Scrutiny alert, a potential increase FCPA statutory penalty amounts, Second Circuit appeal begins, SEC enforcement chief on whistleblowers, marketing the black hole, of note, and a ripple. It’s all here in the Friday roundup.
VimpelCom was not the only company involved in the Uzbek telecommunications bribery scheme. As highlighted in this prior post, Swedish telecom company (a company with ADRs registered with the SEC) and Russia-based Mobile TeleSystems PJSC (a company with shares traded on the New York Stock Exchange) have also been scrutiny.
Recently, Telia issued this release:
“The U.S. and Dutch authorities have since the spring of 2014 investigated historical transactions related to Telia Company’s entry into Uzbekistan in 2007. On the evening of 14 September, Telia Company received new information from the authorities with proposals from them for a settlement with the company. The information received was general and did not go into much detail but suggests a total settlement amount of approximately USD 1.4 billion which corresponds to approximately SEK 12 billion for all investigations. “I have said on many occasions in the past that Telia Company’s entry into Uzbekistan was done in an unethical and wrongful way and we are prepared to take full responsibility. We are cooperating fully with the authorities to bring clarity to the matter. With that said, our initial reaction to the proposal is that the amount is very high. We will now have to analyze the information and decide on how to proceed with the ongoing discussions with the authorities,” says Telia Company’s Chairman Marie Ehrling.”
As highlighted in this prior post, the overall settlement amount in the VimpelCom matter was $795 million ($397.5 million to U.S. enforcement agencies (DOJ and SEC) and $397.5 million Dutch authorities).
Second Circuit Appeal Begins
This previous post highlighted how U.S. District Court Judge Janet Bond Arterton (D.Conn) significantly trimmed the DOJ’s criminal FCPA enforcement action against Lawrence Hoskins. Unhappy with the decision, the DOJ filed a motion for reconsideration which Judge Arterton denied (see here).
The DOJ has appealed to the Second Circuit and recently filed this opening brief. It presents the following statement of the issue.
“Whether a foreign person (who does not reside in the United States) can be liable for conspiring or aiding and abetting a U.S. company to violate the Foreign Corrupt Practices Act if that individual is not in the categories of principal persons covered in the statute.”
FCPA Statutory Penalty Amounts
The House Financial Services Committee recently met to “mark up” the Financial CHOICE Act of 2016. As indicated in this memo, among other things, the Act seeks to:
Increase statutory criminal penalties for prohibited foreign trade practices that constitute willful violations of the Foreign Corrupt Practices Act of 1977 from $2 million $4 million for issuers and from $100,000 to $250,000 for individuals;
Increase statutory civil penalties for violations of the Foreign Corrupt Practices Act, from $10,000 to $50,000 for issuers and individuals;
Even if enacted, the enhanced penalty provisions would have very little practical significance in most FCPA enforcement actions because of the Alternative Fines Act and the prominence of SEC disgorgement.
SEC Enforcement Division Chief Andrew Ceresney recently delivered this speech about whistleblowers. Speaking on the “type of cases where whistleblower assistance is valued,” Ceresney stated, in relevant part:
“Another class of cases where whistleblower tips can be helpful is in our enforcement of the Foreign Corrupt Practices Act. Pursuing violations of the FCPA remains an important part of the SEC’s enforcement efforts. Most of the activity in these cases is usually overseas, where we have less access to evidence. And parties to these arrangements have great incentives to conceal their conduct. Tips related to FCPA violations have increased from 115 in fiscal year 2012 to 186 in fiscal year 2015 — an approximate 62% increase. Because of the difficulties in investigating overseas conduct, we are hopeful this trend will continue. Here, though, I want to highlight a subsidiary benefit of the whistleblower program. We are often alerted to FCPA violations by companies self-reporting violations. The program has vastly increased the incentives for companies to self-report misconduct to us, as companies are aware that we may receive information from other sources if they are not forthcoming with us, and as I have emphasized before, if we learn the company made the decision not to self-report after learning of misconduct, there will be consequences. So even before the tips are sent, the impact of the program manifests in other ways as well.”
