Missing records in Sands-China FCPA case puts e-discovery in spotlight, lawyer careers at risk

Casino moguls feuding over billions, a mysteriously elusive hard drive and an international conspiracy with politically-sensitive corruption overtones are all on display in a Clark County, Nevada county courtroom.

Although intrigue and skullduggery are hardly rare in financial crime cases, a lawsuit linked to the US probe of the Las Vegas Sands Corp. for possible Foreign Corrupt Practices Act violations has now entered James Bond territory.

For 18 months, attorneys for Las Vegas Sands told county Judge Elizabeth Gonzalez they could not respond to a request to produce 100,000 electronic records because they were kept in Macau, China, where the Macau Personal Data Privacy Act, they said, prohibited the records from leaving the country.
However, in June it surfaced that copies of the documents had already been moved from China to Las Vegas, and had been reviewed by the same attorneys who feigned ignorance to the judge.

Hidden records became issue in mundane contract suit

The revelations of hidden documents arose in a breach of contract suit by the dismissed CEO of Sands’ China operations, Steven Jacobs.  The seeming legal tussle over an alleged wrongful termination took on outsize importance for Sands when Jacobs accused his former employer of engaging in possible FCPA violations.

In October 2010, Jacobs sued his former boss, Sheldon Adelson, the very visible owner of the Las Vegas Sands and Sands China. He said he was fired for not following alleged “illegal demands.” Jacobs says Adelson instructed him to covertly investigate Macau government officials and use “improper leverage” to ease regulation of his Chinese casinos.

The Las Vegas Sands fired back, saying it terminated Jacobs for working on unauthorized deals and painting his lawsuit as the action of a vengeful employee.

Nevertheless, the US Justice Department and Securities and Exchange Commission found the evidence presented in Jacob’s suit has sufficiently compelling to launch an investigation into Sands for possible bribery of Chinese officials.

US digs into possible corrupt payments by Sands in China

That FCPA probe has now widened far beyond these allegations. However, the thousands of unearthed electronic documents in the Jacobs case may add new angles to the year-long investigation. The uncovered evidence may contain FCPA landmines for Sands and Adelson.

In addition to possible bribery in Macau, US agencies are scrutinizing Sands for FCPA violations in three transactions in mainland China. These include a $50 million real estate purchase by an Adelson organization, sponsorship of a Chinese basketball team by Sands, and a ferry service contract between Macau and Hong Kong.

Sands first revealed it was under investigation in an SEC filing last year and has since stated it is cooperating with the investigation.

The evidence previously concealed by Sands and its attorneys in the Jacobs case includes copies of hard drives and Outlook emails of Jacobs. Few details of what the electronic files contain have emerged, but in recent months past Jacobs e-mails have surfaced. They depict internal worries at Sands about potential FCPA violations.

Sands GC warned of FCPA danger in very high ‘legal fees’

In July, the investigative journalism group, ProPublica, obtained e-mails from 2010 between Jacobs and former Sands general counsel Alberto Gonzalez-Pita. They describe concerns over a $700,000 payment to a Macau political figure working as a Sands attorney. In the e-mails, Gonzalez-Pita warns Jacobs that the fees seemed unusually high, and said that FCPA counsel for Sands “highlighted a problem with paying… anything more for the… work than his normal fees.”

“The fees will require a lot of explaining given what our other firms are charging and given the FCPA,” Gonzalez-Pita wrote.

Jacobs responded he was surprised to hear about the FCPA red flags, and told Gonzalez-Pita that Adelson directly authorized the payments. It is not known if Adelson knew about his attorneys’ concerns. Adelson, himself, is not currently implicated in any wrongdoing in connection with the FCPA investigations.

Lawyers reviewed records they later said did not exist

Beyond the impact on the FCPA case, the tale of how the files were concealed and later unearthed is a lesson on the discovery difficulties that often follow large volumes of electronic information in complex financial crime cases.

At the request of Las Vegas Sands deputy general counsel, the company’s Chinese subsidiary transferred the electronic files to Las Vegas in August 2010. Sands lawyers at Holland & Hart reviewed them after they were stored in company servers in Las Vegas in anticipation of litigation.

Until June 2010, neither Holland & Hart lawyers nor Sands China lawyers at Glaser Weil Fink Jacobs Howard Avchen & Shapiro, who also knew of the Las Vegas files, admitted knowledge of the files and said their possession of them was an “error.”

Judge Gonzalez did not buy those explanations. She ruled, “The court concludes… that the 100,000 emails and other ESI (electronically stored information) were not transferred in error, but was purposefully brought into the United States after a request by Las Vegas Sands for preservation purposes.”

Judge hit lawyers with sanctions, doubted corporate intentions

On September 14, Judge Gonzalez imposed sanctions against the lawyers. She issued a nine-page order laying out a pattern of deception by the lawyers “with varying degrees of willfulness… ranging from careless non-disclosure to knowing, willful and intentional conduct in concealing the existence of the transferred data.”

She also said Sands changed its corporate policy to resist disclosure of the materials. Before July 2011, Las Vegas and Sands China offices could access each other’s files through a network-to-network connection.

The judge said she conducted seven hearings from May 2011 to May 2012 to flesh out the Macau privacy issue, only to discover later that duplicates of the records in Las Vegas rendered the whole effort moot.

During those hearings in court, lawyers for Sands and Adelson sat in silence. Justin Jones, of Holland & Hart, who reviewed and printed out at least 30 of the records, court records show, said nothing when attorneys at Glaser Weil first told Judge Gonzalez the documents could not be extracted from Macau.

‘Repetitive and abusive’ lawyer tactics, Judge said

This “repetitive and abusive” tactic, the judge said, appeared to be an attempt to stall discovery. She held a three-day hearing starting September 10 to determine appropriate sanctions.

She has ruled that the Las Vegas Sands cannot raise the Macau data privacy issue as a defense or object to admitting the files as evidence. Sands must also pay attorneys’ fees related to the “needless” hearing and motions and contribute $25,000 to the Legal Aid Center of Southern Nevada.

Pocket change to Adelson, great career harm to lawyers

Adelson, 79, is worth more than $20 billion according to the Bloomberg Billionaires Index. The attorneys’ fees amount to little more than the pocket change between his couch cushions. The reputational harm to his lawyers could be far more damaging.

It is not yet clear what impact this development in the Jacobs case will have on the Sands corruption probe. If Jacobs’ electronic files turn out to contain evidence of FCPA violations, the consequences to Sands and its legal team could be serious and get dangerously close to obstruction of justice.

“Although the amount of the sanction wasn’t much, especially considering Adelson’s deep pockets, the facts and admissions that came to light during the hearing ought to have mortified all the attorneys for Las Vegas Sands,” said John Smith, a longtime reporter and columnist for the Las Vegas Review-Journal, said in an interview.