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PBSJ Corp. Unable to File Annual Report

The PBSJ Corporation is a global engineering and architectural firm headquartered in Florida.

In its recent SEC filings (here and here), the company announced that it was unable to file its Annual Report due to an FCPA internal investigation “in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries.”

The filing indicates that:

“The Company is unable to determine at this time (i) whether the results of the internal investigation will indicate that its internal controls over financial reporting were not operating effectively, (ii) the impact, if any, such internal investigation may have on the Company’s annual report on internal control over financial reporting that the Company is required to include in the Form 10-K, or (iii) the effect, if any, such internal investigation may have on the Company’s financial statements to be included in the Form 10-K.”

According to the filing:

“The Company has self-reported to the Securities and Exchange Commission (the “SEC”) and the Department of Justice (the “DOJ”) the circumstances surrounding this internal investigation. Should the SEC or DOJ decide to conduct its own investigation, the Company will cooperate fully.”

PBS&J International, Inc.’s “previous international assignments have extended to nearly every corner of the world” and its “recent global pursuits have centered on prominent projects in the Middle East, North Africa, the Caribbean, Central and South America, Europe, and Australia” – according to the company’s website (see here).

While it is increasingly common for a company to disclose such FCPA issues (see here for prior posts on voluntary disclosure), it is rather unusual for the FCPA disclosure to prevent the company from otherwise meeting its disclosure requirements under the securities laws.

For local media coverage of PBSJ’s disclosure (see here).

Team of Plenty

Voluntary disclosure (i.e. picking up the phone and calling the DOJ and/or SEC (if applicable) to schedule a meeting, during which a company’s lawyers disclose conduct that could potentially implicate the FCPA, even though the enforcement agencies, in many cases, would never find out about the conduct) is a tough issue.

In a November 2009 speech to an FCPA audience (see here), Assistant Attorney General Lanny Breuer acknowledged that the decision of whether to make a voluntary disclosure is “sometimes a difficult question” […] a question I grappled with as a defense lawyer.”

The Gibson Dunn Year End FCPA Report (the subject of yesterday’s post see here) has this to say about voluntary disclosure:

“To be sure, a company that voluntary discloses a potential FCPA violation to DOJ and the SEC will be better situated than one that otherwise finds itself across the table from the government having not disclosed the conduct.”

[…]

“On the other hand, there is substantial debate about just how “tangible” the benefits of voluntary disclosure truly are.”

[…]

“Although some corporate defendants that self-reported misconduct have certainly received relatively lenient treatment, it is not clear that voluntary disclosure was the reason for any particular settlement term.”

[…]

“Although it is certain that companies do receive some benefit for self-reporting FCPA violations, the real question is whether the company considering a voluntary disclosure is better off for having made the disclosure, which is not necessary one-and-the-same. Because voluntary disclosure makes the government aware of alleged improper conduct that it otherwise may have never discovered on its own, the likelihood of the government uncovering the misconduct through other means, such as a whistleblower, foreign government investigation, tip from a competitor or business partner, or industry-wide investigation, is a critical factor in determining whether to make a voluntary disclosure.”

[…]

“Given the multitude of factors to consider when making a voluntary disclosure decision, it is often challenging to make such a significant decision with any degree of confidence that a particular course of action is the right one. This task is made even more difficult by the uncertainty of obtaining any particular benefits for disclosing.”

As raised in a prior post (see here), a company’s decision in deciding whether or not to voluntarily disclose conduct to the enforcement agencies that could potentially implicate the FCPA is made even more difficult given the potential conflict of interest FCPA counsel has in advising the company as to the important disclosure issue – particularly where the disclosure only involves a potential FCPA violation?

I raised this lurking “elephant in the room” question in connection with Dyncorp International’s recent disclosure of potential FCPA issues.

One could raise the same question in connection with Team Inc.

In August 2009, Team (a Texas-based provider of specialty industrial services) disclosed (here) that an internal investigation conducted by FCPA counsel “found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises.”

The release further noted that “[b]ased upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000. The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues. We have voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter.”

In the prior post, I noted that a voluntary disclosure often sets into motion a series of events and the next thing the company knows it is paying for a team of lawyers (accompanied by forensic accountants and other specialists) even though the voluntary disclosure that got the whole process started involved conduct that may not actually violate the FCPA.

Fast forward to yesterday as Team disclosed (here) as follows:

“As previously reported, the Audit Committee is conducting an independent investigation regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) in cooperation with the U.S. Department of Justice and the Securities and Exchange Commission. While the investigation is ongoing, management continues to believe that any possible violations of the FCPA are limited in size and scope. The investigation is now expected to be completed during the first calendar quarter of 2010. The total professional costs associated with the investigation are now projected to be about $3.0 million.”

A $3 million dollar internal investigation concerning non-material payments made by a branch office that represents less than one-half of one percent of the company’s annual consolidated revenues?

Wow!

