This September 15th post regarding the SEC’s enforcement action against Jun Ping Zhang (the former Chairman and CEO of CareFx China, a dissolved Chinese subsidiary of Harris Corp) noted that the SEC, in the Ping Order, found that as a result of Ping’s conduct “Harris violated the FCPA’s books and records provisions.”
Elsewhere, the Order stated that as a result of the alleged improper conduct CareFx was awarded over $9.6 million in contracts.
Accordingly, the prior post wondered whether a future Foreign Corrupt Practices Act enforcement action against Harris Corp. would be forthcoming. Indeed, there have been several examples of the SEC first bringing an FCPA enforcement action against an individual and then following up with an FCPA enforcement action against the company. (For instance, in August 2015 the SEC brought an FCPA enforcement action against Vicente Garcia (a former head of Latin American sales for SAP) followed by SAP enforcement action in February 2016- see here).
It turns out that the answer to the question: will there be an FCPA enforcement action against Harris Corp. is no because in this SEC release issued on September 12th (a day before the September 13th Ping Order) the SEC states:
“Although only able to perform limited pre-acquisition due diligence on the subsidiary, Harris took immediate and significant steps after the acquisition to train staff in China and integrate the subsidiary into Harris’s system of internal accounting controls. As a result of Harris’s postacquisition measures, including the implementation of an anonymous complaint hotline, Harris discovered the misconduct at the subsidiary within five months of the acquisition.
The SEC determined not to bring charges against Harris, taking into consideration the company’s efforts at self-policing that led to the discovery of Ping’s misconduct shortly after the acquisition, prompt self-reporting, thorough remediation, and exemplary cooperation with the SEC’s investigation.”
When publishing the September 15th post, I was not aware of this interesting nugget because it was not discussed, suggested or inferred anywhere in the Ping Order.
This law firm client alert (drafted by the lead counsel for Harris Corp. in connection with the CareFx China investigation) called the situation a “first of its kind.”
“Put simply, Harris’ declination from the SEC — following on the declination Harris received from the U.S. Department of Justice (“DOJ”) in November 2015 — represents the first time in a “pure” FCPA investigation that a multinational corporation has avoided prosecution entirely while one of its former employees was sanctioned for FCPA violations that created clear potential FCPA liability for the company.”
As often happens in the FCPA space, the law firm alert was picked up by the media and a narrative was established, see here from Compliance Week regarding the “landmark” FCPA case which Compliance Week called on Twitter a “major, major #fcpa case.”
However, far from being a “first of its kind” example, the Harris Corp. situation represents the 20th example since 2000 in which the DOJ/SEC charged an individual with FCPA violations but neither the DOJ or SEC charged the corporate employer.
Those examples, several of which were highlighted in this previous post, are as follows.
- Dmitrij Harder (2015, individual associated with Chestnut Consulting Group Inc., no enforcement action against Chestnut Group).
- Dmitry Firtash, Andras Knopp, Suren Gevorgyan, Gajendra Lal, Periyasamy Sunderalingam (2014, individuals associated with DF Group, no enforcement action against DF Group).
- Ernesto Lujana, Tomas Clark, Alejandro Hurtado,Benito Chinea, Joseph DeMeneses (2013-2014, individuals associated with Direct Access Partners, no enforcement action against Direct Access Partners).
- Garth Peterson (2012, individual associated with Morgan Stanley, no enforcement action against Morgan Stanley).
- Washington Cruz, Amadeus Richers and Cecilia Zurita (2011, individuals associated with Cinergy Telecommunications Inc., enforcement action against Cinergy Telecommunications was dropped).
- Jean Fourcand (2010, individual associated with Fourcand Enterprises, Inc., no enforcement action against Fourcand Enterprises).
- Juan Diaz (2009, individual associated with JD Locator Services Inc., no enforcement action against JD Locator Services).
- Antonio Perez, Joel Esquenazi and Carlos Rodriguez (2009, individuals associated with Terra Telecommunications Corp., no enforcement action against Terra Telecommunications).
- Marguerite Grandison (2009, individual associated with Telecom Consulting Services Corp., no enforcement action against Telecom Consulting Services).
- Charles Jumet, John Warwick (2009, individuals associated with Ports Engineering Consulting and Overman Associates- no enforcement action against Ports Engineering Consulting Corp or Overman Associates).
