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Scrutiny Alerts and Updates

scrutiny alert

Late April or early May is when foreign issuers tend to file Form 20-F’s with the SEC and as highlighted in this post several foreign issuers from Brazil, Peru, the U.K. and South Korea disclosed Foreign Corrupt Practices Act scrutiny.

But first, Cognizant Technology Solutions appears to continue to “boil the ocean” in terms of pre-enforcement action professional fees and expenses and Misonix is hit with a civil lawsuit connected to its FCPA scrutiny.

Cognizant Technology Solutions

This prior post highlighted the FCPA scrutiny of Cognizant Technology Solutions first disclosed in late September 2016. This post discussed how the company’s FCPA scrutiny presented an interesting, albeit early, FCPA case study as to the FCPA’s many “ripples.” (See here for the article “FCPA Ripples“).

As highlighted in this March 2o17 post, the case study become all the more interesting given that Cognizant disclosed: “in 2016, we incurred $27 million in costs related to the FCPA investigation and related lawsuits. We expect to continue to incur expenses related to these matters in 2017 and future periods.” The question was asked: is Cognizant “boiling the ocean”?

In its most recent quarterly filing, the company disclosed: “during the quarter ended March 31, 2017, we incurred $14 million in costs related to the FCPA investigation and related lawsuits.”

It strikes me as unusual for an internal investigation that appears to have begun in the second half of 2016 and appears to be based on a single country (India) has resulted in over $40 million in pre-enforcement action professional fees and expenses in approximately 9 months. In short, if I were a Cognizant board member (not to mention a Cognizant shareholder), I would have some serious concerns.

Misonix

The company has been under FCPA scrutiny since September 2016 and recently disclosed:

“Former Chinese Distributor – FCPA

For several months, with the assistance of outside counsel, the Company conducted a voluntary investigation into the business practices of the independent Chinese entity that previously distributed its products in China and the Company’s knowledge of those business practices, which may have implications under the FCPA, as well as into various internal controls issues identified during the investigation.

On September 27, 2016 and September 28, 2016, we voluntarily contacted the SEC and the DOJ, respectively, to advise both agencies of these potential issues.  The Company has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating fully with these agencies in their investigations of these matters.

Although the Company’s investigation is complete, additional issues or facts could arise which may expand the scope or severity of the potential violations.  The Company has no current information derived from the investigation or otherwise to suggest that its previously reported financial statements and results are incorrect.

At this stage, the Company is unable to predict what, if any, action the DOJ or the SEC may take or what, if any, penalties or remedial measures these agencies may seek.  Nor can the Company predict the impact on the Company as a result of these matters, which may include the imposition of fines, civil and criminal penalties, which are not currently estimable, as well as equitable remedies, including disgorgement of any profits earned from improper conduct and injunctive relief, limitations on the Company’s conduct, and the imposition of a compliance monitor.  The DOJ and the SEC periodically have based the amount of a penalty or disgorgement in connection with an FCPA action, at least in part, on the amount of profits that a company obtained from the business in which the violations of the FCPA occurred.  During its distributorship relationship with the prior Chinese distributor from 2010 through 2016, the Company generated sales of approximately $8 million from the relationship.

Further, the Company may suffer other civil penalties or adverse impacts, including lawsuits by private litigants in addition to the lawsuit that has already been filed, or investigations and fines imposed by local authorities. The investigative costs to date are approximately $2.1 million, of which approximately $2.0 million was charged to general and administrative expenses during the nine months ended March 31, 2017.

Former Chinese Distributor – Litigation

On April 5, 2017, the Company’s former distributor in China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against the Company and certain officers and directors of the Company in the United States District Court for the Eastern District of New York, alleging that the Company improperly terminated its contract with the former distributor. The complaint, which seeks various remedies, including compensatory and punitive damages, specific performance and preliminary and post judgment injunctive relief, asserts various causes of action, including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. The Company believes it has various legal and factual defenses to the allegations in the complaint, and intends to vigorously defend the action. The case is at its earliest stages; there has been no discovery and there is no trial date.”