Double-wow because the payments may not even violate the FCPA because they were made to “employees of foreign government owned enterprises” (see here for several prior posts on the enforcement agenices untested and unchallenged interpretation of the “foreign official” element)!

Others have scratched their heads about this as well (see here and here).

Of course, the FCPA does not contain a de minimis exception and of course the FCPA contains books and records and internal control provisions applicable to issuers like Team. Thus, even if the payments were not material in terms of the company’s overall financial condition, there still could be FCPA books and records and internal control exposure if they were misrecorded in the company’s books and records or made in the absence of any internal controls.

But then again, the FCPA books and records and internal control provisions would be implicated if a Team employee took his Cousin Randy to the company’s corporate suite for the ballgame but recorded the costs as “marketing expenses” on his reimbursement request causing the company to misrecord the payment. Yet, no one would suggest disclosing this potential FCPA violation!

A Post-Holiday Stocking Stuffer

January can be a dismal month. The joy of the holiday season has diminished, our waistlines have expanded, it’s cold, and for many readers of this blog – it is time to start cranking out the billable hours again upon realizing, at this point, you are “annualized” at 600 hours.

But for FCPA watchers, it’s a different story as the holiday season has traditionally extended into the first week of January – the week in which Gibson, Dunn & Crutcher releases its Year-End FCPA Report (see here).

Part year in review, part marketing document, the report is a useful resource for those interested in following FCPA developments.

A couple of thoughts.

The number of DOJ FCPA enforcement actions noted in the report (26) is significantly inflated by separately including corporate prosecutions and related individual prosecutions. While this number is a good attention grabber, it is subject to debate whether 2009 was a record-enforcement year as corporate FCPA prosecutions by the DOJ slowed to a trickle in the second half of 2009. Since July 2009, there have been only two substantive DOJ FCPA enforcement actions against corporations (Control Components and UTStarcom). Whether the widely reported 100+ cases in the “pipeline” are taking longer to resolve, being resolved informally with no public disclosure, or about to burst onto the scene in 2010 is an open question and remains to be seen.

I’ve noted before that FCPA enforcement is a “unique creature.” I’ll say it again after reading this sentence in the report concerning the SEC’s charges against Bobby Benton (see here for a prior post) – “the fact that Benton did not settle the charges against him is remarkable in and of itself.”

A Look Back (and Forward)

This week marks not only the end of a year, but also a decade.

So let’s take a look back at FCPA enforcement circa 2000.

In 2000, the FCPA was indeed “on the books” (the statute was enacted in 1977), yet there was little in terms of FCPA news or enforcement actions.

A “U.S. newspapers and wires” search for the FCPA in the 2000 picks up 64 “hits” and among the more noteworthy stories from that year were the following:

(1) BellSouth corporation disclosed that the SEC launched a probe into whether one of its Latin American subsidiaries violated the FCPA and the company also disclosed that its outside counsel had already investigated the conduct and found that no violations had occurred; and

(2) BF Goodrich Company announced that it was using a web-enabled training system to educate its employees about work-related legal issues including the FCPA.

One could even attend a few FCPA training sessions in 2000 as the search picked up programs sponsored by both the City of New York Bar and the Washington DC Bar.

There was even one FCPA enforcement action in 2000!

In December 2000, the SEC announced (here) the filing of a settled cease-and-desist proceeding against International Business Machines Corporation (“IBM”).

According to the SEC order (here), IBM violated the books and records provisions of the FCPA based on the conduct of its indirect, wholly-owned subsidiary, IBM-Argentina, S.A. The conduct involved “presumed illicit payments to foreign officials” in connection with a “$250 million systems integration contract” between Banco de la Nacion Argentina (“BNA”) (an apparent “government-owned commercial bank in Argentina) and IBM-Argentina.

The SEC order finds that, in connection with the contract, IBM-Argentina’s Former Senior Management (without the knowledge or approval of any IBM employee in the U.S.) caused IBM-Argentina to enter into a subcontract with an Argentine corporation (“CCR”) and that “money paid to CCR by IBM-Argentina in connection with the subcontract was apparently subsequently paid by CCR to certain BNA officials.”

According to the Order, IBM-Argentina paid CCR approximately $22 million under the subcontract and “at least $4.5 million was transferred to several BNA directors by CCR.”

According to the Order, the former Senior Management “overrode IBM procurement and contracting procedures, and hid the details of the subcontract from the technical and financial review personnel assigned to the Contract.” The Order finds that IBM-Argentina “recorded the payments to CCR in its books and records as third-party subcontractor expenses” and that IBM-Argentina’s financial results were incorporated into IBM’s financial results filed with the Commission.

Based on the above conduct, the SEC concluded that “IBM violated [the FCPA’s books and records provisions] by failing to ensure that IBM-Argentina maintained books and records which accurately reflected IBM-Argentina’s transactions and dispositions of assets with respect to the Subcontract.” IBM consented to a cease and desist order and consented to entry of a judgment ordering it to pay a $300,000 penalty.

A Washington Post article about the IBM action notes that it “is the SEC’s first in three years involving overseas bribery.”

