War at Wynn Opens a Legal Can of Worms
By PETER J. HENNING
DealBook
New York Times
February 27, 2012, 3:35 pm
What the Deal Professor described as an “all-out war” between Wynn Resorts and Kazuo Okada, the Japanese pachinko machine magnate who has been ousted as a director and shareholder, is not just a boardroom battle over control of the company. Wynn’s accusations that Mr. Okada may have violated the Foreign Corrupt Practices Act means the Justice Department and the Securities and Exchange Commission will be scouring the company’s books for possible violations, a front that neither side can control.
By invoking the specter of overseas bribery, Wynn has effectively opened itself up to a wide-ranging federal investigation of its dealings in Macau and elsewhere. Combined with the lawsuit it filed against Mr. Okada, the company likely will face soaring legal costs over the next year or two as it deals with the fallout from the dispute.
Mr. Okada owned 19.66 percent of Wynn until the company forcibly moved to redeem his shares at a 30 percent discount earlier this month because of its determination that he did not meet the “suitability” requirement for an investor in a Nevada casino. Wynn released a report prepared Louis J. Freeh, the former F.B.I. director, and his law firm asserting there was evidence Mr. Okada engaged in “prima facie violations” of the Foreign Corrupt Practices Act, a conclusion he strongly disagrees with. The report describes $110,000 in benefits purportedly provided by Mr. Okada to Philippine casino regulators and potential benefits of about $5,000 to South Korean officials.
Mr. Okada has been seeking to build a $2 billion casino complex in the Philippines, but had been rebuffed in his attempt to get Wynn to participate in the project. The growing dispute between Mr. Okada and Wynn marked the end of the once-close relationship he had with Stephen A. Wynn, the billionaire who controls the company.
The first salvo in the battle between Mr. Okada and Wynn was fired in January, when he sued the company to gain access to records relating to its $135 million donation to the University of Macau, where the company has a large casino. Wynn disclosed that the S.E.C. had asked the company to preserve its records related to the donation as part of an informal inquiry.
An initial issue that investigators will have to determine is whether these transactions violated the Foreign Corrupt Practices Act. While it is described as a bribery statute, the act also covers gifts given for the purpose of influencing in any way the acts or decisions of a foreign official, so a charitable donation could result in a violation.
Wynn’s donation does not fit the usual pattern for a violation of the Foreign Corrupt Practices Act, however, because it was a highly public gift, including a ceremony attended by, among others, Mr. Okada. Investigators will look at the reasons for the donation, and whether it was made as a result of any pressure from public officials in Macau. It is not a defense to a charge that the payment was made in response to requests by a local government.
The information about the benefits that Mr. Okada is accused of providing raise a different question regarding the applicability of the Foreign Corrupt Practices Act. Under the law, a company that issues securities in the United States, or any citizen or resident of this country, comes within the prohibition on overseas bribery. A third category in the statute reaches payments made by any person “while in the territory of the United States,” so that transactions that involve an American subsidiary or transfers through a United States financial institution could be covered by the law.
Mr. Freeh’s report describes benefits provided to Philippine casino regulators for “high-roller” rooms at Wynn Resorts Macau and other expenses that were paid through a “ledger account” that Mr. Okada maintained with the company, paid for by him and created “for billing conveniences related to charges incurred at various Wynn Resorts locales.”
Whether there is any direct tie between benefits Mr. Okada provided abroad and conduct in the United States is unclear. He has a Nevada-based company through which he owned his Wynn shares before their redemption, but it does not appear that it has any involvement in the Philippine gaming operation. Nor were any of the benefits provided at Wynn’s Nevada properties.
The only apparent connection to the United States is Mr. Okada’s use of his Wynn “ledger account” to pay for the rooms and expenses, which resulted in entries on the company’s records in the United States. But this does not appear to have involved any misuse of corporate assets, only funds provided by Mr. Okada that were maintained with the company, almost like a personal account in which Wynn acted as the bookkeeper.
Even if these transactions did not violate the Foreign Corrupt Practices Act, federal investigators are unlikely to limit themselves to just the University of Macau donation and Mr. Okada’s dealings with Philippine casino regulators. For example, the Las Vegas Sands Corporation has disclosed that the S.E.C. and Justice Department are investigating whether it violated the act related to its Macau casino, and there is a possibility that Wynn’s operation there will be subjected to similar scrutiny.
Once an investigation is opened, it takes on a life of its own and can go in any direction, so Wynn should be prepared to deal with the S.E.C. and Justice Department for quite a while. Legal fees for the company and its directors in this type of investigation can grow quickly, as Avon has learned as it disclosed spending $95 million in 2010 dealing with a Foreign Corrupt Practices Act investigation that has been going on since 2008.
Wynn will also see burgeoning legal costs from its lawsuit against Mr. Okada, filed in Nevada state court, alleging breach of fiduciary duty and other violations. He is sure to litigate his removal from the company’s board and the redemption of his shares at a substantial discount to the current market price.
Not only does Wynn have to pay its own lawyers, but it may have to pay for Mr. Okada’s legal counsel in defending against the company’s lawsuit. Wynn’s articles of incorporation are typical of publicly traded companies by providing for indemnification of legal fees resulting from litigation related to a director’s conduct. By accusing him of breaching his fiduciary duty as a director, the company may be on the hook for any costs in defending against its lawsuit.
In addition, the indemnification provision covers government investigations, so to the extent the S.E.C. and Justice Department scrutinize Mr. Okada for his actions as a director of Wynn, the company may be responsible for paying those legal fees as well.
The indemnification provision has an interesting limitation that does not require the company to pay legal fees for any actions related to a person’s “capacity as a stockholder, including, but not limited to, in connection with such person being deemed an unsuitable person.” Wynn could try to avoid paying Mr. Okada’s lawyers by claiming that the cases relate to his suitability as an investor in a Nevada casino. Whether that argument can succeed remains to be seen, and asserting this ground would generate additional litigation over the availability of indemnification – for which the company might also have to pay for his lawyers, too.
For Wynn, this is only beginning of its battles as it faces a potentially lengthy investigation by the S.E.C. and Justice Department along with protracted litigation with Mr. Okada. The company may well see its legal costs take a sizable bite out of profits over the next few quarters.
Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.
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