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DOJ and SEC Decline FCPA Action Against California-Based Software Company
On September 8, a California-based software company disclosed in its annual statement that following an investigation into its operations in Russia and certain of the Commonwealth of Independent States, the DOJ and SEC have both declined to bring enforcement actions under the FCPA. An announcement of possible violations was first disclosed in the December 2013 blog post by Roxane Marenberg, Vice President and Deputy General Counsel in the company’s Global Compliance Enablement division. In the post, Marenberg stated that the company was conducting an investigation into alleged FCPA violations at the request of the SEC and DOJ in response to a communication those agencies had received concerning the company’s operations and discounting practices. The company’s disclosures did not provide any further detail about the nature of the business activities being investigated.
SEC Appoints New Deputy Associate Director in Division of Investment Management's Rulemaking Office
On September 7, the SEC named Sarah G. ten Siethoff Deputy Associate Director in the Division of Investment Management’s Rulemaking Office. Since joining the SEC in 2008, Ms. ten Siethoff has served in various roles in the Division’s Rulemaking Office, including Assistant Director, Senior Special Counsel, and Senior Counsel. In her new role, Ms. ten Siethoff will, among other things, recommend rulemaking and other policy initiatives under the Investment Company and the Investment Advisers Acts of 1940. Prior to joining the SEC in 2008, Ms. ten Siethoff worked as an associate in private practice.
SEC Announces $22 Million-Plus Whistleblower Award; Program Surpasses $100 Million in Awards
On August 30, the SEC announced that a whistleblower will receive more than $22 million for providing the SEC with a “detailed tip and extensive assistance” to help the agency uncover “well-hidden” securities fraud at the whistleblower’s company. The $22 million-plus award is the second largest SEC whistleblower award, following a $30 million award in September 2014. The SEC began the whistleblower program in 2011 and announced its first award in August 2012. Since then, the agency’s program has surpassed $100 million in total money awarded. More than 14,000 whistleblower tips have been submitted to the Whistleblower Office, with a total of 33 whistleblowers receiving monetary awards.
UK-Based Pharmaceutical Company Agrees to Pay $5.5 Million to Settle FCPA Charges with SEC
On August 30, the SEC announced a $5.5 million settlement with a U.K.-based pharmaceutical company to settle charges under the FCPA’s books and records and internal control provisions due to allegedly improper payments made by the company’s wholly-owned subsidiaries in China and Russia. In its administrative order, the SEC alleged that the Chinese subsidiaries made improper payments to doctors at state-owned healthcare providers to incentivize purchasing and prescribing the company’s pharmaceuticals. The improper payments were funded by fraudulent tax receipts, inflated travel invoices, and fabricated speaker fees. The Chinese subsidiary also allegedly made improper payments to government officials in exchange for reductions or dismissals of proposed financial sanctions against the subsidiary. Similarly, the SEC alleged that the company’s Russian subsidiary made improper payments in connection with pharmaceutical sales. Without admitting or denying the SEC’s findings, the company agreed to disgorge $4.325 million and pay a $375,000 civil penalty with $822,000 in prejudgment interest.
The SEC’s administrative order indicates that the company waived its statute of limitations defenses. This is notable because the company’s misconduct allegedly ended in 2010, and the statute of limitations for FCPA offenses is five years.
This settlement represents another in a series of SEC investigations of the pharmaceutical industry.
Houston-Based Company Disgorges $5 Million to Settle SEC Enforcement Action
In an SEC cease and desist order filed on August 11, Key Energy Services, Inc., a Houston-based provider of rig-based oil well services, agreed to disgorge $5 million to settle charges that the company violated the books and records and internal control provisions of the FCPA. According to the order, from August 2010 through at least April 2013, Key Energy’s Mexican subsidiary paid bribes of at least $229,000 to a contract employee at Petroleos Mexicanos (Pemex), the Mexican state-owned oil and gas company. In exchange, the subsidiary received Pemex non-public information, advice and assistance on contracts with Pemex, and lucrative amplifications or amendments to those contracts. The funds were allegedly funneled through an entity purporting to provide consulting services, but for which there was no evidence of appropriate authorization of the relationship, and no supporting documentation regarding the purported consulting work performed. According to the SEC, the subsidiary improperly recorded the transfers to the consulting firm as legitimate business expenses, which were consolidated into Key Energy’s books and records. Key Energy allegedly failed to implement and maintain sufficient internal controls, including within the subsidiary relating to interactions with Pemex officials, and failed to respond to indications that the subsidiary was improperly using consultants.
