SCS Corporation, Ltd. (SCS), a unit of Houston oil and gas drilling company Hyperdynamics Corporation (“Hyperdynamics”), has filed parallel actions in the Southern District of Texas (4:16-cv-00076) and before the American Arbitration Association against two partners who SCS alleges used an FCPA investigation into Hyperdynamics as a pretext for breaching their joint exploration agreement.

SCS and its partners, Tullow Guinea Ltd. (“Tullow”) and Dana Petroleum (E&P) Limited (“Dana”), have been engaged under a joint operating agreement to explore deposits off the coast of Guinea.  In 2013, the U.S. Securities and Exchange Commission began an FCPA investigation into Hyperdynamics, which was eventually settled in the fall of 2015.  Nevertheless, in 2014, while the FCPA investigation was open, Tullow declared force majeure and halted all work on the exploration project. Tullow eventually withdrew its declaration of force majure, but, according to SCS, has not resumed sufficient activity to meet the drilling timelines required by the Guinean government which expire in the fall of 2016.  The Complaint alleges that Tullow does not have the funds to fulfil its portion of the exploration and that its declaration of force majure and subsequent delays are merely a diversion designed to stall the enterprise. Dana is similarly alleged to have undertaken a dilatory course of conduct.

The parallel actions seek (1) a determination that Tullow and Dana are in breach of the joint operating agreement, (2) orders requiring Tullow and Dana to move forward with their exploration and drilling activities, and (3) damages stemming from the delays.

According to the Complaint, Tullow had ulterior motives when it declared force majure based on the ongoing FCPA investigation.  If Tullow truly believed that force majure applied, however, then its declaration may have bell that could not be unrung.  Although Tullow eventually withdrew its declaration, it has, at least by SCS’s account, not commenced work since the declaration and may now be in breach of contract.

Of course, corporations must be concerned when their partners become the subject of FCPA investigations. They should not, however, take any unnecessarily drastic steps.  Independent counsel can investigate and assess a corporation’s potential liability for the acts of its partner and should be consulted whenever a concern arises. Taking the time to evaluate one’s own potential liability may save the working relationship and avoid litigation tangential such as this.

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In U.S. v. Nitek Electronics, Inc., the Federal Circuit constrained the Department of Justice’s ability to seek import penalties based on a culpability level different than the level alleged by the Customs and Border Protection during the administrative penalty process.

Generally, when pursing penalties for lost import duties due to misclassification of goods under 19 U.S.C. § 1592, the Government must demonstrate a material false statement or omission amounting to fraud, gross negligence, or negligence.  Based on the level of culpability alleged by the Government, the burden of proof for the Government shifts significantly from clear and convincing evidence for fraud, proving the elements for gross negligence, and the mere burden of proving the act or admission (with the burden shifting the the importer to show that the act was not negligent) under a negligence theory.

In Nitek, the importer of gas valves disputed the CBP’s allegations of grossly negligent conduct during the course of the administrative penalty proceeding.  The matter was subsequently referred to the DOJ which pursued an enforcement action based on a negligence theory.  The Court of International Trade held that the  DOJ could not pursue penalties against an importer based on a different level of culpability than the level alleged by the CBP during the administrative proceeding.  The Federal Circuit affirmed the Court of International Trade’s decision, finding that the Government had not exhausted administrative remedies when it pursued an ‘independent’ claim based on negligence which was not present in the administrative proceeding.

Those close to the case are hailing the decision as a significant victory for importers who, in the past, have been unfairly forced to defend penalty actions brought under multiple theories by multiple agencies.  As the CBP is now likely to take additional care when investigating and selecting the theory which the government will pursue during the administrative proceeding, mounting a robust defense from the very outset of any administrative action is now an absolute imperative for importers.

The First Circuit Court of Appeals recently upheld the five-year prison sentence of former Sea Star Line LLC president, Frank Peake, following his conviction as part a massive shipping price-fixing scheme centered in Puerto Rico. See the First Circuit’s opinion here.

Cargo ship with shipping containers
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The Government alleged that Peake, along with the heads of several other carriers, conspired to artificially inflate shipping rates and surcharges and rigged bids submitted to corporations and government entities for freight services. Following a two week trial, Peake was convicted and his sentence was calculated based on the $565 million in revenue that Sea Star generated between 2005 and 2008.

On appeal, Peake’s counsel raised various challenges including that: the juror pool had been tainted by the prosecution’s references to the effect of the scheme on the price of consumer goods; the judge improperly directed the jury to continue deliberations when it appeared to be hung; and the sentence had not been properly calculated because at least some portion of Sea Star’s revenue was not the result of the price-fixing scheme, and therefore, the sentence calculation should be reduced.

The First Circuit rejected these arguments and found that the District Court had properly instructed the jury regarding the basis for the sentence calculation and had not erred when instructing the jury to continue its deliberations after it was unable to come to a resolution within a single day.

This case underscores just how high the stakes for individual actors can be when the federal sentencing guidelines are applied to full extent.  When potential violations arise and possible resolutions are considered, individuals and their counsel must appreciate that “worst-case-scenario” prison sentences are indeed possible even if they appear disproportionate to the actual gains from the violation.  Well-versed counsel is the best resource to evaluate potential personal liability and navigate the nuances of resolution prior to trial (and the possible application of the sentencing guidelines).