ZTE in-house lawyers implicated in U.S. sanctions case

“ZTEC senior managers created an elaborate system to hide the 2013-2016 Iran data, authorized the false information that ZTEC defense counsel unwittingly provided to attorneys for the DOJ and federal law enforcement agents, and took steps to delete all communications related to this cover-up,” the government's documents state.

The criminal investigation had been ongoing since 2012. Citing fear of arrest, ZTE in 2015 declined to send its general counsel, Guo Xiaoming, to the United States for a deposition in an unrelated patent case pending in New York federal district court.

According to Tuesday's court documents, ZTE senior managers lied to outside counsel from August 2014 through March 2016 about the company's involvement in the illegal sales. Outside counsel unknowingly gave false information to investigators, prosecutors said in court papers this week.

“On July 8, 2015, in-house counsel for ZTEC accompanied outside counsel in a meeting with the Department of Justice and federal law enforcement agents and reported that ZTEC was complying with the regulations and laws of the United States. That statement was false,” prosecutors wrote in the new filings.

The government didn't identify outside counsel. ZTE engaged DLA Piper, according to one published report in July 2012 that cited a confidential FBI affidavit, to craft a response to a U.S. Commerce Department subpoena about transactions with Iran.

But the criminal plot had begun unraveling much earlier, after Reuters reported in March 2012 about the company's deals with Iran. Then the general counsel of ZTE's U.S. subsidiary in Dallas, Ashley Kyle Yablon, began cooperating with U.S. investigators. Yablon said ZTE in-house counsel from China asked him to help in a cover-up and he refused.

Yablon is no longer listed as ZTE's general counsel in Dallas and could not be reached for comment.

ZTE under the plea deal agreed that the company general counsel and three other senior managers either have resigned, would resign or be terminated within six months.

The company also replaced its CEO in April 2016, the same month ZTE advised prosecutors that its senior management had lied to its outside counsel and to the government about the shipments.

“ZTEC acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” Dr. Zhao Xianming, chairman and CEO since April 2016, said in a statement. “Instituting new compliance-focused procedures and making significant personnel changes has been a top priority for the company.”

In the plea negotiations, ZTE was represented by Wendy Wysong of Clifford Chance in Hong Kong and Washington, D.C., and by Michael Gibson, managing partner of Burleson, Pate & Gibson in Dallas.

The government's case was brought by the U.S. Attorney's Office in Dallas and by the DOJ's national security division.

Under the terms of the plea agreement, ZTE must pay a criminal and civil penalty of nearly $1.2 billion, with $300 million of that suspended so long as the company abides by the agreement. ZTE must also hire an independent compliance monitor for the three years the company is on probation.

The company also must set up a compliance office separate from its legal department. ZTE in November named Houston lawyer Matt Bell as chief export compliance officer to create a global compliance program, according to the company's statement.

Morrison & Foerster partner John Carlin, former assistant attorney general for the DOJ's national security division who oversaw the ZTE investigation during his time at Main Justice, noted the cooperation among several agencies—including the U.S. Department of the Treasury, Commerce Department and DOJ.

“The price tag should underscore to boardrooms worldwide—even those outside the financial sector—the continued importance of a well-functioning compliance program and the pitfalls of an insufficient response to indications of wrongdoing,” Carlin, chairman of the law firm's global risk and crisis management practice, said.

By Sue Reisinger, Corporate Counsel

Inside the billion-dollar plea agreement this week between the U.S. government and the Chinese telecom giant ZTE Corp. sits a tale of lawyers gone bad. And at least one who didn't.

ZTE agreed to plead guilty on March 7 to illegally shipping communications and surveillance equipment to Iran in violation of U.S. export controls. The company also agreed to plead guilty to obstructing justice and making a material false statement to federal investigators. The plea agreement is pending before the U.S. District Court of the Northern District of Texas in Dallas.

According to the U.S. Justice Department's criminal information and a statement of stipulated facts, ZTE's general counsel in China along with the company CEO and two other executives—for sales and logistics—plotted first to make the illegal Iran deals through side companies and then lied to their outside counsel. The documents identify the senior managers only by title.

“ZTEC senior managers created an elaborate system to hide the 2013-2016 Iran data, authorized the false information that ZTEC defense counsel unwittingly provided to attorneys for the DOJ and federal law enforcement agents, and took steps to delete all communications related to this cover-up,” the government's documents state.

The criminal investigation had been ongoing since 2012. Citing fear of arrest, ZTE in 2015 declined to send its general counsel, Guo Xiaoming, to the United States for a deposition in an unrelated patent case pending in New York federal district court.

According to Tuesday's court documents, ZTE senior managers lied to outside counsel from August 2014 through March 2016 about the company's involvement in the illegal sales. Outside counsel unknowingly gave false information to investigators, prosecutors said in court papers this week.

“On July 8, 2015, in-house counsel for ZTEC accompanied outside counsel in a meeting with the Department of Justice and federal law enforcement agents and reported that ZTEC was complying with the regulations and laws of the United States. That statement was false,” prosecutors wrote in the new filings.

The government didn't identify outside counsel. ZTE engaged DLA Piper, according to one published report in July 2012 that cited a confidential FBI affidavit, to craft a response to a U.S. Commerce Department subpoena about transactions with Iran.

But the criminal plot had begun unraveling much earlier, after Reuters reported in March 2012 about the company's deals with Iran. Then the general counsel of ZTE's U.S. subsidiary in Dallas, Ashley Kyle Yablon, began cooperating with U.S. investigators. Yablon said ZTE in-house counsel from China asked him to help in a cover-up and he refused.

Yablon is no longer listed as ZTE's general counsel in Dallas and could not be reached for comment.

ZTE under the plea deal agreed that the company general counsel and three other senior managers either have resigned, would resign or be terminated within six months.

The company also replaced its CEO in April 2016, the same month ZTE advised prosecutors that its senior management had lied to its outside counsel and to the government about the shipments.

“ZTEC acknowledges the mistakes it made, takes responsibility for them, and remains committed to positive change in the company,” Dr. Zhao Xianming, chairman and CEO since April 2016, said in a statement. “Instituting new compliance-focused procedures and making significant personnel changes has been a top priority for the company.”

In the plea negotiations, ZTE was represented by Wendy Wysong of Clifford Chance in Hong Kong and Washington, D.C., and by Michael Gibson, managing partner of Burleson, Pate & Gibson in Dallas.

The government's case was brought by the U.S. Attorney's Office in Dallas and by the DOJ's national security division.

Under the terms of the plea agreement, ZTE must pay a criminal and civil penalty of nearly $1.2 billion, with $300 million of that suspended so long as the company abides by the agreement. ZTE must also hire an independent compliance monitor for the three years the company is on probation.

The company also must set up a compliance office separate from its legal department. ZTE in November named Houston lawyer Matt Bell as chief export compliance officer to create a global compliance program, according to the company's statement.

Morrison & Foerster partner John Carlin, former assistant attorney general for the DOJ's national security division who oversaw the ZTE investigation during his time at Main Justice, noted the cooperation among several agencies—including the U.S. Department of the Treasury, Commerce Department and DOJ.

“The price tag should underscore to boardrooms worldwide—even those outside the financial sector—the continued importance of a well-functioning compliance program and the pitfalls of an insufficient response to indications of wrongdoing,” Carlin, chairman of the law firm's global risk and crisis management practice, said.