices Act mostly in connection with a tangled history of relations between Las Vegas Sands and the powers that be in Beijing and Macau and a cast of assorted middlemen peddling influence in the shadowy terrain in between, among them, so it’s alleged, a prominent Macau lawyer who is a member of the territory’s Legislative Assembly. Most of this was dragged into the light when Steve Jacobs, who was fired in 2010 as head of the company’s China operations, sued for wrongful termination. In March 2011, LVS disclosed that it had been subpoenaed by the Justice Department and the Securities and Exchange Commission “relating to its compliance with the Foreign Corrupt Practices Act.”
It is not uncommon for FCPA investigations to begin this way, with somebody talking out of school. In his March 2012 counterclaim challenging the forced redemption of his Wynn Resorts stock, Mr Okada says he was ousted from the corporation for challenging the authority of Chairman and CEO Steve Wynn, who he claims runs Wynn Resorts as his “personal fiefdom”. This extended to questions he says he’d raised about the propriety of a sizable donation the company pledged in May 2011 to a University of Macau foundation—$135 million in 11 annual installments, the final payment to be made the year Wynn’s Macau casino concession is due to expire.
Likewise, much of what former FBI Director Louis Freeh would report from the Philippines in support of Wynn’s breach-of trust against Mr Okada appears to derive from information supplied by an attorney with an axe to grind and relationships with people in high places, including former executives with the Philippines Amusement and Gaming Corporation (PAGCOR), the government agency that licenses and regulates the industry. The report, compiled in late 2011 and early 2012, touched at some length on links between local affiliates of Mr Okada and one Rudolfo “Boysee” Soriano, who had been a comped guest of Mr Okada’s at Wynn Macau and Wynn Las Vegas on at least four occasions and is described as a PAGCOR consultant and confidante of Efraim Genuino, the agency’s former chairman. Soriano’s name acquired sudden notoriety last month after Reuters reported that Mr Okada’s Universal Entertainment Corp. was under investigation by the Nevada Gaming Control Board and the Philippines Department of Justice in connection with a 2010 transfer of $40 million from the United States to a company in Hong Kong, $30 million of which found its way to companies controlled by Mr Soriano. The money was moved through Aruze USA, the Nevada-registered entity that held Mr Okada’s Wynn Resorts shares. Aruze USA is wholly owned by Tokyo-based, JASDAQ listed Universal, which is licensed in Nevada as a gaming machine manufacturer and is 67.9% controlled by an Okada family entity. Mr Okada is the chairman of Universal and president, secretary and treasurer of Aruze USA. Reuters reported that at least two former Universal employees were talking to the FBI in connection with the investigations.
Las Vegas Sands, meanwhile, has marshaled the services of legal heavyweights Mark Mendelsohn, former head of the Justice Department’s FCPA unit, and Richard Grime, an FCPA expert in the White Collar Defense and Corporate Investigations Practice of D.C.-based O’Melveny and Myers; while Sheldon Adelson, the company’s famously combative chairman, who has said he fears “vilification” as an outspoken foe of the Obama administration, spent 2012 writing enormous checks to Republican candidates, political action committees and dark money non-profits to try to keep Mr Obama from returning to the White House.
Had he succeeded it’s likely his FCPA worries would be behind him. As it stands, $150 million or so in direct and indirect campaign contributions later, his company is also the target of a federal probe into alleged money-laundering at its Las Vegas casinos. Mr Adelson was planning to travel to Washington this month, according to a Huffington Post report, to meet with Republican lawmakers. The agenda was to include the Foreign Corrupt Practices Act, the Post said, citing party insiders.
“It looks like Sheldon is shooting himself in the foot when it comes to the FCPA,” says a source with ties to the regulatory authorities in Macau.
For what it’s worth, Mr Wynn is also a major Republican donor. Similarly outspoken in his dislike for the Obama presidency, he acknowledged “urging” his 12,000 Las Vegas employees to vote for Mitt Romney.
Love Gone Sour
In January 2011, Wynn’s independent directors led by former Nevada Gov. Bob Miller, who chairs the board’s Compliance Committee, undertook the first of two risk assessments of the Philippines. Their conclusion was that corruption is “deeply ingrained” in the gaming industry there and that newly elected President Benigno Aquino wasn’t likely to do much about it. The committee also claimed to have evidence leading to “reasonable suspicion that persons acting on Okada’s behalf had engaged in improprieties,” possibly a reference to the allegations currently swirling around Boysee Soriano.
