International Law Advisory - Willbros Group Agrees to Pay $32.3 Million To Resolve DoJ and SEC FCPA Enforcement Actions

May 21, 2008

On May 14, 2008, to settle enforcement actions based on findings of FCPA violations, Willbros Group, Inc. and its wholly owned subsidiary Willbros International, Inc. (collectively “Willbros”), both Panamanian corporations headquartered in the United States, entered into a Deferred Prosecution Agreement with the US Department of Justice (“DoJ”). On the same day Willbros (an issuer) and four former employees entered into a civil settlement with the US Securities and Exchange Commission (“SEC”). The FCPA charges relate to Willbros operations in two countries – Nigeria and Ecuador. In addition, the SEC charged Willbros with securities fraud in connection with its business in Bolivia. Willbros agreed to pay $32.3 million to settle the charges, representing penalties, disgorgement of profits, and prejudgment interest, and entered into a consent decree.¹ Willbros has also agreed to retain a compliance monitor for a period of three years. The DoJ recognized Willbros’ voluntary disclosure of this matter to enforcement authorities, its extensive and thorough internal investigation, and its remedial steps and control enhancements.

This settlement follows criminal pleas last year by two former Willbros’ executives, Jim Bob Brown and Jason Steph (who was also one of the four settling with the SEC last week). The amount of penalties represents the second highest level of fines and penalties to date, following the Baker Hughes settlement last year. The investigation is ongoing, and may result in additional individual prosecutions. Both the company and the previously prosecuted individuals are committed to providing ongoing cooperation to the government.

The Payments At Issue

Nigeria
The core allegations in this case arise out of Willbros’ business in Nigeria. In 2003 Willbros sought work valued at $387 million on a major engineering, procurement, and construction (“EPC”) gas pipeline known as the Eastern Gas Gathering System (“EGGS”). To obtain this contract, Willbros and its former employee Jason Edward Steph made payments and promises to pay totaling more than $6.3 million to officials of the Nigerian National Petroleum Corporation and National Petroleum Investment Management Service, a senior official in the executive branch of the Nigerian federal government, officials of the multinational oil company serving as the operator of the EGGS joint venture, and a political party in Nigeria. To effectuate these payments, Willbros entered into a sham agreement with an outside consultant for which payment would be made at 3% of the contract revenues for certain projects, including the EGGS project. Payments to that consultant were then channeled in whole or in part to the aforementioned officials to cause those officials to award the EGGS project.

As a result of an internal investigation launched in 2005, the consultancy arrangement was terminated. Steph and the other employees, concerned that failure to make additional payments to government officials would cause an interruption in the company’s Nigerian business, orchestrated a series of loans from sources outside the company as well as from a Willbros petty cash account in Nigeria, the proceeds of which were funneled through a second consultant to Nigerian officials. According to the SEC, as part of this scheme, Steph directed Willbros employees to fabricate invoices and inflated forecasts and budgets to procure cash from the company’s headquarters in the United States. These payments totaled $1.8 million.

In addition to the scheme associated with the EGGS project, Willbros also agreed to make improper payments of more than $5 million to assist with obtaining business in Nigeria’s offshore fields.

The SEC documents also allege that Steph and others bribed Nigerian tax and court officials in a scheme by which fictitious invoices for non-existent vendors were created or acquired in order to obtain funding from the company’s offices in the United States. Ultimately, at least $300,000 of this money was used for illicit tax and court official payments.

Ecuador
Additional claims in this case are based on payments to officials of the state-owned oil company PetroEcuador and its subsidiary PetroComercial in order to assist with obtaining and retaining business associated with the Santo Domingo project, involving the rehabilitation of sixteen kilometers of gas pipeline in Ecuador. The business was valued at $3 million. In late 2003 to early 2004 Willbros agreed to make payments of at least $300,000 to officials of PetroEcuador and PetroComercial; the agreement was to pay $150,000 in advance with the remaining $150,000 to be paid at the project’s conclusion in exchange for being awarded the Santo Domingo project work. The first payment was made in the first half of 2004. Because of changes in the management of PetroEcuador during the course of the project, Willbros ultimately paid a total $255,000 at the conclusion of the project, split between former and current PetroEcuador officials.

Bolivia
The SEC found that Willbros was involved in a scheme to minimize its Bolivian subsidiary’s value-added tax (VAT) obligations to the Government of Bolivia through the use of fictitious invoices generated by an outside consultant. These invoices would create for Willbros an offset to VAT it had received from its customers and, in turn, reduce VAT owed to the Government of Bolivia. This scheme resulted in underpayments to the government, and inflated the company’s net income by approximately 6.4% in fiscal year 2003 and earnings per share by $0.03 for both fiscal year 2003 and the first three quarters of 2004. In 2005, as a result of findings during its internal investigation, Willbros restated previously issued financial statements. The SEC found that Willbros’ registration statements included material misrepresentations.

