Even Rocket Scientists Get Caught Under The FCPA

Shu Quan-Sheng (Shu), 68, a native of China, naturalized U.S. citizen and Ph.D. physicist, entered a guilty plea before Judge Henry C. Morgan, Jr. in U.S. District Court for the Eastern District of Virginia, Norfolk Division to charges that he illegally exported space launch technical data and defense services to the People’s Republic of China (PRC) and offered bribes to Chinese government officials. Shu is the President, Secretary and Treasurer of AMAC International Inc., (AMAC), a high-tech company based in Newport News and that has offices in Beijing.

DOJ Pres Release:Virginia Physicist Pleads Guilty to Illegally Exporting Space Launch Data to China and Offering Bribes to Chinese Officials
Thanks to Richard Cassin of The FCPA Blog for pointing out this story: Rocket Scientist Pleads Guilty.

Comments on CFIUS

Over at Sheppard Mullin’s Government Contracts Blog, Lucantonio N. Salvi put together a summary of comments to the draft CFIUS regulations: Comments On Proposed CFIUS Rules Range From Cautious Praise To Outright Criticism.

[T]he U.S. Department of the Treasury published on April 21, 2008 proposed rules designed to strengthen the process by which the Committee on Foreign Investment in the United States (“CFIUS”) reviews and approves certain business transactions involving foreign investment. The proposed rules were issued under the Foreign Investment and National Security Act of 2007, Pub. L. No. 110-49 (“FINSA”), which requires a more intense CFIUS process that allows the government more discretion in investigating and altering business transactions that may impact national security. The U.S. Department of the Treasury invited comments on the proposed rules through June 9, 2008. Now that the comment period is over, we thought it might be worthwhile to see what types of comments were received. Not surprisingly, it is a mixed bag.

The final regulations are now ready for publishing in the Federal Register and will go into afect thirty days after publication.

See also:

Control under FINSA and CFIUS

On November 14, 2008, the Department of the Treasury issued its final rule to implement the Foreign Investment and National Security Act of 2007, which provided guidelines for the Committee on Foreign Investment in the United States when reviewing investments by foreign persons in U.S. businesses for national security issues. The final regulations go into effect 30 days after publication in the Federal Register: Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. (.pdf) That means they should be in effect by the end of the year.

One issue with the law and regulations is the uncertainty of when notification is required under FINSA.

Under §800.207:

The term covered transaction means any transaction that is proposed or pending
after August 23, 1988, by or with any foreign person, which could result in control of a
U.S. business by a foreign person.

The issue then is what is meant by “control” under FINSA?

The final regulations do not offer much help:

The Final Rule maintains the long-standing approach of defining “control” in functional terms as the ability to exercise certain powers over important matters affecting an entity. Specifically, “control” is defined as the “power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity; in particular, but without limitation, to determine, direct, take, reach, or cause decisions regarding the [matters listed in §800.204(a)], or any other similarly important matters affecting an entity.” See §800.204(a). Two points should be emphasized concerning this definition. First, it eschews bright lines. Consistent with the existing regulations, control is not defined in terms of a specified percentage of shares or number of board seats. Although share holding and board seats are relevant to a control analysis, neither factor on its own is necessarily determinative. Instead, all relevant factors are considered together in light of their potential impact on a foreign person’s ability to determine,
direct, or decide important matters affecting an entity.

One useful carve-out is under §800.302(b) that transactions that are not covered transactions include:

A transaction that results in a foreign person holding ten percent or less of the outstanding voting interest in a U.S. business (regardless of the dollar value of the interest so acquired), but only if the transaction is solely for the purpose of passive investment. (See §800.223.)

See my prior blog posts:

Treasury Issues Final Regulations for Committee on Foreign Investment in the United States

On November 14, 2008, the Department of the Treasury issued its final rule to implement the Foreign Investment and National Security Act of 2007, which provided guidelines for the Committee on Foreign Investment in the United States when reviewing investments by foreign persons in U.S. businesses for national security issues.

The Foreign Investment and National Security Act of 2007 amended section 721 of the Defense Production Act of 1950 (50 USC §2170) authorizing the President to review merger, acquisitions and takeovers by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States to determine the effects of such transaction on the national security of the United States.

