U.S. probe relied heavily on firm’s own investigation, FBI memos show

January 12, 2012

When a former employee in 2010 accused a California company called Sempra Energy of paying bribes to advance its interests in Mexico, the U.S. government responded as it often does in white-collar cases: It asked the company to investigate itself.

If proven, the allegations could have meant serious trouble for Sempra. The FBI wanted to know, among other things, whether a $7 million charitable trust that the company financed in Mexico was actually a “slush fund,” documents show.

By March, the FBI had made a preliminary assessment: “There are ample facts and indicators which reflect that Sempra and its business executives may have engaged in criminal activity,” an agency memo said.

But a few months later, citing explanations provided by Sempra and its outside lawyers, the government closed the case.

Under the heading “Summary of Investigation,” an FBI memo recounts a “presentation” by “Sempra outside counsel” but mentions no effort by the government to independently probe the facts about the trust fund.

“Based on the foregoing information, DOJ concluded that no additional investigation was warranted as all allegations had been adequately addressed by Sempra,” a June FBI memo said.

Delegation of investigations

The federal government often delegates investigations of suspected corporate wrongdoing in large part to the very companies under investigation. As The Washington Post has reported, the companies hire teams of lawyers to look into the allegations and share their findings with the Justice Department and the Securities and Exchange Commission.

Recent FBI memos from the Sempra case, which the FBI posted on its Web site after The Post submitted a Freedom of Information Act request, offer a rare inside look at how the process can work.

“This clearly is an example of the DOJ . . . outsourcing an investigation,” said Mike Koehler, an assistant professor of business law at Butler University who represented companies accused of violating federal anti-bribery law and who now specializes in the subject as an academic.

Based on the documents, which Koehler reviewed at The Post’s request, the Justice Department’s handling of the case “really seems like cutting corners and not a thorough investigation,” he said.

Koehler said he was surprised that the government closed the case without enforcement action because information in the documents “would seem to support” charges under the Foreign Corrupt Practices Act.

In accepting the word of Sempra’s lawyers, the government neglected to pursue important questions, an attorney for Rodolfo Michelon, the former Sempra employee, said in a legal brief.

Federal officials “suffered a simultaneous failure of their critical faculties” and “went brain dead” listening to outside lawyers for Sempra, attorney Gary J. Aguirre, a former SEC enforcement official and whistleblower, said in the legal brief.

Anthony Michael Sabino, a law professor at St. John’s University who also reviewed the documents for The Post, reached a different conclusion, saying the government’s reliance on Sempra’s lawyers seemed to work.

The government “asked a series of logical and appropriate questions, and the answers, the responses, appeared to be fairly detailed, and that was enough for them,” Sabino said.

Justice Department officials, including a spokesman for the San Diego FBI office, which opened the file on Sempra, declined to discuss the investigation in any detail.

“As with all substantive allegations, the department carefully reviewed the accusations to determine if they were supported by facts that showed violations of the law,” Justice Department spokeswoman Laura Sweeney said in a Dec. 29 written response to questions.

“After many months of investigation, interviewing witnesses, including current and former employees, and counsel for the company, and examining numerous U.S. and foreign records, experienced prosecutors and agents determined that the facts did not warrant further action,” Sweeney said. “In making that determination, the department conducted its own independent and thorough review while also taking into account the information provided by the company as a result of its internal investigation.”

Sweeney declined to say whether the Justice Department took those investigative steps with respect to the charitable trust.

Sempra spokesman Douglas Kline said that the allegations are false and that the company cooperated fully with the government, providing documents and making employees available for interviews. He declined to say how many employees were interviewed.

Records show that the SEC was working along with the Justice Department. A May document said the SEC staff had finished its investigation of Sempra Energy and did not intend to recommend any enforcement action by the agency.

“While we can’t confirm or comment on any specific investigations, our Enforcement Division does not rely on any company’s internal review but conducts its own investigations, including extensive document review and interviews with witnesses,” SEC spokesman Kevin Callahan said in a statement.

Stretching limited budgets

Government officials have said they often rely on internal corporate investigations to stretch their limited federal budgets. Since Congress sought to encourage whistleblowing by ordering the SEC to reward tipsters for exposing fraud, the SEC has said that, “in appropriate cases,” it will “give the company an opportunity to investigate the matter and report back.”

