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Venezuela’s CITGO Joins Other Companies and State-Owned Entities Seeking to Claim Victim Status and Restitution in FCPA Cases

By Ephraim (Fry) Wernick, Brian L. Howard II, and Michael Hoosier

In a novel and aggressive move likely aimed at garnering goodwill with federal regulators, Venezuelan state-owned entity CITGO Petroleum Company (“CITGO”) has sued its former agent for harm CITGO alleges was caused by the agent’s payment of bribes to foreign officials. The twist? The bribes were paid to CITGO’s own employees, who are considered foreign officials under the Foreign Corrupt Practices Act of 1977 (“FCPA”).

CITGO is a wholly owned subsidiary of Venezuela’s state-owned oil and natural gas company Petróleos de Venezuela, S.A. (“PDVSA”).1 One aspect of its business operations is that CITGO coordinates procurement efforts on behalf of PDVSA through its Special Projects Department.2 As CITGO detailed in a complaint filed in the Southern District of Texas on May 26, 2020, between 2014 and 2018, businessman Jose Manuel Gonzalez Testino and his company Petroleum Logistics Service Corp. (“PLS”) “served as a procurement and logistics vendor” for CITGO, receiving a 5.75% commission for the goods and equipment provided pursuant to a 2014 agreement.3

Last year, Gonzalez Testino pleaded guilty to federal charges of conspiracy to violate the FCPA by paying bribes to PDVSA and CITGO officials. As detailed by the DOJ’s press release on the plea, Gonzalez Testino paid bribes “to direct PDVSA contracts to Gonzalez’s companies and to give Gonzalez’s companies other business advantages[.]” Gonzalez Testino also admitted to bribing “several PDVSA officials who were based in Houston and employed by Citgo.”4

Typically, such admissions would be quite incriminating and compelling evidence against CITGO, since they implicate CITGO employees as recipients of bribes and expose CITGO to corporate criminal liability under the FCPA, wire fraud and possibly other federal statutes. But CITGO is now attempting to use Gonzalez Testino’s own admissions against him, arguing that the bribes harmed CITGO by “induc[ing] CITGO to use PLS in particular procurement transactions[.]”5 These transactions totaled over $20 million between 2014 and 2018, and CITGO also alleges harm from the legal costs “associated with investigating and remediating these matters.”6 CITGO relies heavily upon the government’s criminal information filed against Gonzalez Testino last year, which “described bribes to five CITGO employees” and “further stated that these bribes were made in order to ‘help[] Gonzalez’s companies win PDVSA contracts to supply equipment and services, including logistics services.’”7

CITGO may want the court to view it as a victim, but CITGO probably also has another audience in mind: DOJ. The suit seems also to be an attempt to convince DOJ prosecutors to view the company as a victim rather than a possible target for FCPA enforcement.

Another Bite at the Apple?

CITGO’s suit represents a second attempt by a Venezuelan state-owned entity to recover what it alleges were “inflated” prices and legal costs related to alleged bribery of its own employees. The suit comes three years after Bariven S.A. — a separate subsidiary of PDVSA — failed in a 2017 attempt to seek victim status under the Mandatory Victims Restitution Act (“MVRA”) and the Crime Victims’ Recovery Act (“CVRA”) related to FCPA allegations and similar contentions that Bariven overpaid on contracts as a result.8 The government opposed this motion, arguing that Bariven’s “employees and senior officers were actively involved in the bribery and money laundering schemes underlying the offenses of conviction to such an extent that corruption was pervasive within the entity and the entity must therefore be considered a participant in the scheme[.]”9

An Uphill Climb for CITGO?

Bariven’s previous failure is not CITGO’s only sign that it will face an uphill battle to succeed on its claims. The same day that CITGO filed its suit against PLS and Gonzalez Testino, the Eleventh Circuit Court of Appeals in In re Empresa Publica de Hidrocarburos del Ecuador denied another state-owned entity, PetroEcuador, victim status under the CRVA and MVRA because PetroEcuador’s own employees, like CITGO’s, had engaged in misconduct by accepting bribes. No. 20-11430-Q (11th Cir. May 26, 2020).

Similar to CITGO’s current allegations, PetroEcuador had alleged that it was directly and proximately harmed by paying prices for contracts that were inflated by bribes. The Eleventh Circuit disagreed, as “[t]he record demonstrate[d] that at least five PetroEcuador employees, including a member of the Board of Directors and other high-level employees, were involved in the underlying bribery scheme[,]” and “[t]heir actions can be imputed to PetroEcuador[.]” Because of this “pervasive, constant, and consistent illegal conduct,” the Eleventh Circuit also ruled that “PetroEcuador had not demonstrated the requisite link between the criminal conduct at issue and any alleged harm.”

Although CITGO’s civil suit against its former agent and his company does not invoke the CVRA or the MVRA, CITGO is likely to face similar scrutiny about whether harm could be proven given its own employees’ misconduct. Notwithstanding, CITGO’s attempt signals that companies and state-owned entities are continuing to get creative with ways to recover the costs of expensive litigation, and to avoid potential exposure under the FCPA.

1 As CITGO explains in its complaint, “CITGO is a wholly owned subsidiary of CITGO Holding, Inc., which is a wholly owned subsidiary of PDV Holding, Inc., which in turn is a wholly owned subsidiary of PDVSA, which, as noted above, is the state-owned petroleum corporation of the Bolivarian Republic of Venezuela.” See Plaintiff CITGO Petroleum Corporation’s Complaint (Dkt. 1) ¶19, CITGO Petroleum Co. v. Petroleum Logistics Serv. Corp., No. 4:20-cv-01820 (S.D. Tex. filed May 26, 2020).

2 See id. at ¶30.

3 See id. at ¶4.

4 Press Release, U.S. Dep’t of Justice, Business Executive Pleads Guilty to Foreign Bribery Charges in Connection with Venezuela Bribery Scheme (May 29, 2019).

5 See Compl. at ¶5.

6 See id. at ¶18.

7 See id. at ¶¶8-9 (citing Information ¶22, United States v. Jose M. Gonzalez-Testino, No. 19-cr-00341 (S.D. Tex. May 14, 2019) (“Criminal Information”)).

8 For a broader discussion of attempts to use the MVRA, and the related CVRA, by companies and individuals in FCPA cases, see our previous post in which we predicted that more parties would file claims for restitution under the MVRA based on FCPA claims. See Ephraim “Fry” Wernick, Christopher James, Laura Muse and Michael Riggins, Five (Less Predictable) Predictions for FCPA Enforcement in 2020, Insight: V&E Foreign Corrupt Practices Act Update (Jan. 10, 2020).

9 Government’s Response to Bariven S.A.’s Motion for Recognition of its Rights as a Victim and Entitlement to Restitution (Dkt. 113), United States v. Rincon-Fernandez et al., No. 4:15-cr-00654 (S.D. Tex. Feb. 20, 2017).

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.