- Shu Quan-Sheng (2008, individual associated with AMAC International Inc. – no enforcement action against AMAC International Inc.)
- Leo Smith and Martin Self (2007-2008, individuals associated with Pacific Consolidated Industries – no enforcement action against Pacific Consolidated Industries).
- Gerald and Patricia Green (2008, individuals associated with Film Festival Management – no enforcement action against Film Festival Management).
- Yaw Osei Amoako, Steven Ott, Roger Young (2006-2007, individuals associated with ITXC Corporation – no enforcement action against against ITXC Corp.)
- Richard Novak (2006, individual associated with “several internet businesses” – no enforcement action against the businesses).
- David Kay, Douglas Murphy (2002, individuals associated with American Rice, Inc. – no enforcement action against American Rice other than a cease and desist order with no monetary component).
- Richard Pitchford (2002, individual associated with the Central Asia American Enterprise Fund – no enforcement action against the Central Asia American Enterprise Fund).
- Daniel Rothrock (2001,individual associated with Allied Products Corp. – no enforcement action against Allied Products Corp.)
- Richard Halford, Albert Reitz, Robert King, Pablo Hernandez (2001, individuals associated with Owl Securities and Investments, Limited – no enforcement action against Owl Securities).
Having established that the Harris example was clearly not a “first of its kind” example, let’s next dive into the findings of the SEC’s Ping Order and the SEC’s release regarding Harris.
Ping was the former Chairman and CEO of CareFx China.
In April 2011, Harris completed the acquisition of Carefx Corporation and in the process acquired Carefx China. For starters, certain of Ping’s conduct discussed in the SEC’s order occurred prior to Harris acquiring Carefx.
The SEC states that Harris was “only able to perform limited pre-acquisition due diligence on [Carefx China].” As to the due diligence that Harris was able to perform, the SEC states: “Ping did not disclose this bribery scheme to Harris’s attorneys during the pre-acquisition due diligence process.”
Next, the SEC states:
“Harris took immediate and significant steps after the acquisition to train staff in China and integrate the subsidiary into Harris’s system of internal accounting controls. As a result of Harris’s post-acquisition measures, including the implementation of an anonymous complaint hotline, Harris discovered the misconduct at the subsidiary within five months of the acquisition.”
As to what happened next, here is what Harris Corp. previously disclosed:
“In response, we initiated an internal investigation and learned that certain employees of the Carefx China operations had provided pre-paid gift cards and other gifts and payments to certain customers, potential customers, consultants, and government regulators, after which we took certain remedial actions. The results of the investigation were disclosed to our Audit Committee, Board of Directors and auditors, and voluntarily to the U.S. Department of Justice (“DOJ”) and the SEC.”
The SEC’s order states:
“On December 17, 2011, Harris dissolved CareFx as a separate business entity. Before the dissolution, Harris consolidated CareFx’s books and records into its financial statements. CareFx’s revenues accounted for less than 1% of Harris’s gross revenues.”
[I]n April 2012, Harris relieved Ping of his duties as Chairman and CEO of CareFx China, and later terminated his services at Harris in July 2012.”
Against this backdrop, the lack of an SEC enforcement action against Harris Corp. certainly seems like a fair resolution and for this restraint the SEC ought to be commended. In effect, what the SEC recognized was a de facto compliance defense (for more on how the enforcement agencies recognize a de facto compliance defense and thus would have little to fear from an actual compliance defense in the FCPA, see “Revisiting an FCPA Compliance Defense“).
What’s interesting about the SEC’s seeming recognition of a de facto compliance defense is that, as highlighted in this 2011 post, SEC Chair Mary Schapiro offered the following reason, among others, against a compliance defense when asked by Congress.
“[P]roviding an affirmative defense for reasonably designed compliance programs could allow companies to retain ill-gotten gains. A company could engage in bribery or other corrupt behavior, obtain a benefit from such conduct (i.e. securing lucrative contracts), and yet not disgorge its ill-gotten gains. Enabling companies to retain proceeds generated from the payment of bribes would disincentivize those companies from adopting rigorous anti-corruption programs.”
In this regard, the SEC did find in the Ping order that as a result of the alleged improper conduct CareFx was awarded over $9.6 million in contracts.