In 2000, there were no DOJ FCPA prosecutions (against corporations or individuals).

The first DOJ corporate FCPA prosecution of this decade did not occur until 2002.

In that action (here) Syncor Taiwan, Inc. (a wholly-owned, indirect subsidiary of Syncor International Corporation) pleaded guilty to a one-count criminal information charging violations of the FCPA. According to the DOJ release, “[t]he company admitted making improper payments [approximately $344,110] to physicians employed by hospitals owned by the legal authorities in Taiwan for the purpose of obtaining and retaining business from those hospitals and in connection with the purchase and sale of unit dosages of certain radiopharmaceuticals.”

The release further notes that the company “made payments [approximately $113,000] to physicians employed by hospitals owned by the legal authorities in Taiwan in exchange for their referrals of patients to medial imaging centers owned and operated by the defendant.”

Based on this conduct, the release notes that the company agreed to a $2 million criminal fine – “the maximum criminal fine for a corporation under the FCPA” (as noted in the release). The release also notes that “Syncor International has consented to the entry of a judgment requiring it to pay a $500,000 civil penalty, the largest penalty ever obtained by the SEC in an FCPA case.”.

From this retrospective, two issues jump out.

First, as demonstrated by the IBM action, the notion that an issuer may be strictly liable for a subsidiary’s (even if indirect) violations of the FCPA books and records is nothing new. (See here for a prior post on this issue).

Second, as demonstrated by the Syncor action, DOJ’s interpretation of the “foreign official” element to include non-government employees employed by state-owned or state-controlled entities stretches back to earlier this decade. (See here for prior posts on this issue).

This retrospective also highlights just how significantly FCPA enforcement has changed this decade.

For starters, the same “U.S. newspapers and wires” search for the FCPA (year to date) picks up nearly 700 “hits” (a ten-fold increase from ten years ago). In addition, if one wanted to, one could attend (it seems) an FCPA seminar, training session, bar event, etc. every week in a different state.

Further, I bet my Jack LaLanne Power Juicer received this holiday season that if the IBM enforcement action were to have recently occurred, the SEC would have also charged FCPA internal control violations as well as sought a significant disgorgement penalty given that the alleged improper payments in that matter helped secure a $250 million contract.

Moreover, the $2 million “maximum criminal fine for a corporation under the FCPA” (as noted in the Syncor DOJ release) seems laughable when viewed in the context of the $450 million Siemens criminal fine (Dec. 2008) or the $402 million Kellogg Brown & Root criminal fine (Feb. 2009). Also laughable is the $500,000 “largest penalty ever obtained by the SEC in an FCPA case” (as noted in the Syncor release) when viewed in the context of the $350 million Siemens penalty or the $177 million KBR/Halliburton penalty.

Has the conduct become more egregious during this decade or have enforcement theories and strategies simply changed? I doubt it is the former.

Why have enforcement theories and strategies changed? One of the best, candid explanations I’ve heard recently is that FCPA enforcement for the government “is lucrative.” (See here).

One of the great legal “head-scratchers” of this decade is how DOJ and SEC’s enforcement of the FCPA against business entities has taken place almost entirely outside of the normal judicial process due to the fact that corporate FCPA prosecutions are resolved through non-prosecution or deferred prosecution agreements, settled through SEC cease and desist orders, or otherwise resolved informally. The end result is that in many cases, the FCPA means what DOJ and SEC says it means.

My hope for the New Year and decade is that many of the untested and unchallenged legal theories which are now common in FCPA enforcement will actually be subject to judicial scrutiny and interpretation.

Happy Holidays

Got some last-minute holiday shopping on the “to-do” list today?

You may want to consider this for that valued colleague, an item sure to turn heads and earn the recipient a pass from FCPA scrutiny for having a well-communicated FCPA policy.

Looking to spend a little extra on that special someone this holiday season?

You may want to consider this item.

In the spirit of the season, I include a clip from my favorite holiday movie – “A Christmas Story.”

While it is indeed unfortunate when a company becomes the subject of an FCPA enforcement action or when an individual faces the prospect of losing his or her liberty because of an FCPA violation, I must confess I do feel a bit like Ralphie in “A Christmas Story” every time an FCPA enforcement action is released.

Clueless as to what I am talking about – here is the clip.

It goes something like this.

The FCPA enforcement action is released by the DOJ or SEC.

I immediately seek seclusion so that I can de-code the messages in the otherwise bare-bones, conclusory DOJ non-prosecution or deferred prosecution agreement or SEC complaint and consent decree.

The family is calling and I am needed elsewhere.

I yell out, “just a minute.”

I am close to cracking the code and the messages therein.

The calls persist, but I’m getting closer and the tension is mounting.

I’m almost there.

And then … the message.

The enforcement officials have concluded, yet again, that employees of state-owned or state-controlled enterprises are “foreign officials!”

***

Thanks for reading, all the best this Holiday season, and be sure to stop back in a few days.

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