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Still Yet Another Noisy Exit

Perhaps it is a new trend.

Perhaps it is because the media now covers anything and everything FCPA related.

In any event, it is noticeable.

There has been still yet another “noisy exist.”

Including the below example, I count five in the last few months. See here, here and here for the prior posts.

In October 2009, Stephen Lowe was hired by Allison Transmission (“Allison”) as its Managing Director, China, Japan & Korea Operations. [Allison (here) is an Indiana based designer, manufacturer and supplier of automatic transmissions for medium- and heavy-duty commercial vehicles and military vehicles. In 2007 (see here) The Carlyle Group and Onex Corporation acquired Allison Transmission from General Motors Corporation for US$5.575 billion.]

Lowe alleges in this complaint recently filed in Marion County (Indiana) Superior Court that Allison fired him in July 2010 because he “refused to engage in violations of the FCPA.” Lowe’s complaint implicates both Allison’s Vice President of International Sales and Marketing (“Vice President”) and Allison’s Commercial Director of Asia Strategy (“Commercial Director”).

Among other things, Lowe alleges that: (i) he witnessed the Commercial Director deliver a cash filled envelope to Beijing City Bus officials during dinner; (ii) he heard the Commercial Director describe how he purchased silver jewelry for Chinese government officials “in order to please the officials” (iii) the Commercial Director bragged about winning a Beijing City Bus Olympics contract by doing “whatever it took to please the officials” “including giving gifts, money and prostitutes” and (iv) the Commercial Director “deliberately lost” high-stakes card games to “key Beijing City Bus officials.” [Brain teaser of the day – is deliberately losing a high-stakes card game to a “foreign official” providing the official with a “thing of value”?]

According to the complaint, Allison’s Vice President knew, and approved of, certain of the Commercial Director’s conduct. According to the complaint, “a month before Allison fired him” Lowe disclosed his concerns about the Commercial Director and the Vice President to Allison’s Marketing Manager.

Lowe’s complaint, filed by The Employment Law Group law firm, alleges various Indiana state law causes of action including retaliatory discharge, breach of contract, and breach of the implied covenant of good faith and fair dealing.

For additional coverage of Lowe’s complaint, see here from the Indiana Business Journal.

Yet Another Noisy Exit

Rodolfo Michelon was the Director & Controller – Mexico of Sempra Global. Michelon was also the legal representative of various Sempra subsidiary companies located in Mexico and served as a member of the board of directors of the Mexican subsidiaries.

That is until March 10, when Michelon was terminated by Sempra.

In a lawsuit (here) recently filed in California state court, Michelon claims that his termination was wrongful for many reasons, including the following:

“Sempra regularly required Michelon to transfer funds, and account for illegitimate expenditures that boiled down to bribes of government officials – everything from fraudulent trusts ostensibly to purchase fire fighting equipment for Mexican governments, to paying off local fisherman to move their operations away from Sempra facilities, to demanding remediation of accounting that falsely stated Sepmpra’s assets, to the outright wiring of huge amounts of money to ‘consultants’ throughout Mexico. As with his other attempts to ensure he was complying with his ethical requirements as a CPA, Michelon’s repeated questioning and protests of the miscellaneous frauds and bribes was met with open hostility and threats of termination. The termination of the Controller employment was not only in retaliation for Michelon’s complaints, but it was also meant to keep Michelon from reporting the frauds and bribes to governmental, law enforcement officials.”

Sempra Global is described (here) as “the umbrella for Sempra Energy’s businesses operating in competitive energy markets. Sempra Global companies acquire, develop and operate infrastructure assets related to the production and distribution of energy, including power plants, natural gas pipelines and liquefied natural gas (LNG) receipt terminals.”

Various Sempra entities are publicly traded issuers (see here).

In this San Diego Union Tribune report Sempra officials “called Michelon a disgruntled ex-employee attempting to cash in by making ‘outlandishly false claims and misrepresentations’ after being let go in a routine reorganization.” A Sempra spokesperson said that the “company first became aware of Mr. Michelon’s claims several months ago” and that “Sempra’s board of directors ordered an independent investigation, which found Mr. Michelon’s allegations to be completely without merit.”

Michelon’s “noisy exit” is the fourth such exit publicly reported over the past three months that may implicate the FCPA. See here and here for the prior posts.

Innospec Checkup

“As of March 31, 2010, Innospec had $67.5 million in cash and cash equivalents, $22. million more than its total debt of $45.0 million.” (see here for the prior post).

“As of June 30, 2010, Innospec had $77.0 million in cash and cash equivalents, $30.0 million more than its total debt of $47.0 million.” (see here for the prior post).

As reported by the company earlier this week (see here):

“As of September 30, 2010, Innospec had $101.5 million in cash and cash equivalents, $53.5 million more than its total debt of $48 million.”

As evident from the above, Innospec’s cash coffers continue to grow and business is doing well. The company’s President and CEO “We are pleased to report strong earnings growth as well as excellent cash generation for the third quarter of 2010. All three of our business segments again performed well, generating double-digit increases in operating income.”

Why does any of this matter?

Because in March 2010, Innospec (see here) agreed to pay $40.2 million in combined DOJ/SEC/SFO fines and penalties for violating the Foreign Corrupt Practices Act and other laws.

However, it could have been worse.

The SEC release (see here) notes that Innospec, without admitting or denying the SEC’s allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement was waived.

