This post went in-depth regarding this week’s $28 million Foreign Corrupt Practices Act enforcement action against PTC Inc. and related entities.
This post continues the analysis by highlighting various issues to consider.
As highlighted in this previous post, the company first disclosed its FCPA scrutiny in August 2011. Thus, the timeline was approximately 4.5 years.
Pre and Post – Enforcement Action Professional Fees and Expenses
Unlike some issuers under FCPA scrutiny, PTC does not appear to have disclosed its pre-enforcement action professional fees and expenses over the past 4.5 years. If the company’s scrutiny followed a typical path, those pre-enforcement action professional fees and expenses likely were equal to or exceeded the $28 million settlement amount.
Given that PTC did not disclose its pre-enforcement action professional fees and expenses, it is unlikely that the company will disclose its post-enforcement action professional fees and expenses either. However, there will be plenty because, as a condition of settlement, the company is required to report to the DOJ for a three year term.
In the words of the DOJ:
“The [PTC Entities] engaged in extensive remedial measures, including a review and enhancement of the Companies’ and PTC Inc.’s compliance program, the establishment of a dedicated compliance team at the corporate level and at PTC China and enhanced policies for business partners, the termination of the business partners involved in the misconduct described in the Statement of Facts …, and the implementation of new customer travel policies and additional controls around expense reimbursement.”
In the words of the SEC:
“As part of its internal review and investigation, PTC undertook significant remedial measures including terminating the senior staff at PTC-China implicated in the FCPA violations. PTC also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies worldwide, and implemented additional specific enhancements in China. These steps included: (1) reviewing and enhancing its anti-bribery policy, code of ethics, and gifts and entertainment policies to correct previous deficiencies; (2) establishing a dedicated compliance team, including a chief compliance officer and a new compliance director in China; (3) expanding its other compliance resources in China, including hiring a new vice president of finance for Asia and adding additional legal staff in China; (4) hiring a new management team in China, including a new China President; (5) enhancing its FCPA training for employees; (6) severing its relationships with the business partners that were implicated in the FCPA violations and discontinuing the use of COD partners or business referral partners generally; (7) implementing a comprehensive due diligence program for all other business partners that includes a risk-scoring system operated by a third party vendor and that includes FCPA training as part of the onboarding process; (8) obtaining quarterly anti-corruption certifications from sales staff; and (9) undertaking periodic compliance audits.”
Against this backdrop, is it truly necessary for PTC to report to the government for three years regarding its “remediation efforts to date, their proposals reasonably designed to improve the Companies’ internal controls, policies, and procedures for ensuring compliance with the FCPA and other applicable anti-corruption laws, and the proposed scope of the subsequent reviews”?
One Core Enforcement Action
Certain FCPA Inc. participants have adopted creative counting methods when it comes to keeping FCPA enforcement statistics.
No doubt, some will count the PTC enforcement action as three separate enforcement actions (the DOJ component, the SEC component as to the company, and the SEC component as to the individual) even though each action was based on the same core conduct. Counting FCPA enforcement actions this way distorts FCPA enforcement statistics because this week’s action was one core action.
First Individual DPA by the SEC
The Yu Kai Yuan DPA, which the SEC termed the first DPA with an individual in an FCPA case, might be the most inconsequential legal document you will ever read.
Based on the same core conduct in the DOJ NPA and the SEC administrative order, the SEC alleged that Yuan (a Chinese citizen who resides in Shanghai and was last a sales executive for PTC entities in China in 2011) caused violations of the FCPA’s books and records and internal controls provisions.
The only specific allegation as to Yuan in the DPA is the first paragraph which merely identifies him. There is no other specific allegation regarding him including how he caused violations of the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s allegations, Yuan agreed to refrain from violating the “federal and state securities law” and to “refrain from violating the applicable rules promulgated by any self-regulatory organization or professional licensing board.”
If what the SEC is seeking is more individual enforcement actions in connection with corporate FCPA actions, the Yuan DPA represents one way to juice the statistics.
Additional Sloppy or Incomplete Pleading
The recipients of the travel and entertainment alleged were employees of alleged Chinese state-owned entities.
That is all the DOJ and SEC state in the resolution documents.
Even though the two-factor control and function test set forth in Esquenazi is flawed (see pgs. 24-43 in this article for a detailed discussion of why), it would seem incumbent on the enforcement agencies to include allegations or findings relevant to this two-factor test as the business community (at least one intended audience of FCPA resolution documents) remains confused regarding the contours of the “foreign official” element.
Like many, many other FCPA enforcement actions, the PTC action assumes causation.
In other words, it is assumed that the only reason the Chinese SOEs purchased PTC products and services is because certain of the SOE employees engaged in non-business travel and received other things of value such as iPods, wine and clothing from PTC entities.
Such assumed causation, very much relevant to disgorgement issues, would seem to speculative at best.
Just Plain Silly
Speaking of assumed causation, some have asserted that the Yuan individual DPA by the SEC was “inspired in part by the Yates memo issued over at the Justice Department.”
My own two cents is that suggesting such a connection is just plain silly. The Yuan DPA signatures began in November 2015 and as stated by the SEC the DPA was the “result of significant cooperation [Yuan] provided during the SEC’s investigation” – an investigation which began in 2011.
Application of DD-3
One often overlooked reason for the general increase in FCPA enforcement in the modern era is that in 1998 the statute was expanded through the dd-3 portion of the FCPA which applies to, generally speaking, non-issuer foreign companies and foreign nationals, to the extent the “while in the territory of the U.S.” jurisdictional prong has been satisfied.
The DOJ’s NPA was against PTC China entities, not PTC Inc., and invoked dd-3. While not explicit in the resolution documents, the “while in territory of the U.S.” jurisdictional prong was presumably met given that certain PTC China employees accompanied the alleged Chinese “foreign officials” on their travels to the U.S.