recent post highlighted the SEC FCPA enforcement action against Goodyear.
This post continues the analysis by highlighting various issues to consider associated with the enforcement action.
Invoking a Standard That Does Not Even Exist Under the FCPA
To anyone who values the rule of law, it is troubling when an FCPA enforcement agency invokes a standard of liability that does not even exist under the FCPA.
As previously highlighted in this article, “Why You Should Be Alarmed By the ADM FCPA Enforcement Action,” the enforcement agencies’ invocation of a ‘‘failure to prevent or detect’’ internal controls standard is alarming because such a standard does not even exist in the FCPA and is inconsistent with actual legal authority. Just as important, such a standard is inconsistent with enforcement agency guidance relevant to the internal-controls provisions.
Nevertheless, and notwithstanding such legal authority and enforcement agency guidance, the SEC again referenced the “prevent and detect” standard twice in the Goodyear enforcement action.
The internal-controls provisions are specifically qualified through concepts of reasonableness and good faith. This statutory standard is consistent with congressional intent in enacting the provisions. Relevant legislative history states: ”
“While management should observe every reasonable prudence in satisfying the objectives called for [in the books-and-records and internal-controls provisions], . . . management must necessarily estimate and evaluate the cost/benefit relationships to the steps to be taken in fulfillment of its responsibilities . . . . The size of the business, diversity of operations, degree of centralization of financial and operating management, amount of contact by top management with day-to-day operations, and numerous other circumstances are factors which management must consider in establishing and maintaining an internal accounting controls system.”
As highlighted here, the only judicial decision to directly address the substance of the internal-controls provisions states, in pertinent part, as follows:
“The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of ‘‘reasonable assurances’’ contained in [the internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies as they consider the institution of accounting controls and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness.”
In addition, various courts have held—in the context of civil derivative actions in which shareholders seek to hold company directors liable for breach of fiduciary duties due to the company’s alleged FCPA violations— that just because improper conduct allegedly occurred somewhere within a corporate hierarchy does not mean that internal controls must have been deficient.
The ‘‘failure to prevent and detect’ standard is also alarming when measured against the enforcement agencies’ own guidance concerning the internal controls provisions. As highlighted here, the SEC’s most extensive guidance on the internal controls provisions states, in pertinent part, as follows:
“The accounting provisions’ principal objective is to reaching knowing or reckless conduct.”
“Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.”
“The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”
A Government Required Transfer of Shareholder Wealth to FCPA Inc.?
According to Goodyear’s initial disclosure of the matter, the voluntary disclosure resulted from an anonymous source reporting through a confidential ethics hotline. In short, an effective internal control.
According to the SEC, Goodyear “promptly halted the improper payments” and voluntarily reported the matter to the SEC (and DOJ). Goodyear also provided significant cooperation with the SEC’s investigation and undertook significant remedial efforts and disciplinary actions. Goodyear also implemented “improvements to its compliance program, both specific to its operations in sub-Saharan Africa, and globally.” In short, an effective internal control and remediation.
Nevertheless, as a condition of settlement, Goodyear is required to report to the SEC, “at no less than 12 month intervals during a three year term” on the status of its remediation and implementation of compliance measures.” The SEC’s Order contains further specifics about initial reviews, written reports, and follow-up reviews and reports.
Let’s call a spade a spade folks. This amounts to little more than a government required transfer of shareholder wealth to FCPA Inc. (See here for the prior post of the same title).
While the Goodyear enforcement action was clearly not a top ten enforcement action in terms of overall settlement amount, it was the 4th largest SEC only FCPA enforcement action of all-time behind (Eli Lilly, General Electric and Diageo).
No-Charged Bribery Disgorgement
As in prior years, in the Goodyear enforcement action the SEC continued its practice of ordering disgorgement even though the offending company was not charged with violating the FCPA’s anti-bribery provisions.
As highlighted in this previous post, so-called no-charged bribery disgorgement is troubling.
Among others, Paul Berger (here) a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”
Not The First FCPA Enforcement Action Against a Goodyear Entity
As highlighted in this prior post, in 1989 the DOJ charged Goodyear International Corp., a subsidiary of Goodyear Tire & Rubber Co., with FCPA anti-bribery violations for alleged improper payments to Iraqi officials. Goodyear International pleaded guilty and agreed to pay a $250,000 fine.
A Future Enforcement Action Against a Tire Industry Company?
It will be interesting to see if anything comes from the following sentence in the SEC’s Order. The SEC is “not imposing a civil penalty based upon [Goodyear’s] cooperation in a Commission investigation and related enforcement action.”