The release states that “[b]ased on its financial condition, Innospec offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7 million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning allegations of violations of the Cuban Assets Control Regulations.”

In other words, Innospec got a pass on approximately $50 million.

Innospec’s “Inability to Pay” is also noted in the DOJ’s plea agreement (see here).

In other Innospec news, the company’s most recent 10-Q filing (see here) suggests that the company expects its compliance monitor to cost $3.9 million (see pg. 22).

This prior post discussed the civil complaint, based on the DOJ and SEC’s allegations, filed against Innospec by a competitor alleging violations of
the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act.

Here is what Innospec had to say about this litigation in its recent filing:

“On July 23, 2010, NewMarket Corporation and its subsidiary, Afton Chemical Corporation (collectively, “NewMarket”), filed a civil complaint against the Company and its subsidiary, Alcor Chemie Vertriebs GmbH (“Alcor”), in the U.S. District Court for the Eastern District of Virginia. The complaint makes certain claims against the Company and Alcor with respect to alleged violations of provisions of the Robinson-Patman Act, the Virginia Antitrust Act and the Virginia Business Conspiracy Act as a result of alleged actions involving officials in Iraq and Indonesia pertaining to securing sales of the Company’s tetra ethyl lead (TEL) fuel additive, to the apparent detriment of the plaintiffs and their sales of a competing non-lead based fuel additive. The complaint seeks treble damages of an unspecified amount, plus attorneys’ fees, costs and expenses. The factual allegations underlying the complaint appear to relate to the same matters that were the subject of the Company’s recently-disclosed resolution with the DOJ, SEC, OFAC and SFO. On September 22, 2010, the Company filed a motion to dismiss. On October 4, 2010, NewMarket filed an amended complaint incorporating the Sherman Act and related claims in addition to its previous claims. The Company filed its response to the amended complaint and a separate motion to dismiss on October 29, 2010. The Company believes both the complaint and amended complaint are without merit and intends to defend them vigorously, but because of uncertainties associated with the ultimate outcome of these complaints and the costs to the Company of responding to them, we cannot assure you that the ultimate costs and damages, if any, that may be imposed upon us will not have a material adverse effect on our results of operations, financial position and cash flows. As at September 30, 2010 we had accrued $0.5 million in respect of probable future legal expenses and provided no additional accruals in respect of this matter.”

Another Noisy Exit

Steven Jacobs was the President of Macau Operations for Las Vegas Sands Corp. (“LVSC”), a company with shares traded on the New York Stock Exchange (see here).

That is, until his termination on July 23, 2010.

In an October 20th complaint filed against LVSC in District Court, Clark County, Nevada (see here) alleging breach of contract and tort-based causes of action, Jacobs alleges, among other things, that LVSC’s “notoriously bellicose” Chief Executive Officer and majority shareholder made several “outrageous demands” upon him including, but not limited to the following:

“demands that Jacobs use improper ‘leverage’ against senior government officials of Macau in order to obtain Strata-Title for the Four Seasons Apartments in Macau;”

“demands that Jacobs threaten to withhold Sands China business from prominent Chinese banks unless they agreed to use influence with newly-elected senior government officials of Macau in order to obtain Strata-Title for the Four Seasons Apartments and favorable treatment with regards to labor quotas and table limits;”

“demands that secret investigations be performed regarding the business and financial affairs of various high-ranking members of the Macau government so that any negative information obtained could be used to exert ‘leverage’ in order to thwart government regulations/initiatives viewed as adverse to LVSC’s interests;” and

“demands that Sands China continue to use the legal services of a Macau attorney […][an individual media is reporting as a member of a Chinese local government executive council] despite concerns that [the individual’s] retention posed serious risks under the criminal provisions of the United States code commonly known as the Foreign Corrupt Practices Act (‘FCPA’).”

A LVSC spokesperson has been quoted as saying “While Las Vegas Sands normally does not comment on legal matters, we categorically deny these baseless and inflammatory allegations.”

For other examples of recent noisy exists that may implicate the FCPA see this prior post.

An Immaterial Disclosure?

The securities laws generally require issuers to disclose material facts and events to investors.

What is material?

Technically, there is SEC guidance on the issue (see here).

The issue basically boils down to whether the information would affect the judgment of a reasonable investor in making an investment decision.

As Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) explained at the recent World Bribery and Corruption Compliance Forum (here) the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) – Desmet conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a “complicated gray area” to use Desmet’s words. He said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.” Because of this, Desmet said that it is “prudent” for any issuer to approach the SEC with any “suspicion” of bribes “as soon as” the company learns of the improper payment.

It is against this backdrop that issuers frequently disclose immaterial payments which may implicate the FCPA.

Case in point, Sensata Technologies Holding N.V. (“Sensata”) (here), a global industrial technology company that began trading on the New York Exchange in March 2010 (see here).

The company had this to say in its October 22nd 10-Q filing (here):

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether
any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was
immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The
Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. The Company is unable to estimate the potential penalties, if any, that might be assessed and, accordingly, no provision has been made in the accompanying condensed consolidated financial statements.”

Since the disclosure, Sensata’s shares have climbed approximately 1.5%.

However, this has not stopped the new breed “FCPA” plaintiff lawyers from acting.

Yesterday, the Shareholders Foundation announced (here) an investigation on behalf of investors of Sensata concerning “whether certain officer and directors of Sensata […] breached their fiduciary duties and are liable for possibly violating the U.S. Foreign Corrupt Practices Act (“FCPA”).”

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