According to the company’s 2012 lawsuit, these findings were presented at a board meeting the following month with Mr Okada present. Steve Wynn announced at the meeting that he’d been invited by Mr Okada to meet with Mr Aquino. The independent directors responded that “involvement in the Philippines was inadvisable” and recommended against it. The meeting with Mr Aquino was canceled. Mr Okada was “embarrassed and angry”.
The committee’s second investigation, commissioned that August, went further, declaring that it had “identified anomalies and improprieties in Universal/Okada’s dealings in the Philippines”. The findings included concerns that Mr Okada was “engaging in acts that would render him unsuitable under Nevada gaming regulations, and breaching the fiduciary trust duties he owed Wynn Resorts”.
Sometime around the end of October, Washington, D.C.-based Freeh, Sporkin & Sullivan was brought in “to examine Mr Okada’s efforts in connection with the creation of a gaming establishment in the Republic of the Philippines”. Specifically, the board wanted something definitive on whether Mr Okada “may have breached his fiduciary duties to Wynn Resorts; engaged in conduct that potentially could jeopardize the gaming licenses of Wynn Resorts; and/or violated the Wynn Resorts compliance policy”.
It’s difficult to imagine that Mr Okada couldn’t have known at this point that his days at the company were numbered, for his first written request for corporate records relating to the University of Macau donation was submitted on 2nd November. Three more requests would follow, on the 17th, the 29th and 12th December. On 11th January of this year, he went into state court in Nevada to demand the information. He also wanted to see records relating to the status of his substantial equity holding as a result of the 2009 divorce settlement between Steve and Elaine Wynn, who is also a director, and records explaining how the company had spent some $30 million he says he provided back in 2002 to get the Macau business off the ground.
It was almost exactly one month later, on 13th February, that the Securities and Exchange Commission, which jointly enforces the FCPA, came calling, requesting through its Salt Lake Regional Office that the company “preserve information relating to the donation to the University of Macau, any donations by the Company to any other educational charitable institutions … and the Company’s casino or concession gaming licenses or renewals in Macau”.
The irony is somewhat striking since, to hear Wynn tell it, the company’s standing with regard to the FCPA has been of paramount concern going back to 2008. That was the year a Philippines subsidiary of Aruze USA won one of four no-bid licenses from PAGCOR to develop a resort casino on land reclaimed from Manila Bay and christened Entertainment City.
Louis Freeh’s background is indicative of just how much this had come to worry the board. His law partners include two retired federal judges, one of whom used to head the SEC’s Enforcement Division. Mr Freeh had been a US attorney and US District judge prior to joining the Clinton administration in September 1993, where he would direct the FBI for almost seven years, continuing in the post for five months more after George W. Bush took office. After leaving the government he represented Prince Bandar bin Sultan, the former Saudi ambassador to the US, in the al-Yamameh arms-for-oil scandal involving Europe’s largest defense contractor, UK-based BAE Systems. In 2010, BAE would forfeit US$400 million in one of the largest criminal prosecutions in FCPA history. That same year, as part of the fourth-largest FCPA settlement up to that time, Mr Freeh was appointed to monitor Daimler AG’s compliance with the Act after the giant automaker and three subsidiaries agreed to pay $93.6 million in fines and hand over $91.4 million in profits to settle alleged violations. In 2011, he served as an independent investigator for FIFA in the Mohamed bin Hammam bribery scandal. While the SEC was poring over Mr Okada’s January petition, Mr Freeh was briefing Wynn’s Compliance Committee on what he’d learned about the Philippines. His final interview, with Mr Okada and Mr Okada’s US counsel, took place in Tokyo on 15th February. On the 18th, he gave what Wynn describes as a “detailed presentation” to the board and provided copies of his final report, which concluded that Mr Okada’s conduct “constituted prima facie evidence of violations of the Foreign Corrupt Practices Act”. It was on that day, apparently, that Wynn issued a 10-year IOU to buy back Aruze USA’s shares, amounting to a 19.66% stake in the company, at a 30% discount to their market value at the time. The next day, the company filed its suit in Nevada District Court in Las Vegas charging the man who had helped bankroll Wynn’s empire with “breach of fiduciary trust”. Mr Okada was later booted off the board of Wynn Macau. He is still on the board of Wynn Resorts, his seat protected by Nevada law unless the shareholders vote to remove him.
“I love Kazuo Okada as much as any man that I’ve ever met in my life,” Steve Wynn once proclaimed. “And there is hardly anything that I won’t do for him.”
