This previous post highlighted the DOJ’s so-called “declination” letters and posed the salient question – what viable criminal charges did the DOJ actually “decline”?
This post continues the analysis of the enforcement actions by highlighting additional issues to consider.
In the SEC’s release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:
“Akamai and Nortek each promptly tightened their internal controls after discovering the bribes and took swift remedial measures to eliminate the problems. They handled it the right way and got expeditious resolutions as a result.”
Here are the facts:
As highlighted in this prior post, Nortek voluntarily disclosed to the SEC and DOJ on January 7th and 8th, 2015 respectfully.
Thus from start to finish, Nortek’s FCPA scrutiny lasted approximately 1.5 years.
As highlighted in this prior post, Akamai voluntarily disclosed to the SEC and DOJ in February 2015.
Thus from start to finish, Akamai’s FCPA scrutiny likewise lasted approximately 1.5 years.
Granted 1.5 years is more “expeditious” than the typical 2-4 year time frame often associated with FCPA scrutiny, but is 1.5 years really “expeditious” as the SEC states?
Relevant to this issue, consider also that both NPAs indicate that the company and its counsel signed off on the NPAs in late April 2016 / early May 2016, but it took over a month for the SEC’s signature to happen. Is this really “expeditious” as the SEC states?
Effective Internal Controls
The SEC’s NPA dinged Nortek for its ineffective internal controls.
However, consistent with prior SEC FCPA guidance, Nortek had effective internal controls.
As noted in the NPA:
“In 2014, Nortek conducted an internal audit of Linera China’s books and records. The internal audit team identified questionable payments made to local Chinese officials. As a result, Nortek conducted an internal investigation of Linear China’s conduct and forensically analyzed Linear China’s financial records.”
Here is what the SEC said in prior FCPA guidance.
“The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”
Disgorgement Beyond the Limitations Period
This recent post highlighted SEC v. Graham in which the 11th Circuit held that disgorgement is subject to a five year statute of limitations. The post noted that the decision will likely not matter in corporate SEC FCPA enforcement actions 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. As noted in the post, in the FCPA context the SEC has never been put to its burden of proof by an issuer and it was not put to its burden of proof in the Nortek and Akamai enforcement actions.
While the substantive statement of facts in the Nortek NPA are a paltry 4 paragraphs, the statement of facts concern alleged “improper payments and gifts” between 2009 to 2014. Applying SEC v. Graham, approximately 1/3 of the disgorgement amount was likely beyond the five-year limitations period. (Note – the Akamai NPA was an even slimmer 3 paragraphs but concerned alleged “bribes paid to Chinese government officials” “from at least 2013 through 2015).
SEC NPA / DPA FCPA Scorecard
Examining the root cause of an enforcement action is not to excuse the alleged conduct, but to understand the circumstances which gave rise to the enforcement action in the first place.
As highlighted many times on these pages, trade barriers and distortions are often the root causes of bribery and a reduction in bribery will not be achieved without a reduction in trade barriers and distortions.
So why did the Akamai enforcement action take place?
Well, the very first sentence of the SEC’s substantive statement of facts states:
“Under China’s regulatory system, Akamai-China is required to contract with third-party channel partners to deliver its services to end customer.”
Useless Settlement Language
The securities laws are a short-hand term to describe literally hundreds of specific provisions and many securities laws violations do not even require scienter.
Thus, the following language from the NPAs is close to useless.
“[Nortek / Akamai] understand and agree that it shall be a violation of this agreement if it violates the federal securities laws after entering into this agreement.”