See here for the above-mentioned civil complaint filed by Cicel.

BRF

Brazil based BRF, a company with ADRs traded on the NYSE, recently disclosed:

Weak Flesh Operation

The Brazilian authorities are investigating Brazil’s meat processing industry in the so-called “Weak Flesh Operation,” which became public on March 17, 2017. The investigation involves a number of companies in the industry in Brazil.

On March 17, 2017, we learned of a decision issued by a federal judge of the state of Paraná authorizing the search and seizure of information and documents, and the detention of certain individuals in the context of this Weak Flesh Operation.  Two BRF employees were detained (one of which has been released) and three were identified for questioning (of which two were questioned, including Mr. Rodrigues, our Vice President – Corporate Integrity).

In addition to the above our Mineiros plant was temporarily suspended by the MAPA on March 17, 2017, so that MAPA could conduct an additional audit on its production process. After conducting an audit, the MAPA authorized the Mineiros plant to resume operations as of April 8, 2017. The Mineiros plant reopened on April 10, 2017 and resumed its operations on April 11, 2017.

On April 15, 2017, the Brazilian Federal Police issued a report on the investigation and recommended charges against three BRF employees. On April 20, 2017, based on the Brazilian Federal Police investigation, Brazilian federal prosecutors filed charges against two BRF employees (one of our regional manufacturing officer and one of our corporate affairs manager).

Based on the charges filed against such two employees, the main allegations at this stage involve alleged misconduct relating to improper offers and/or promises to government inspectors.

BRF has communicated with, and has received requests for information from certain regulators and governmental entities, including the U.S. Securities and Exchange Commission and U.S. Department of Justice in relation to this matter. BRF is cooperating with these inquiries.

BRF’s Statutory Audit Committee has already initiated an investigation with respect to the allegations involving BRF employees in the Weak Flesh Operation and is in the process of engaging outside counsel in connection with this investigation.”

Gol Intelligent Airlines

Brazil based Gol Intelligent Airlines, a company with ADRs traded on the NYSE, recently disclosed:

Irregular Payments Investigation

“In 2016, we received inquiries from Brazilian tax authorities regarding certain payments to firms that turned out to be owned by politically exposed persons in Brazil. Following an internal investigation, we retained U.S. and Brazilian legal counsel to conduct an external independent investigation to ascertain the facts with regard to these and any other payments identified as irregular and to evaluate the adequacy and effectiveness of our internal control and compliance programs in light of the findings of the investigation.

In December 2016, we entered into a leniency agreement with the Brazilian Federal Public Ministry (the “Leniency Agreement”), under which we agreed to pay R$12.0 million in fines and to make improvements to our compliance program. In turn, the Federal Public Ministry agreed not to bring any criminal or civil suits related to activities that are the subject of the Leniency Agreement and that may be characterized as (i) acts of administrative impropriety and related acts involving politically exposed persons or (ii) other possible actions, which at the date of the Leniency Agreement had not been identified by the ongoing investigation (any such actions possibly resulting in an increase in the fines under the Leniency Agreement). In addition, we paid R$4.2 million in fines to the Brazilian tax authorities related to the above-mentioned payments. We voluntarily informed the U.S. Department of Justice, the SEC and the CVM of the external independent investigation and the Leniency Agreement.

The external independent investigation was concluded in April 2017. It revealed that certain additional irregular payments were made to politically exposed persons. None of the amounts paid were material (individually or in the aggregate) in terms of cash flow, and none of our current employees, representatives or members of our board or management knew of any illegal purpose behind any of the identified transactions or knew of any illicit benefit to the Company arising out of the transactions investigated. We will be reporting the conclusions of the investigation to the relevant authorities in due course. These authorities may impose significant fines and possibly other sanctions on us.”