One final point.
While most of the above examples of individual FCPA actions with no corporate actions involved privately held companies, a few examples did involve issuers.
The most analogous example to the Harris matter would seem to be the DOJ/SEC’s FCPA enforcement actions against Yaw Osei Amoako, Steven Ott and Roger Young (all individuals associated with ITXC Corp) without a related enforcement action against ITXC Corp.
However, similar to the Harris matter, the ITXC Corp. matter involved a merger issue and ITXC Corp. was no longer a viable entity at the time of the individual enforcement actions. However, Teleglobe Int’l (the company that acquired ITXC Corp.) was a viable entity, but there was no enforcement action either against Teleglobe. In this regard, it was notable that the DOJ/SEC alleged that individuals associated with ITXC failed to disclose and/or concealed certain information from Teleglobe during pre-merger due diligence. (See here).
Regarding its FCPA scrutiny because of the merger, Teleglobe disclosed:
“On August 16, 2004, Teleglobe announced that after the merger with ITXC, which was consummated on May 31, 2004, as part of its normal ongoing review of ITXC’s operations in connection with the post-merger integration of the Company and ITXC, the Company had identified and was investigating potential instances of noncompliance with the United States Foreign Corrupt Practices Act (“FCPA”) relating to ITXC’s operations in certain African countries prior to its merger with Teleglobe, consummated on May 31, 2004. The Company voluntarily notified the Securities and Exchange Commission (the “SEC”) and the U.S. Department of Justice (the “DOJ”) of the matter. The Company’s Audit Committee subsequently engaged an outside law firm, Debevoise & Plimpton LLP (“Debevoise”), to investigate the FCPA-related matters. As a result of the investigation, the following individuals are no longer employed by the Company: the Company’s Vice President, Sales-Wireless, formerly the Executive Vice President, Global Sales for ITXC; the Company’s Regional Buyer for Africa, formerly ITXC’s Regional Director for Africa; and the Company’s Executive Vice President and General Counsel, formerly Vice President, General Counsel and Secretary of ITXC prior to its merger with Teleglobe.
Following the completion of its investigation into the actions of ITXC employees in November 2004, at the request of the Company’s Audit Committee, Debevoise conducted an investigation into Teleglobe’s foreign agency agreements and practices in order to confirm that no similar issues exist with respect to Telelgobe’s compliance with the FCPA.
Debevoise recently completed its investigation with respect to Teleglobe’s compliance with the FCPA, and has issued a final report concerning the results thereof to the Audit Committee. The Debevoise report states that its investigation uncovered no violation of the FCPA by Teleglobe employees. However, the report also concludes that commercial bribery appears to have occurred with regard to two agents retained by Teleglobe (with whom the Company no longer carries on business) relating to one telecommunications carrier in Asia that is a Teleglobe customer. The report finds evidence that it is likely that payments made by Teleglobe to these agents were paid for the benefit of employees of such telecommunications carrier. As a result of the investigation, the Company’s Regional Sales Managing Director, Asia/Pacific and the Company’s sales representative responsible for that carrier have been terminated and several other employees were reprimanded. The Debevoise report makes a number of recommendations aimed at improving Teleglobe’s compliance practices and procedures, which recommendations the Company has begun to implement.
Teleglobe has been cooperating fully with the SEC and the DOJ with respect to this matter, and it has periodically briefed representatives of the SEC and DOJ concerning the investigation. The SEC has advised the Company that it is conducting an informal inquiry into the matter and has requested that Teleglobe provide certain documents to it on a voluntary basis. The Company intends to continue to fully cooperate with the SEC and the DOJ concerning these matters, and has voluntarily provided certain documents to the SEC in response to their request. Based on Debevoise’s investigation into the actions of ITXC employees and any additional factors arising from the final report, Teleglobe cannot predict the extent to which the SEC, the DOJ or any other governmental authorities will pursue administrative, civil or criminal proceedings, the imposition of fines or penalties or other remedies or sanctions. The Company has not identified, and does not believe it is likely that, any material adjustment to its financial statements is or will be required in connection with the results of this investigation, although it is possible that a monetary penalty, if any, may be material to the Company’s results of operations in the quarter in which it is imposed.”