Sempra, a Fortune 500 company whose headquarters is in San Diego, has extensive operations in Mexico, including a liquified natural gas (LNG) project on the Pacific coast near the city of Ensenada in Baja California.

Michelon was a controller for the company in Mexico until spring 2010, when he was laid off. The company has said he was one of about 90 employees whose jobs were eliminated. He filed a lawsuit that November asserting that he was wrongfully discharged and accusing Sempra of making payoffs to Mexican officials. The Foreign Corrupt Practices Act makes it illegal for U.S. companies to bribe foreign officials.

Last January, after the news media had reported on Michelon’s claims, Sempra contacted the Justice Department. FBI agents, federal prosecutors and SEC lawyers met with outside lawyers for Sempra, who presented the results of an internal investigation by a law firm.

The internal investigation concluded that the allegations “were without merit” and that the whistleblower was “a disgruntled ex-employee who wants to extract money from the Company by whatever means necessary,” according to an FBI summary.

Nonetheless, on Feb. 10, the government asked Sempra to do additional legwork: for example, “obtain evidence” from a government office in Mexico; “conduct an investigation of any cash transactions in Mexico over the last four years”; and “conduct an investigation of any charitable or political donations exceeding $25,000 made by Sempra to Mexican officials or entities over the last four years,” according to an FBI memo.

The FBI memos, which have been redacted to obscure some of their content, show that the government focused on several issues. As early as March, an FBI document shows, the Justice Department had decided to stop probing one of those issues — whether Sempra paid a bribe to get someone evicted from land near its LNG project.

Another major focus: Was the Ensenada Trust — to which Sempra donated $7 million — a slush fund for corrupt payments?

Sempra’s outside counsel had said the primary purpose of the trust was to engender goodwill with members of the Ensenada community, a March 15 FBI memo said. But the FBI memo said that an internal Sempra memo from 2005 “appears to refute” the explanation about the trust’s origins from Sempra’s outside counsel.

The Sempra document said that the trust was established at the request of an Ensenada city official and that as a result, the official signed a permit that Sempra needed, according to the FBI memo. The city official became an official of the trust, the FBI memo said.

“During Q4 2005, subject to no unplanned permitting impediments [emphasis added by FBI], Sempra will contribute [an additional] $5,000,000 USD to the Trust,” the Sempra document said, as quoted in the FBI memo.

The memo said the facts indicated that Sempra and company employees “participated in violations” of the Foreign Corrupt Practices Act. It said the FBI’s investigative strategy would include “interviewing witnesses to the criminal conduct.” Prosecutors had already participated in meetings “with Sempra representatives and witnesses,” the memo said.

A similar scenario

Koehler said the SEC took enforcement action against pharmaceutical maker Schering-Plough — and the company agreed to pay a $500,000 penalty — based on a scenario that resembled the FBI documents’ description of the Ensenada Trust.

In the Schering-Plough case, the company allegedly made payments to a charitable foundation headed by a Polish official who was in a position to influence Polish government purchases of Schering-Plough products. Schering-Plough settled the case in 2004, neither admitting nor denying wrongdoing.

Koehler also said that, based on the FBI documents, it appears that Sempra improperly accounted for payments to the Ensenada Trust.

But in June, the FBI dropped the matter.

An FBI memo explaining its decision cited assurances by the company and its legal counsel.

“Sempra confirmed” that any permits it needed after the trust was created were “issued with little discretion by the city of Ensenada,” or were issued by other government authorities, the memo said.

“Sempra counsel addressed the various means of oversight of the Trust,” including audits, “such that it appeared the trust was created, funded and operated in a legitimate manner,” the memo said.

“Sempra counsel stated that in its review of the trust, no evidence was uncovered to indicate there was a quid pro quo relationship between the funding of the Trust and any approvals needed from the City of Ensenada for the construction of the LNG plant, nor was any evidence discovered of payments to government officials or their relatives,” the FBI memo said.

The law firm that represented Sempra in the April briefing for government officials was Jones Day, where Sempra’s executive vice president and general counsel was formerly a partner.

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