First, there was the $3.9 million enforcement action against SAP (see here).
Then, there was the $12.8 million enforcement action against SciClone Pharmaceuticals (see here).
And then, as highlighted in this post, there was an individual action against Ignacio Cueto Plaza, the current CEO of LAN Airlines (pictured at left).
The Cueto enforcement action was noteworthy in at least five respects.
- First, it was a rare SEC individual FCPA enforcement action (the Cueto action represents only the fourth core individual action since April 2012).
- Second, it was an FCPA enforcement action against a CEO (rarely do individual FCPA enforcement actions involve an executive officer).
- Third, it was an FCPA enforcement action against an existing CEO (most individual FCPA enforcement involve former employees because the company, as part of its remedial measures, terminates the employee found to be in violation of the FCPA).
- Fourth, even though most FCPA enforcement actions are based on “old” conduct, a 2016 enforcement action based on 2006 conduct stretches the credibility of the SEC’s enforcement program to a new level, coupled with the fact that a U.S. law enforcement agency brought an enforcement action against a Chilean citizen based on alleged improper conduct in Argentina.
- Fifth, most FCPA enforcement actions, even those that “only” charge or find FCPA books and records and internal controls violations, are still based on the alleged “foreign officials.” In this regard, the Cueto enforcement action is vague whether the SEC viewed the Argentine “union officials” to be “foreign officials” under the FCPA. If the SEC did view the “union officials” as such, it stretches the definition of “foreign official” even further. If the SEC did not view the “union officials” as foreign officials, the Cueto action represents a rare enforcement action concerning improper booking and insufficient internal controls concerning an instance of commercial bribery.
In this administrative action, the SEC found as follows.
“In 2006 and 2007, Ignacio Cueto Plaza (“Cueto”), the CEO of LAN Airlines S.A. (“LAN”), authorized $1.15 million in improper payments to a third party consultant in Argentina in connection with LAN’s attempts to settle disputes on wages and other work conditions between LAN Argentina S.A. (“LAN Argentina”), a subsidiary of LAN, and its employees. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. The payments were made pursuant to an unsigned consulting agreement that purported to provide services that Cueto understood would not occur. Cueto authorized subordinates to make the payments that were improperly booked in the Company’s books and records, which circumvented LAN’s internal accounting controls.”
Cueto is described as follows.
” [A] Chilean citizen and, since 2012, has been CEO of LAN. From 1995 to 1998, Cueto served as President of LAN Cargo, a LAN subsidiary located in Miami, Florida. He served on the Board of Directors of LAN from 1995 to 1997. From 1999 to 2005, Cueto was CEO of LAN’s passenger airline business. In 2005, Cueto became President and COO of LAN Airlines S.A. He remained in that position until June of 2012, when LAN merged with Brazilian Airline TAM, S.A. (“TAM”) and became LATAM Airlines Group S.A. (“LATAM”). Cueto remains CEO of LAN, which is now part of LATAM.”
The enforcement action focuses the “obstacles that LAN might face in trying to enter the Argentine airline market.” Under the heading “LAN Faces Major Issues Upon Entering the Argentine Market,” the order states:
“Upon entering the Argentine passenger airline market LAN immediately faced several major issues impacting its viability and began losing money. First, it needed to meet demands from labor unions representing the employees acquired from LAFSA and Southern Winds. Second, LAN needed majority ownership of its Argentine subsidiary, and therefore had to persuade the Argentine government to change its existing law on foreign ownership of domestic airlines and to increase caps on airfares. Third, LAN needed regulatory authorization to operate various flight routes, both domestically and internationally, in Argentina. Since the Argentine passenger airline market was heavily regulated by the government, particularly officials within the Department of Transportation who had close ties to the unions, LAN sought help from the government officials with each of these issues.
In early 2006, the consultant again contacted the Vice President of Business Development and offered to assist LAN in Argentina. By this time, the consultant was a government official in the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. On January 31, 2005, the Secretary of Transportation appointed the consultant as a Cabinet Advisor “ad-honorem.”
LAN executives, including Cueto, knew that for LAN Argentina to become profitable it would need an infusion of cash. LAN asked Argentine government officials to liberalize the laws on foreign ownership so that LAN could own a majority share of LAN Argentina and sought government authorization to raise regulated airfares. On or about August 8, 2006, the President of Argentina signed a Decree that enabled LAN to become a majority owner of LAN Argentina and allowed LAN to raise airfares by 20%. LAN Argentina was also awarded critical additional flight routes by the Transportation Secretary.”
Under the heading “LAN Encounters Problems with the Unions in Argentina,” the order states:
“As part of the deal that LAN reached with the Argentine government in March 2005, LAN was required to hire between six and eight hundred employees from the defunct LAFSA and Southern Winds airlines. LAN was bound by the existing bargaining agreements between LAFSA, Southern Winds and the labor unions.
There were five unions representing airline employees in Argentina. They included the grounds crew union, the Asociación del Personal Aeronáutico (APA), the pilots’ union, the Asociación de Pilotos de Lineas Aereas (APLA), the mechanics’ union, Asociacion del Personal Técnico Aeronáutico (APTA), the flight attendants’ union, Asociación de Tripulantes de Cabina de Pasajeros de Empresas Aerocomerciales (ATCPEA), and the supervisors’ union, Unión del Personal Superior y Profesional de Empresas Aerocomerciales (UPSA).
All of the unions were powerful and unafraid to make demands on LAN. They sought wage increases and additional benefits, and used the terms of their respective Collective Bargaining Agreements (“CBAs”) as leverage. These labor agreements contained provisions that LAN believed were unfavorable, such as restrictions on the hours employees could work and their work locations.