Enforcement Actions

US enforcement authorities brought several charges against Willbros, its wholly owned subsidiary Willbros International, and the former employees. As noted earlier, in 2007, the DoJ had charged two former executives, Jim Bob Brown, Division Manager of Willbros (Nigeria) Limited, and Jason Steph, General Manager – Onshore in Nigeria for Willbros International, in relation to the Nigerian activities, and secured pleas from both of them that include possible prison terms of not more than five years and fines of not more that $250,000. Sentencing for both is scheduled for later this year. In the settlement announced last week, the DoJ charged Willbros with conspiracy to violate and violation of the anti-bribery and books and records provisions of the FCPA. To resolve the enforcement action brought by the DoJ, Willbros entered into a deferred prosecution agreement under which it agreed to appoint a compliance monitor for a term of three years and to pay a fine of $22 million, in four installments over three years.

The SEC found that Willbros violated the anti-bribery, books and records, and internal controls provisions of the FCPA, including by knowingly failing to implement a system of internal controls. The SEC complaint also names four former employees of Willbros, Jason Steph, Gerald Jansen, Lloyd Biggers, and Carlos Galvez, alleging, inter alia, that they had aided and abetted Willbros’ violation of the anti-bribery, books and records, and internal controls provisions of the FCPA, and that they knowingly circumvented the internal controls of Willbros and falsified its books and records in violation of the FCPA. To resolve the enforcement action brought by the SEC, Willbros agreed to pay a $10.3 million in disgorgement and prejudgment interest. Willbros also consented to a permanent injunction against violation of the antibribery and accounting provisions of the FCPA. All four former employees also consented to permanent injunctions. Defendants Jansen and Galvez were ordered to pay civil penalties of $30,000 and $35,000, respectively; a determination on the payment of a civil penalty by Steph was deferred pending his sentencing in the criminal case.

Compliance Lessons

The Willbros case is in many respects consistent with recent trends in FCPA enforcement involving improper payments that are significant in amount and involve the award of contracts, although it also breaks some new ground. Features that are consistent with recent trends include the following:

Multi-million dollar penalties, including fines, and, for publicly traded companies, disgorgement of profits from contracts secured through improper conduct;
A focus on operating issues (e.g., payments to reduce tax liabilities) as well as procurement issues;
A continued focus on prosecution of foreign issuers and foreign subsidiaries (although Willbros International was treated as a “domestic concern” due to its US headquarters);
Emphasis on the FCPA ’s accounting requirements as well as the anti-bribery provisions;
Use of deferred prosecution agreements instead of non-prosecution agreements to resolve cases involving conduct that is perceived as egregious;
Use of compliance monitors with a scope of monitoring extending beyond the FCPA to local anti-bribery laws, including commercial bribery laws;
Prosecution of individuals, including non-US citizens;
Cooperation with foreign and local law enforcement authorities, in this case, the SEC’s Fort Worth regional office, US tax authorities (for investigative assistance), and the Economic and Financial Crimes Commission (EFCC) of Nigeria;
The imposition of broad prospective compliance program obligations; and
Asserted but unquantified penalty-mitigating benefits of voluntary disclosure. prompt and thorough internal investigations, remedial actions including discipline, and cooperation with the government.

Willbros breaks new ground in the securities fraud claims asserted by the SEC. The Commission alleges that a senior Willbros executive, a Willbros employee, and an outside consultant implemented and utilized a fraudulent tax avoidance scheme in Bolivia, which resulted in material misstatements in Willbros Group’s financial statements. The SEC found that Willbros’ scheme to minimize the VAT tax obligations of its Bolivian subsidiary to the Government of Bolivia resulted in an inflation of the net income and earnings per share of the company in violation of the Exchange Act. While this conduct was occurring, in 2003 and 2004, Willbros sold securities to the public pursuant to previously filed registration statements and filed resale shelf registrations incorporating by reference periodic securities filings that the SEC viewed as containing material misrepresentations regarding tax liabilities and contract costs.

The SEC complaint alleges that the conduct described above violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, charging the company with violations of such provisions and various individuals with aiding and abetting those violations. The SEC has previously indicated its interest in pursuing securities fraud theories, particularly in the context of FCPA representations and warranties in mergers & acquisitions, as evidenced by the Titan case in 2005. However, this case represents the first case in the FCPA area actually to prosecute on such a theory. It should be noted that the securities fraud claims are not based on the improper payments, but on the use of a tax-minimization scheme that inflated earnings. In this sense, the securities fraud allegations are not unusual, but can be seen simply as a use of other prosecutorial tools to pursue wrongful conduct that does not fall under the FCPA’s bribery prohibitions. Such allegations could have a significant impact, however, as they could well increase the risk of class action securities fraud suits to the company.

We will continue to keep you apprised of developments related to FCPA enforcement. If you have any questions or for further information, please feel free to contact Lucinda Low at 202.429.8051; Erik Kitchen at 202.429.8132; Pat Norton at 202.429.8034; Jonathan Drimmer at 202.429.6477; Matt Herrington at 202.429.8164; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Michael Pass at 202.429.8101; Brittany Prelogar at 202.429.5518; Sarah Lamoree at 202.429.6488; Michael Lieberman at 202.429.8064; or William Gordon at 202.429.8013.

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_{1. This amount was listed in Willbros’ 2007 10-K annual report (filed February 29, 2008) as the aggregate amount set aside in reserve by the Company pending execution of agreements to settle claims with the DoJ and SEC in these matters. However, as the DoJ fine is to be paid in four installments over three years, the present value of the fine is actually closer to $30 million.}