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KBR Nears Final Plea Deal

A criminal information filed in federal court in Houston on Friday shows that Kellogg, Brown & Root LLC, the Houston-based global engineering and construction firm that was once part of Halliburton, will plead guilty to violating the Foreign Corrupt Practices Act. KBR may appear in court next week. The information refers to a plea agreement that has not yet been released by the Justice Department. The Houston Chronicle and the AP have reports.

The criminal information, according to the reports, indicates that the government has agreed to a $402 million fine, payable in installments, beginning with a $52 million payment five days after sentencing, and seven $50 million installments, each due on the first day of each quarter beginning April 1. Under federal sentencing guidelines, the fine range was between $376.8 million and $753.6 million.

Two weeks ago, KBR’s former parent, Halliburton, said a settlement of Foreign Corrupt Practices Act enforcement actions with the Justice Department and the Securities and Exchange Commission was waiting for the DOJ’s final approval. It said it had reserved $559 million for the proposed settlements. Halliburton is obligated under indemnity agreements to pay fines and penalties on behalf of KBR. It said in the release that it would “pay $382 million [to the DOJ] on behalf of KBR in eight installments over the next two years. Pursuant to the terms of the prospective settlement with the SEC, Halliburton would agree to be jointly and severally liable with KBR for and, as a result of the indemnity, to pay to the SEC $177 million in disgorgement.”

In September 2008, Albert “Jack” Stanley, 65, a former chairman and CEO of KBR, pleaded guilty to a two-count criminal information charging him with conspiracy to violate the Foreign Corrupt Practices Act and conspiracy to commit mail and wire fraud. His final sentencing is set for May this year. Under his plea agreement, he faces up to seven years in prison and a restitution payment of $10.8 million.

From 1995 to 2004, Stanley helped a joint venture that included KBR and its predecessors funnel $182 million in bribes to government officials in Nigeria. The bribes were paid in exchange for contracts worth $6 billion to build liquefied natural gas facilities there. KBR’s 2007 Annual Report (its most recent) described a joint venture called TSKJ “formed to design and construct large-scale projects in Nigeria. TSKJ’s members are Technip, SA of France, Snamprogetti Netherlands B.V., which is a subsidiary of Saipem SpA of Italy, JGC [of Japan] and us, each of which has a 25% interest. TSKJ has completed five LNG production facilities on Bonny Island, Nigeria . . . .”

Jack Stanley was a senior vice president of Dresser Industries, Inc. when it merged into Halliburton in September 1998. Dresser’s wholly-owned construction subsidiary, Kellogg, was combined with Halliburton’s construction subsidiary, Brown & Root, Inc., to form KBR. In November 2006, Halliburton spun KBR off and it became a separate publicly-traded company. Former Vice President Dick Cheney was Halliburton’s chief executive from 1995 to 2000.

Why did Halliburton, and not KBR, first announce the proposed settlements with the DOJ and SEC two weeks ago? Under the indemnity in their agreement for KBR’s spin off, known as the master separation agreement, Halliburton calls the shots on most FCPA-related matters. Here’s what KBR said about that in the 2007 Annual Report:

As part of the master separation agreement, Halliburton has agreed to indemnify us for certain FCPA Matters, but we had to agree that Halliburton will, in its sole discretion, have and maintain control over the investigation, defense and / or settlement of FCPA Matters until such time, if any, that we exercise our right to assume control of the investigation, defense and /or settlement of FCPA Matters. We have also agreed, at Halliburton’s expense, to assist with Halliburton’s full cooperation with any governmental authority in Halliburton’s investigation of FCPA Matters and its investigation, defense and/or settlement of any claim made by a governmental authority or court relating to FCPA Matters, in each case even if we assume control of FCPA Matters.

Halliburton said in its release two weeks ago that it gave KBR the indemnity “[t]o enhance KBR’s financial stability and solvency, making possible the separation of KBR . . . .”

KBR, Inc. trades on the NYSE under the symbol KBR.

Halliburton Company trades on the NYSE under the symbol HAL.

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