Not that Foreign Corrupt Practices Act are conveniently timed or anything like that, but the SEC’s fiscal year ends on September 30th and for the second consecutive day, the SEC announced an FCPA enforcement action (in the past two days the SEC has announced 22 other enforcement actions).
Two days ago, it was Hitachi (see here for the prior post).
Yesterday, it was Hyperdynamics Corp – an oil and gas company with shares quoted by the OTCQX, an over-the-counter marketplace operated by OTC Market Group, Inc.
If there was ever an inconsequential FCPA enforcement this would be it. In fact, the SEC’s normally chatty press office didn’t even issue a release. However, as relevant to the title of this post, tell Hyperdynamics shareholders that this episode was inconsequential and they are likely to have a different opinion.
In this slim administrative action (the specific factual allegations are a mere four paragraphs) the SEC states:
“Hyperdynamics was founded in 1996 as a commercial computer and communications service provider. In 2001, the company transitioned to the oil and gas industry, and one year later, Hyperdynamics purchased contract rights from a small oil company which owned the exclusive drilling rights offshore the Republic of Guinea. Company executives began travelling to Guinea in 2005, and eventually opened a wholly-owned subsidiary in Conakry to facilitate ongoing operations.
From July 2007 through October 2008, Hyperdynamics, through its subsidiary, paid $130,000 for public relations and lobbying services in the Republic of Guinea to two supposedly unrelated entities – $55,000 to BerMia Service SRL, and $75,000 to Africa Business Service (“ABS”). The subsidiary’s books and records were consolidated with Hyperdynamics’s books and records, and these payments were recorded as public relations and lobbying expenses, even though the company lacked sufficient supporting documentation to determine whether the services were actually provided and to identify the ultimate recipient of the funds.
In late 2008, Hyperdynamics discovered that a Guinean-based employee controlled BerMia and ABS. Hyperdynamics also learned that this employee was the sole signatory on the ABS account. But Hyperdynamics could not determine how, if at all, BerMia or ABS spent the funds they had received, or whether any services actually were provided. Moreover, the company could not recover the funds. There is no evidence that these funds were in fact spent on legitimate public relations and lobbying activities, yet Hyperdynamics’s books and records continued to reflect that the funds were spent for these purposes.
Hyperdynamics lacked adequate internal accounting controls over its disbursement of funds through its Guinean subsidiary, as well as its recording of such disbursements. In addition, the company did not have a due diligence and monitoring process in place for vetting third-party vendors; accordingly, it failed to conduct due diligence on BerMia and ABS. As a result, Hyperdynamics did not timely discover that the payments were made to companies controlled by its employee, nor could it ascertain the true purpose for which these funds were spent. The inadequate controls also led Hyperdynamics to record these disbursements as public relations and lobbying expenses without any supporting documentation that such services were provided.”
Based on the above, the SEC found that Hyperdynamics violated the FCPA’s books and records and internal controls provisions.
Under the heading “Remedial Efforts and Cooperation,” the order states:
“Beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors. The company also hired its first in-house lawyer, who implemented a number of training programs and revised company policies related to its Guinean operations. Hyperdynamics also increased the number of its accounting personnel, and instituted a series of procedures to more strictly control and identify transfers of funds to Guinea, including the transfer of signature authority over Guinean accounts to Houston-based employees, as well as requiring corporate pre-approval for all Guinean expenditures.
In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff.”
Without admitting or denying the SEC’s findings, Hyperdynamics agreed to pay a $75,000 penalty.
In this disclosure, the company states:
“As previously disclosed, the SEC had issued a subpoena to Hyperdynamics concerning possible violations of the FCPA. This settlement fully resolves the SEC’s investigation. As previously disclosed in May 2015, the DOJ closed its investigation into possible FCPA violations by Hyperdynamics without bringing any charges against the Company.
The allegations in the Order relate to certain issues concerning the company’s books and records and internal controls in 2007-2008. Hyperdynamics consented to the SEC Order without admitting or denying the SEC’s findings and agreed to pay a $75,000 penalty to the SEC.
In reaching this resolution, the Commission considered remedial acts undertaken by the company and cooperation afforded the Commission staff. The SEC Order recognizes that, beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors, revised its policies, implemented training programs, increased its legal and accounting personnel, and instituted a series of procedures to more strictly control transfers of funds.”
According to the company’s most recent annual report:
“We incurred approximately $7.5 million in legal and other professional fees associated with the FCPA investigations in the year ended June 30, 2014, and another $5.2 million in the year ended June 30, 2015, for a total of $12.7 million.”
Calculating the ratio between pre-enforcement action professional fees and expenses and settlement amounts, this represents a whopping 170 to 1 ratio. (To learn more about such ratios see “FCPA Ripples“).
If I were a Hyperdynamics shareholder, I would be asking some serious questions.
Nancy Kestenbaum, Lanny Breuer and Barbara Hoffman of Covington & Burling reportedly represented Hyperdynamics.