FINSA codifies the structure, role, process and responsibilities of the Committee on Foreign Investment in the United States. Previously, CFIUS had existed only by executive order. FINSA establishes CFIUS in statute.

On April 21, 2008, the Department of the Treasury issued proposed regulations for the CFIUS . You can also get the comments on the proposed CFIUS regulations.

The final regulations go into effect 30 days after publication in the Federal Register: Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons. (.pdf) That means they should be in effect by the end of the year.

See my blog posts:

See also:

Hedge Fund Registration Act

Senator Charles Grassley of Iowa is looking to expand the registration requirements of the Investment Advisers Act. According to Jim Hamilton’s World of Securities Regulation, the Senator Will Reintroduce in 111th Congress Bill Requiring SEC Registration of Hedge Fund Advisers. The Washington Post story has Senator’s Grassley’s statement coming out of the House Oversight and Government Reform Committee hearing: Fund Chiefs Back Oversight.

The SEC issued a rule in 2004 to try to expand the registration requirement under the Investment Advisers Act by defining client to mean each of the limited partners in a private investment fund, not just the fund itself. That rule was overturned by Goldstein v. SEC which found the rule to be broader than what was authorized under the Investment Advisers Act.

See also:

Mark Cuban and Insider Trading

The Wall Street Journal reported that the SEC filed insider trading charges against Mark Cuban (owner of the Dallas Mavericks basketball team): SEC Charges Mark Cuban With Insider Trading. You can read the full text of the complaint against Mark Cuban.

According to the complaint, Cuban owned 600,000 shares in Mamma.com Inc.  (now called Copernic Inc.), whose shares are trded on NASDAQ. Cuban was told of an upcoming PIPE transaction. News of the transaction would likely have a substantial negative impact on the stock of the company. On the day prior to the announcement, Cuban sold all of his shares in the company and avoided losses in excess of $750,000.

Additional Time to Comply with Identity Theft Prevention Regulations

The Massachusetts Department of Consumer Affairs and Business Regulation have extended the deadline for compliance with 201 CMR 17.00: Business Community Given Additional Time to Comply with Identity Theft Prevention Regulations.

The regulations were orginally set to take effect on January 1, 2009. That deadline has been extended to May 1, 2009.  The deadlines for certification from third party providers and ensuring encryption of laptops have been extended to January 1, 2010.

See previous posts:

Opening Securities and Futures Accounts from an OFAC Perspective

The Office of Foreign Assets Control published new guidance specific to the securities industry on 11/06/2008: Opening Securities and Futures Accounts from an OFAC Perspective.

A strong OFAC compliance program consists of procedures that are similar to those found in a brokerage firm’s Customer Identification Program (“CIP”). Firms should use risk-based measures for verifying the identity of each new customer who opens an account. In establishing procedures, firms should identify and consider their size (e.g., total assets under management), their location, their customer base, the types of accounts they maintain, the methods by which accounts can be opened (e.g., in person or non face-to-face), and the types of identifying information available for each customer. Firms should also assess risks posed by each customer and transaction, asking questions such as:

  • Is the customer regulated by a Federal functional regulator, widely known, or listed on an exchange?
  • Has the firm had any previous experience with the customer or does it have prior knowledge about the customer?
  • Is the firm facilitating a U.S. person’s investment in a foreign issuer or other company that conducts business in a sanctioned country?
  • Is the customer located in a high-risk foreign jurisdiction that is considered to be poorly regulated or in a known offshore banking or secrecy haven?
  • Is the customer located or does it maintain accounts in countries where local privacy laws, regulations, or provisions prevent or limit the collection of client identification or beneficial ownership information?

Prior to entering into a business relationship with a client, you should screen the new client’s identification information, as well as the customer’s proposed transaction(s), against OFAC’s Specially Designated Nationals and Blocked Persons list (“SDN list”) [which is available at
http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx], and applicable OFAC sanctions programs.

The paper highlights a few key differences between OFAC compliance and CIP requirements. OFAC requires you to look deeper into the beneficial ownership of a client. CIP is limited to the “person that opens a new account.”

The other key difference is that OFAC does not permit you to reallocate your legal liability to a third party such as an introducing firm. OFAC takes the position that you can still be “held liable for any OFAC violations that occur due to the third parties’ negligence.”