Marketing the Black Hole
I’ve run FCPA searches every day for the past 7 years. Thus, I have a pretty good handle on the “flow” of FCPA information in the public domain. One new trend I’ve noticed is law firms marketing what I’ll call the black hole. In other words, marketing information or events for which there is no meaningful information in the public domain.
This is increasingly occurring in connection with so-called “declinations.”
As highlighted here, Cisco recently disclosed that the DOJ and SEC will not bring an enforcement action concerning conduct that has been under review since 2013 (conduct which the company previously stated that it “found no basis to believe that Cisco’s activities are in violation of any law”).
Thereafter, Davis Polk issued this release titled “Davis Polk Advises Cisco on FCPA Investigations Resulting in Declinations from DOJ and SEC.” It states:
“Davis Polk advised Cisco Systems, Inc. (“Cisco”) on investigations conducted by the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) into potential breaches of the Foreign Corrupt Practices Act (“FCPA”) related to business activities in Russia and elsewhere in the Commonwealth of Independent States. On September 9, 2016, Cisco announced that following the investigations both the SEC and DOJ informed the company that they decided not to bring enforcement actions. The Davis Polk litigation team included partners Linda Chatman Thomsen, Neil H. MacBride, Neal A. Potischman and Greg D. Andres, counsel Michael Scheinkman and associates Juliana Murray, Sarah Breslow, Arif H. Dhilla and Philip Woolley Young. Members of the Davis Polk team are based in the New York, Washington DC and Menlo Park offices. WilmerHale and Walker Stevens Cannom Yang LLP served as co-counsel.”
WilmerHale followed up with this release noting:
“Partners Jay Holtmeier and Randall Lee and Senior Counsel Roger Witten were part of the team representing Cisco. The software company came under investigation by the SEC and DOJ in an overseas matter and made the declinations public this month.”
This recent SEC civil complaint against RPM Intentional Inc. and Edward Moore (RPM’s General Counsel) does not directly relate to the FCPA (even though technically it alleges generic FCPA books and records and internal controls violations), but is nevertheless of note.
In pertinent part, the complaint alleges:
“This is a disclosure and accounting fraud case arising from the failure of RPM International Inc. (“RPM”) to timely disclose a loss contingency, or record an accrual for, an investigation by the U.S. Department of Justice (the “DOJ investigation”). A public company facing a loss contingency, such as a lawsuit or government investigation, is required under accounting principles and the securities laws to (1) disclose the loss contingency if a material loss is reasonably possible, and (2) record an accrual for the loss contingency if a material loss is probable and reasonably estimable. In connection with the DOJ investigation, RPM faced a material loss that was probable and reasonably estimable, but RPM failed to disclose the loss contingency or record an accrual on its books when required to do so.
Defendant Edward W. Moore, RPM’s General Counsel and Chief Compliance Officer, oversaw RPM’s response to the DOJ investigation, but failed to disclose material facts about the investigation to RPM’s Chief Executive Officer, Chief Financial Officer, Audit Committee, and independent auditors (the “Audit Firm”). For example, Moore knew but failed to inform them: (1) that RPM sent DOJ several analyses estimating that Tremco overcharged the government by at least $11.9 million on the contracts under investigation; (2) that RPM agreed to submit a settlement offer by a specific date to resolve the DOJ investigation; and (3) that, prior to submitting the settlement offer, RPM’s overcharge estimates increased substantially to at least $27-28 million. Additionally, Moore made material misrepresentations to the Audit Firm about the DOJ investigation in connection with the Audit Firm’s reviews and audits of RPM’s financial statements and SEC filings.”
Settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era. To learn more about this dynamic, read the article “FCPA Ripples.”
Among the ripples highlighted is FCPA scrutiny can negatively impact a company’s cost of capital, specifically a company’s credit rating. A recent example includes Moody’s downgrade and negative outlook of Vantage Drilling. Among the reasons:
“[T]he risks pursuant to the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (“SEC”) investigations in relation to Vantage’s alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”). If Vantage becomes subject to any judgment, decree, order government penalty or fine, it may constitute an event of default under the terms of the secured debt agreements and may result in the outstanding debt becoming immediately due and payable.”
A good weekend to all.