It is notable that Key Energy was not required to pay a civil fine in addition to disgorgement. The SEC identified three reasons for accepting Key Energy’s offer of settlement and not imposing a separate civil penalty. First, the SEC praised Key Energy for cooperating with and assisting in its investigation. Key Energy was first contacted by the SEC in January 2014 concerning possible FCPA violations. In April 2014, Key Energy was informed by employees of its subsidiary of possible bribes, at which time the company reported the allegations to the SEC and “undertook a broad internal investigation and risk assessment of [its] international operations.” The SEC specifically noted that, “to the extent the internal investigation identified additional issues of concern, Key Energy provided updates to the Commission staff.”
Second, the SEC considered not only the “cooperation Key Energy afforded to the Commission staff,” but also the “remedial acts undertaken by [the company].” The SEC noted that Key Energy, during its internal review, “promptly and simultaneously undertook significant remedial measures including … a renovation and enhancement of [its] compliance program.” Specific remedial measures included (i) stronger vendor oversight; (ii) enhanced financial controls; (iii) increased training of all international employees; (iv) developing and/or reviewing policies and procedures pertaining to the FCPA, codes of business conduct, and more; and (v) a coordinated wind-down and exit from all markets outside of North America, including a commitment to exit Mexico by the end of 2016.
Finally, “in determining the disgorgement amount and not to impose a penalty,” the SEC “considered Key Energy’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.” This third justification indicates the SEC is not only aware of the current financial strains within the oil and gas services sector, but is uninterested in unnecessarily putting companies out of business. It is also possible that Key Energy’s cooperation and remediation, coupled with its tenuous financial condition, factored into the DOJ’s decision in April to close its investigation of the same conduct without bringing charges.
Medical Device Manufacturer Sets Aside Reserves for DPA Breaches
On August 8, a medical device manufacturer announced in an SEC filing that it is “probable” that the company will incur additional liabilities in connection with the company’s 2012 deferred prosecution agreement (DPA) related to FCPA violations in Mexico and Brazil. The company stated that it had set aside funds for this purpose, but did not specify the amount. The company’s SEC filing stated that the company “expects to continue discussions with the SEC and DOJ but the terms of a potential resolution were not certain.” Two months ago, DOJ stated in a court filing that the company had breached the DPA by failing to implement and maintain a compliance program.
Two Companies Reserve Hundreds of Millions of Dollars for Potential FCPA Settlements
Second quarter SEC filings revealed substantial financial reserves set aside by two companies, each under investigation for alleged FCPA violations for over half a decade. If they end up reflecting the size of the ultimate settlements reached, the reserves, totaling hundreds of millions of dollars, would represent some of the largest FCPA enforcement settlements ever reached by the Justice Department.
According to its July 29 Form 6-K/A filing with the SEC, a Brazilian aircraft manufacturer has recognized a $200 million loss contingency in connection with its discussions to settle the DOJ’s investigation into allegations that the manufacturer’s sales executives bribed various Dominican individuals who, in exchange, influenced legislators in the Dominican Republic to approve a $92 million contract and financing agreement for aircraft. The manufacturer also disclosed that a final settlement is likely to include a deferred prosecution agreement and the imposition of an independent monitor to oversee the manufacturer’s compliance with the terms of an agreement. The related criminal case by the Brazilian government against eight of the manufacturer’s sales executives is still ongoing.
On August 2, a publicly-traded hedge fund revealed in its Form 10-Q filing with the SEC that it has raised its FCPA investigation reserve to over $414 million from the $200 million accrued in the prior quarter. The hedge fund disclosed that it was raising the reserve based on ongoing discussions to resolve the matter with the SEC and DOJ.
Chile-Based Airline Company Settles FCPA Charges
On July 25, a Chile-based airline company agreed to settle parallel criminal and civil FCPA matters relating to alleged bribery of Argentine labor union officials through a sham consulting contract with a third party in exchange for the union accepting lower wages and other concessions. The airline company agreed to pay a total of more than $22 million, including a $12.75 million penalty as part of a three-year Deferred Prosecution Agreement (DPA) with DOJ.
