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Questions And More Questions About Alba v. Alcoa

The story is a real stunner. One of the world's biggest smelters, government-owned Aluminum Bahrain BSC ("Alba"), learns from a Kroll Report that its long-time raw materials supplier, U.S.-based giant Alcoa Inc., allegedly overcharged it for 15 years.

According to the allegations, some $2 billion in bogus billings went to overseas accounts controlled by Alcoa's agent. Some of the tainted money, the allegations continue, was used to bribe Alba's executives in return for more supply contracts. Among the Bahraini officials alleged to be involved is Alba's former chairman, who also served as the country's powerful minister of petroleum.

With the Kroll Report in hand, Alba confronts Alcoa. Pay us $1 billion, it says. If we don't have the money within two weeks, we'll sue. A spokesman for Alcoa says later, ?We said we?d be happy to do a more extensive investigation with them - they said ?we?ll see you in court.??

Alba files its lawsuit in late February 2008, alleging corruption and fraud. As if on cue, the U.S. government appears in the same federal court in Pittsburgh three weeks later. U.S. prosecutors say Alba's complaint alleges facts which, if true, could be relevant to the government's own criminal investigation and a potential criminal trial. So stop the suit for now, the government says, while we investigate whether Alcoa and its executives and agents broke federal laws, including the Foreign Corrupt Practices Act and mail and wire fraud statutes. Alcoa then says it's innocent and is cooperating with the feds.

So what's going on here? Who's the victim? And who wants what?

We know this: foreign governments almost always work extra hard to avoid being dragged into civil litigation in the United States. Despite arguments about confidentiality, privilege and sovereign immunity, civil lawsuits expose them to U.S.-style discovery, and that's bad news. They can be compelled to turn over any documents or other information that might lead to the other side's discovery of relevant evidence. That's a broad category, and it means in civil litigation there's no place to hide.

Dan Newcomb -- author of the annual FCPA Digest -- said this in a Wall Street Journal story about the case: "The reason it's rare for governments to accuse U.S. companies of corruption in American courts is that once you raise a question of corruption, the sovereign runs the risk they will be embarrassed by the requests of discovery from the private party." In this case, he added,"They have to be prepared to withstand Alcoa coming back to them and saying, 'We want to look at every other corrupt transaction you have been involved in.' "

Why, then, would Bahrain sue Alcoa in the U.S.? If Alba's Kroll Report is filled with dynamite, wouldn't Alcoa, if given the chance to read it, immediately start its own investigation? At the same time,wouldn't it begin the process of reconciliation with its huge, long-time customer? We think so. And that, in fact, sounds exactly like what Alcoa wanted to do when it first heard about the Kroll Report. But let's come back to Alcoa later.

As for the government of Bahrain, did it anticipate the U.S. government's intervention in the case? Did Alba believe beforehand that the feds would save it from having to respond to discovery? That seems a bit convoluted and risky as a litigation strategy. It doesn't add up.

But if Bahrain wanted the U.S. government to jump in, which was entirely predictable, why didn't Alba simply take the Kroll Report to the DOJ in the first place, instead of filing the lawsuit? If the DOJ had heard the allegations straight from Alba, and been shown a copy of the Kroll Report, wouldn't it have been compelled to call on Alcoa right away? In other words, if Alba was trying to gain leverage over Alcoa, its civil suit was really irrelevant for that purpose. A tip to the DOJ would have worked just as well. In fact, the civil suit now looks more like a distraction for everyone -- and a potentially disruptive issue for the DOJ's work, as the government's move this week to stay the civil case demonstrated.

Is Alba's lawsuit the tip of a political iceberg in Bahrain? If the suit was unnecessary, and known to Alba to be unnecessary, is the suit then perhaps part of a faction's plan to discredit its domestic political opponents? That question is way above our pay grade, so we'll leave it with others.

Now, then, let's talk about Alcoa. First, we have no reason to doubt its version of events. It said Alba gave it just two weeks to pay $1 billion or face a U.S. lawsuit. But wouldn't it have been exceedingly strange and counterproductive for Alba to give Alcoa an ultimatum with a completely unachievable and therefore meaningless deadline? Here's what we mean.

Anyone who deals with corporate giants knows this: their decisions to settle huge claims -- especially those involving potentially incendiary and felonious allegations -- cannot possibly be made in two weeks or even two months. It might take a year or maybe two, but so what? What are a couple of years to Alba, itself a corporate giant? As long as Alcoa demonstrated its good faith in dealing with the allegations, wouldn't Alba's government masters be satisfied to let the process of resolution run its inevitable course?

Here's a thought. Maybe Alba's alleged two-week payment demand, if true, means that Alba didn't expect or want to be paid the $1 billion. Instead it wanted to file its lawsuit and make a big splash in the U.S. press. And that gets us back to the reason behind the suit -- water too deep for us to swim in.

Another scenario is that Alcoa's account of Alba's two-week payment demand isn't accurate. If that's the case -- which we consider unlikely -- then Alcoa has some tough questions to answer. When did it learn about the fraud and bribery allegations? What investigation did it do? Who within Alcoa might have been involved? Did it self-report the allegations and its internal reactions to them to the SEC and Justice Department? If not, why not? And when was it planning to disclose all this to shareholders?

As we said at the top, the case is a stunner. Forget Hollywood -- this is much more interesting. So stay tuned.

Full post as published by The FCPA Blog on March 22, 2008 (boomark / email).