Obviously, that stopped at Luzon’s steamy shores.
The “Big Stick”
On 24th February, the Financial Times reported that a lawyer for Wynn Resorts who had served with the US Attorney’s Office in Los Angeles had flown to Washington to meet with criminal prosecutors at the Department of Justice. It was not known at the time if the department has joined the SEC in looking into the company’s affairs. It is still not known.
Writing that month in his “White Collar Watch” column in The New York Times, former Justice Department prosecutor and law professor Peter J. Henning suggested that Wynn’s suit against Mr Okada “means the Justice Department and the Securities and Exchange Commission will be scouring the company’s books for possible violations, a front that neither side can control.”
“By invoking the specter of overseas bribery, Wynn has effectively opened itself up to a wide-ranging federal investigation of its dealings in Macau and elsewhere. Combined with the lawsuit it filed against Mr Okada, the company most likely will face soaring legal costs over the next year or two as it deals with the fallout from the dispute.”
Mike Koehler, a law professor with Southern Illinois University and a blogger on all things FCPA, calls this battle of the billionaires “one of the strangest instances of FCPA scrutiny one can imagine”.
“The Freeh report puts the DOJ (and perhaps even the SEC given Okada’s membership on the Wynn Board) in a difficult position. How can the agencies not investigate the conduct at issue when the former director of the FBI is terming the conduct ‘prima facie’ FCPA violations. An analogy would be like calling the fire department to inform that your house is on the fire, but the fire department fails to show up.”
The UMAC endowment, which has generated at least four shareholder lawsuits, is characterized as “suspicious” by Mr Okada, who cites “its enormous size, the fact that the 10-year term of the pledge matches precisely the length of the casino license Wynn Resorts was seeking, and the fact that the lead trustee of the University of Macau Development Foundation also has a position in the Macau government which enables him to influence the issuance of gaming licenses.” Presumably this refers to a prominent local businessman named Peter Lam Kam Seng, a charter member of the foundation and a member of the committee that elects Macau’s chief executive.
“I am at a complete loss as to the business justification for the donation,” Mr Okada said in September in an open letter to Wynn’s shareholders, “other than that it was an attempt to curry favor with those that have ultimate authority for issuing gaming licenses.”
He was the only one of the 16 directors to oppose the endowment. Wynn says that’s not true, that he objected only to its length.
Charitable contributions as such are not prohibited by the Act as long as they are not used as a “pretense” to cover bribes to government officials. This distinction was reiterated in fresh guidance on the Act issued last month by the Justice Department and the SEC.
The guidance gives the example of a Eurasian-based subsidiary of a US NGO that acceded to a request from an agency of a foreign government to make a grant to a local financial institution as a condition for attaining bank status. The company emerged in the clear, however, in part because it informed the DOJ of the request up front and because it did its homework by ensuring the money was transferred to a valid bank account and requiring the institution to provide audited financial statements along with a written agreement restricting the use of the funds and a confirmation that none of its officers were affiliated with the government.
Then there’s the example of pharmaceutical giant Schering- Plough, which had a subsidiary in Poland that donated money to a foundation that restores historical landmarks. The foundation was genuine. Its founder and president, however, was the director of a government health fund that purchases pharmaceuticals. Worse, “Internal documents established that the payments were not viewed as charitable contributions but rather as ‘dues’ the subsidiary was required to pay for assistance from the government official,” the November FCPA guidance notes, adding that the payments also violated Schering’s own policies, which require that charitable giving “generally should be made to health care institutions and relate to the practice of medicine”.
Wynn maintains that the UMAC donation “was made following an extensive analysis which concluded that the gift was made in accordance with all applicable laws.” No doubt, corporate counsel has since made note of these “Five Questions to Consider When Making Charitable Payments in a Foreign Country” from the FCPA guidance:
• What is the purpose of the payment?
• Is the payment consistent with the company’s internal guidelines on charitable giving?
• Is the payment at the request of a foreign official?
• Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding your business in that country?
• Is the payment conditioned upon receiving business or other benefits?