The mechanics’ union, the flight attendants’ union and the supervisors’ union each had a single-function rule contained in their CBAs. The single-function rule was a provision that limited workers from performing more than one work function at a time for LAN. The single-function rule was loosely interpreted and for the most part not enforced by the unions. Had it been enforced, the single-function rule would have required LAN to double its work force and would have seriously imperiled LAN’s ability to continue its operations in Argentina.
Around 2006 the unions began campaigning for wage increases. The unions threatened to enforce the single-function rule unless LAN Argentina agreed to a substantial wage increase. LAN’s management, including Cueto, attempted to negotiate on the wage issues but made no progress and things worsened over time. Eventually there were work stoppages and slowdowns on the part of the workforce, including strikes involving the pilots’ and the mechanics’ unions.”
Under the heading “Cueto Approves Improper Payments,” the order states:
“Beginning in the summer of 2006, the consultant supplied LAN executives with information on how to deal with specific union members and the unions in general. Eventually, the consultant offered to negotiate directly with the unions on LAN’s behalf, making it clear that he would expect compensation for such negotiations, and that payments would be made to third parties who had influence over the unions. After his staff informed Cueto that the consultant was well connected with the unions and could effectively negotiate an agreement with union officials, Cueto approved the retention of the consultant.
During the summer of 2006, Cueto approved payments totaling $1,150,000 to the consultant in connection with LAN’s attempts to settle disputes on wages and other work conditions with the unions. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. Cueto approved the payments to get the unions to abandon their threats to enforce the single-function rule and to get them to accept a wage increase lower than the amount asked for in negotiations. LAN and the consultant agreed that LAN would make the payment to a company controlled by the consultant in Argentina. In 2006, LAN did not have a policy requiring that due diligence be performed on consultants, and neither Cueto nor LAN conducted any due diligence on the consultant or any of his related entities.
Around August 2006, Cueto’s staff informed him that the consultant had reached an oral agreement to settle the wage dispute with the mechanics’ union on LAN’s behalf. Although the existing Collective Bargaining Agreement with the mechanics’ union would remain unchanged, Cueto understood that the union would orally agree not to seek enforcement of the single-function rule for a period of four years in exchange for a wage increase of approximately 6 15% of salary. The wage increase of approximately 15% was lower than the amount originally sought by the mechanics’ union.
Around August 2006, the flight attendants’ and supervisors’ unions both agreed to accept wage increases of approximately 15% and 10% respectively of salaries. The amounts were lower than the amounts originally sought by each union.”
Under the heading, “Cueto Authorized Improper Payments That Were Not Accurately and Fairly Feflected on LAN’s Books and Records,” the order states:
“Cueto directed subordinates to make the improper payments. The improper payments authorized by Cueto were improperly described in the books and records as “other debtors” costs in a LAN subsidiary that had no role in LAN’s argentine business.”
Under the heading, “Cueto Caused LAN’s Internal Accounting Control Failure,” the order states:
“As President and Chief Operating Officer of LAN, Cueto, along with others, was responsible for devising and maintaining compliance with internal accounting controls at LAN. Cueto did not follow the company’s existing internal accounting controls when he authorized the payment of $1,150,000 to the consultant’s company and failed to prevent the payment of $58,000 to another company owned by consultant’s son and wife. Cueto received and approved the sham contract for the consultant’s company to provide consulting services to LAN, knowing that such services would never be provided. Cueto also authorized payment of invoices from the consultant’s company that contained a description of services listed on the invoices that was false.”
Based on the above findings, the order finds that Cueto caused books and records and internal controls violations by LAN and that Cueto also knowingly circumvented or knowingly failed to implement a system of internal accounting controls or knowingly falsified book, record or account and that Cueto also violated falsified or cause to be falsified, a book, record, or account.
Under the heading “Remedial Actions and Undertakings,” the order states:
“As the CEO of LAN, which is now a division of LATAM, Cueto is subject to LATAM’s enhanced compliance structure and internal accounting controls. Cueto is required to certify compliance with LATAM’s new Code of Conduct that was adopted in 2013, as well as other internal corporate policies, including an Anti-Corruption Guide, a Gifts, Travel, Hospitality and Entertainment Policy, an Escalation Policy, and Procurement and Payment policies.
Cueto has attended the Corporate Governance Training provided by the LATAM Chief Compliance Officer and has provided a certification confirming acknowledgement of the Code of Conduct, the relevant applicable regulations, as well as the Company policies. Cueto has also executed an amendment to his employment agreement whereby Respondent acknowledges having been informed regarding the LATAM Manual for the Prevention of Corruption, among other matters, and his responsibilities to perform his duties with the highest ethical standards, in compliance with all Company Policies and Procedures.
Cueto also undertakes to attend all anti-corruption training sessions required for senior executives at LAN. These sessions will include, but are not limited to, both live and online anti-corruption trainings to be completed on at least an annual basis and according to LAN’s Compliance Department’s training schedule. These sessions will include, in addition to anticorruption laws and regulations, such as the FCPA, training on anti-trust laws, the Company’s Code of Conduct and all other applicable policies that each LAN employee must follow. After the conclusion of each session Cueto will sign the appropriate documentation that acknowledges his attendance and understanding of the topics presented. Should LAN modify the schedule of such training sessions for any reason, Cueto will, so long as he is a senior executive of LAN, attend a comparable anti-corruption session on an annual basis and complete appropriate documentation attesting to his attendance and the session’s contents.”
Without admitting or denying the SEC’s findings, Cueto agreed to cease and desist from future legal violations and agreed to pay a $75,000 civil penalty.
Cueto was represented by Richard Grime (Gibson, Dunn & Crutcher – a former Assistant Director of Enforcement at the SEC heavily involved in FCPA enforcement). Commenting generally on the SEC’s evolving and expansive FCPA enforcement theories, Grime recently stated:
“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”