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Issues To Consider From The Analogic Enforcement Action

This previous post [1] went in-depth regarding last week’s $14.9 million Foreign Corrupt Practices Act enforcement action against Analogic Corp. and a related entity.

This post continues the analysis by highlighting various issues to consider.

Sparse Allegations

Rarely has an SEC enforcement action against an issuer contained such few allegations against, well, the issuer.

Aside from the two conclusory legal allegations (Analogic violated the books and records provisions because BK Medical’s books and records were consolidated with Analogic’s and Analogic’s internal controls were deficient), the SEC’s order contains sparse allegations about Analogic.

The only specific factual allegations against Analogic are: (i) that Lars Frost, BK Medical’s former CFO who orchestrated and concealed the improper conduct from, among others Analogic, “reported to Analogic’s corporate controller and chief accounting officer in the United States” and (ii) the following paragraph:

“In 2008, a Senior Vice President at Analogic concluded that BK Medical presented a “significantly greater risk” of violating the FCPA than Analogic’s other business lines, because BK Medical’s products “go in completed form to … hospitals, many of which are government owned.” In addition to recommending that BK Medical implement a FCPA training program, the Senior Vice President recommended in an email to Analogic’s senior management that BK Medical put in place an “official process for validating that their distribution partners do not, or are not likely to engage in prohibited behavior.” Analogic then provided a business ethics and FCPA compliance training to BK Medical sales and finance staff, but no official process was implemented, and no steps were taken to validate whether its Russian distributor or any other distributor was engaged in prohibited behavior.”

Timeline

As highlighted in this [2] previous post, Analogic first disclosed its FCPA scrutiny in October 2011. Thus, from start to finish the scrutiny lasted approximately 4.75 years.

If the DOJ/SEC want the public to have confidence in their FCPA enforcement programs, they must resolve instances of FCPA scrutiny much quicker.

Pre-Enforcement Action Professional Fees and Expenses

As highlighted in “FCPA Ripples [3],” 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.

According to Analogic’s SEC filings, through April 2016 the company spent approximately $5.5 million in pre-enforcement action professional fees and expenses.

No-Charged Bribery Disgorgement

The Analogic enforcement action is the latest example of the SEC ordering disgorgement even though the offending company was not charged with violating the FCPA’s anti-bribery provisions.

As highlighted in this [4] previous post, so-called no-charged bribery disgorgement is troubling.

Among others, Paul Berger (here [5]) (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.”

If Graham Were Applied

I am guessing that this issue to consider will be repeated often in the aftermath of SEC v. Graham, a recent appellate court decision holding that disgorgement is subject to a five-year limitations period. (See here [6] for the prior post).

As noted in this [7] prior post,  Graham of course should matter to FCPA enforcement; however, the reality is that Graham will likely not matter because legal elements, legal exceptions, legal defenses, and other general legal principles often only directly matter to the extent an adversarial proceeding takes place and a litigant is forced to prove things consistent with the applicable burden of proof. Like other corporate FCPA enforcement actions, the SEC was not put to its burden of proof in the Analogic matter.

According to the SEC, the conduct giving rise to the enforcement action occurred “from at least 2001 through early 2011.” Obviously conduct occurring 15 years prior to an enforcement action is beyond any conceivable limitations period. Further, if Graham were applied, the statute of limitations would have run in early 2016. In short, the $11.5 million in disgorgement and pre-judgment interest the SEC extracted in the settlement, likely would not have survived judicial scrutiny.

Company’s Settlement Offer Rejected

In prior SEC filings, Analogic disclosed that it made a $1.6 million “settlement proposal” to the SEC which was “rejected by the SEC.”

The final SEC settlement amount was $11.5 million in disgorgement and pre-judgment interest.

Notable Aspects of the DOJ’s NPA

While DPAs used to resolve FCPA enforcement actions contain a sentencing guidelines calculation, NPAs do not and often just set forth a number. While the BK Medical NPA does not contain a sentencing guidelines calculation, it does nevertheless state that the “the Company received an aggregate discount of 30% off the bottom of the U.S. Sentencing Guidelines fine range.”

As previously proposed, to increase transparency the DOJ should consider setting forth a sentencing guidelines calculation in FCPA NPAs.

*****

As is standard in FCPA NPAs, the BK Medical NPA contained a lengthy paragraph stating that it would be a breach of the agreement if, among other things, the company commits any felony under U.S. federal law.

What was unusual about the paragraph was that BK Medical (a Danish company subject to the FCPA only to the extent certain jurisdictional elements are met) will be in breach of the agreement if the company “commits any acts that, had they occurred within the jurisdictional reach of the FCPA, would be a violation of the FCPA.”

Nothing like writing out an essential element of the FCPA.

*****

The BK Medical NPA states that the “Company did not receive full cooperation credit because, in the view of the Offices, the Company’s cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the Company did not disclose information that was known to the Company and Analogic about the identities of a number of the state-owned entity end-users of the Company’s products, and about certain statements given by employees in the course of the internal investigation.”

What makes the underlined portion notable is that such information has zero relevance, as a matter of law, to the criminal charges the DOJ agreed not to prosecute “knowing and willful falsification of the book, records, and accounts …”.