As for Mr Soriano’s visits to Wynn’s casinos, they were part of more than $110,000 in room and food and beverage complimentaries and other courtesies that were extended to current and former members and associates of PAGCOR and their families at the behest of Mr Okada and/or his representatives. These sums were all charged to a courtesy account maintained by the company for Universal and Aruze USA and funded by deposits from Mr Okada or his affiliates. In November 2009, the husband of then-Philippines President Gloria Macapagal Arroyo was comped a week at Wynn Las Vegas at a cost of more than $4,600. In June 2010, his last month in office, Mr Genuino was comped $1,870 at Wynn Macau. (The Freeh report claims Universal also paid expenses related to a trip by the former PAGCOR chairman to Beijing during the 2008 Olympics.) More than $5,900 was comped in 2010 and 2011 for stays at Wynn Las Vegas and Wynn Macau by four South Koreans, one of whom was identified at the time as commissioner of the Incheon Free Economic Zone Authority, where Mr Okada is also looking to develop a casino. In September 2010, two months after Mr Genuino was sacked by President Aquino on suspicion of corruption, his successor, Cristino L. Naguiat, and a party that included his wife, their children, the nanny and another PAGCOR officer and his wife ran up a bill over four days at Wynn Macau in excess of $50,000.
Mr Okada implies that Wynn was complicit in at least some of this, contending in the Freeh report that “all his efforts in the Philippines prior to the change of presidential administration in the summer of 2010 were undertaken on behalf of and for the benefit of Steve Wynn and Wynn Resorts”. The company vehemently denies this.
The FCPA does not prohibit a “reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official … directly related to the promotion, demonstration or explanation of products or services; or the execution or performance of a contract with a foreign government or agency thereof.”
What it does prohibit is conduct like that of a California telecommunications company that was slapped with an enforcement action for spending several millions of dollars over a period of years for hundreds of customer trips arranged for the purpose of obtaining systems contracts in China. These included visits by employees of state-owned companies to popular US tourist destinations. The trips were purported to be for “training,” and approximately $670,000 of the expenses was falsely recorded as such. A New Jerseybased telecom ran into similar trouble over hundreds of trips by Chinese government officials ostensibly for training and facility inspections that masked holidays in New York City, Las Vegas, Hawaii, Disney World, the Grand Canyon and Niagara Falls. The expenses were either not recorded or falsely listed on the books as “consulting fees,” the Justice Department says. This included cash that was handed to some of the officials for spending money.
According to the Freeh report, everyone in Mr Naguiat’s party received US$5,000 in credit for “shopping and gaming”. This was granted at the request of Mr Okada’s representatives and charged to the Universal/Aruze USA account. Another 80,000 Macau patacas (approximately $10,000) was advanced from the cage and charged to the Universal/Aruze account for a Chanel bag Mr Naguiat wanted for his wife.
If it is true, as Wynn’s suit alleges, that Mr Okada’s representatives also wanted the stay to be kept secret and instructed the hotel that Mr Naguiat would not register as a guest (he would be listed by VIP Services as “Incognito” followed by his name) that could prove especially damning from the standpoint of the FCPA. The same goes for the accusation that they wanted to conceal some of the costs by laying them off on Wynn Macau. This included accommodations at the “most expensive” suite at the property, the 7,000-square-foot Villa. This was refused, according to the Freeh report.
Mr Okada denies any knowledge of or involvement in wrongdoing at the company.
Wynn likewise maintains that it has followed the law both in letter and spirit. In August 2011, the month the Compliance Committee commissioned its second investigation into the Philippines, a notice was issued to all the members of the board to report in October for training on the Foreign Corrupt Practices Act. They also were instructed to review the company’s “Code of Business Ethics” and “Policy Regarding the Payment to Government Officials” and to confirm in writing that they had read and understood them. Wynn says every director signed this “Code of Business Conduct and Ethics Acknowledgement” save one, Kazuo Okada. He notified the board that he would attend the FCPA training, the company says, but the week before it was to start he asked for the training materials to be translated into Japanese. He also wanted the date of the training moved. He never attended.
The lawyers at Latham & Watkins, a US based practice specializing in international law and regulation, say an effective compliance program should be able to satisfy at least three basic questions:
• Is the program well-designed?
• Is it applied in good faith?
• Does it work?
Currently, the FCPA does not provide for an affirmative compliance defense. The US Chamber of Commerce, among others, believes it should.
So does Mr Koehler. “What you’re dealing with is not the law,” he says, “but the Justice Department’s and the SEC’s view of the law and in some cases that view has been rejected by the courts.”
The chamber also wants the Act amended so that “willfulness” has to be proved for a company to be criminally liable. (Currently, this applies only to individuals.) They also want limitations on a company’s liability for the acts of its subsidiaries.
For now, though, good intentions will carry only as much weight as federal prosecutors choose to accord them.
“It’s the enforcement agencies’ view that’s important,” Mr Koehler says. “They hold the big stick.”