As part of the DPA, the company agreed to continue cooperating with DOJ’s investigation, to make improvements to its compliance program, and to retain a compliance monitor for a period of more than two years. In the DPA and in its press release regarding the settlement, DOJ noted that it took into account certain factors that weighed against the company, including that it did not voluntarily disclose the alleged misconduct (which came to light through Argentinian press reports) or discipline the responsible employees. However, DOJ did note that the company cooperated with DOJ’s investigation once the press reports became public, and “provided all relevant facts known to it, including about individuals involved in the misconduct.”
Because of the factors weighing against the company, the penalty was within the U.S. Sentencing Guidelines range, and the company did not receive a discount off the bottom of the range, as suggested in DOJ’s recent guidance regarding its FCPA pilot program. As stated in the guidance, in order to be eligible for full mitigation credit, a company must voluntarily disclose the FCPA violations, and the DOJ considers such disclosure as a factor separate from the company’s cooperation in the subsequent investigation. The company must also engage in timely and appropriate remediation, which includes appropriate discipline of employees identified by the company as responsible for the misconduct. The guidance specifically states that a monitor should not be required if the company “has, at the time of resolution, implemented an effective compliance program.”
In this case, one of the first under the FCPA pilot program, the DOJ followed its guidance by declining to give mitigation credit when the company did not voluntarily self-disclose and did not fully remediate. It is difficult to say what, if any, credit the company received for its cooperation once the investigation began.
At the same time, the company also settled an SEC administrative enforcement action by agreeing to pay $6.74 million in disgorgement and $2.7 million in prejudgment interest. Earlier this year, the company’s CEO separately settled with the SEC regarding the same alleged scheme, and agreed to pay a $75,000 penalty and attend anti-corruption training.
SEC Names Kurt Gottschall Associate Regional Director
On July 20, the SEC named Kurt Gottschall Associate Regional Director of Enforcement in its Denver office. Gottschall began his SEC career in 2000 as a staff attorney and has since served as Branch Chief and Assistant Regional Director. Throughout his career, Gottschall has investigated or supervised numerous enforcement matters related to various securities law violations. The announcement notes several of Gottschall’s career highlights, which include pursuing fraud charges and an emergency asset freeze against promoters of a $30 million Ponzi scheme and a financial fraud case against six executives of an insurance agency franchisor and lender.
Global Technology Company Settles FCPA Charges with SEC; DOJ Issues Third Declination Letter
On July 11, a Wisconsin-based global technology company agreed, pursuant to an administrative cease and desist order and without admitting or denying the SEC’s findings, to pay $14.3 million to settle the SEC’s allegations that it violated the books and records and internal controls provisions of the FCPA. The charges related to actions taken by managers and employees of the company’s wholly-owned Chinese subsidiary, between 2007 and 2013, to make payments to sham vendors to effect bribes and improper payments to employees of Chinese government owned shipyards, ship-owners, and others, as well as to obtain and retain business and personally enrich the subsidiary’s employees. The company’s settlement includes a disgorgement of $11,800,000, prejudgment interest of $1,382,561, as well as a civil penalty of $1,180,000. The company also agreed to a one-year period of self-reporting to the SEC on the status of its FCPA and anti-corruption related remediation and compliance enhancements.
On the same day, the DOJ Fraud Section released a declination letter sent on June 21, 2016, to the company, in which DOJ declined prosecution of possible FCPA violations “despite the bribery by employees of [the company’s] subsidiary in China.” The DOJ letter stated that its decision is consistent with the FCPA Pilot Program , a one-year program launched in April 2016, to encourage companies “to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in their controls and compliance programs.” DOJ determined that the company had voluntarily self-reported potential FCPA violations, conducted a thorough internal investigation, and continues to cooperate fully and remediate its internal controls.
No individuals have been charged in this matter, but DOJ noted in its declination letter that the company removed from the company all 16 employees determined to have been involved in the misconduct. The company also agreed to continue to cooperate in any ongoing investigation of individuals.
This is the third declination letter issued by the DOJ since its FCPA Pilot Program was announced it April 2016. Prior FCPA Scorecard coverage on the FCPA Pilot Program can be found here.