Amec Foster Wheeler

U.K.-based engineering and project management company Amec Foster Wheeler has ADRs traded on the NYSE and recently disclosed:

“Amec Foster Wheeler has received voluntary requests for information from, and continues to cooperate with, the SEC and the US Department of Justice (‘DOJ’) regarding the historical use of agents by Foster Wheeler, primarily in the Middle East, and certain of the Company’s other business counterparties in that region. In addition, the Company has provided information relating to the historical use of third parties by Foster Wheeler and certain of its operations to the DOJ and SEC in other regions. The Company has also made a disclosure to the UK Serious Fraud Office. Given the stage of these matters, it is not possible to estimate reliably what effect the outcome that any investigation or any regulatory determination may have on the Company.”

KT Corp.

Korea-based telecommunications company KT Corp. has ADR shares traded on the NYSE and recently disclosed in this SEC filing:

“Certain of our business activities or acts of our management, employees or other relevant parties, including, without limitation, investigations, claims or legal proceedings involving our former chief executive officer Mr. Lee [Mr. Suk-chae Lee, our former chief executive officer who resigned in November 2013] and incidents relating to the employment of certain executives and execution of certain advertising contracts described above, may raise concerns about compliance with laws of Korea and other relevant jurisdictions, including the United States. These various and sometimes conflicting laws and regulations include the U.S. Foreign Corrupt Practices Act and other laws prohibiting corrupt payments to governmental officials and commercial counterparties. Compliance with complex Korean and foreign laws and regulations that apply to our operations increases our cost of doing business. Failure to comply with these laws and regulations could also result in fines, penalties and criminal sanctions against us, our officers, or our employees, prohibitions on conduct of our business, and damage to our reputation. Criminal or civil investigation by Korean or other authorities may result in a material impact to our business or reputation, which in turn could impact our relationships with certain of our customers and business partners, and which potentially could give rise to additional regulatory inquiries in Korea or elsewhere. Defending us against any allegations or charges of wrongdoing also could be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel. There can be no assurance that we or our employees and other relevant parties will always be in full compliance with these laws and regulations, or that future legal or regulatory developments applicable to us will not have an adverse impact on our business, reputation or stock price.”

Grana y Montero

This prior February 2017 post highlighted the scrutiny of Peru-based Grana y Montero, a company with shares traded on the NYSE, after a media report that the construction group knew about $20 million in bribes paid to a former president by its partner, scandal-tainted Brazilian firm Odebrecht SA.

Recently Grana y Montero made this filing indicating that it was unable to timely file its Form 20-F. The disclosure states:

“Graña y Montero S.A.A. (the “Company”) is unable to file its Annual Report on Form 20-F (the “Form 20-F”) for the period ended December 31, 2016 within the prescribed time period without unreasonable effort or expense. As previously disclosed by the Company in Current Reports furnished on Form 6-K, the Company is carrying out additional procedures in connection with the finalization of its consolidated financial statements and the assessment of its internal controls as of and for the year ended December 31, 2016, related to its association with affiliates of Odebrecht S.A. (“Odebrecht”) in certain projects in Peru.

Odebrecht and certain persons affiliated with it entered into a plea agreement with U.S., Brazilian and other authorities in which they indicated that bribery payments were made in connection with certain projects in multiple countries, including Peru. These projects may include certain consortia controlled and operated by Odebrecht affiliates in which the Company held minority investments. In light of these events, the Company has initiated an internal investigation relating to the Company’s participation in the six consortia with Odebrecht in the period 2005-2017. This internal investigation is currently ongoing.

[…]

The Company intends to file its Form 20-F as soon as practicable and within the fifteenth calendar day after its prescribed due date; however, the Company is presently uncertain whether such filing will occur by such date.”

Societe Generale

As highlighted in this previous post, Societe Generale has been under FCPA scrutiny since 2014 for its business dealings in Libya. As highlighted in this previous post, in a U.K. lawsuit the Libyan Investment Authority has alleged that the company “paid a middleman $58 million in alleged bribes to secure almost $2 billion in business … during the final years of dictator Moammar Gadhafi’s rule.”

The Wall Street Journal reports here:

Societe Generale has “agreed to pay €963 million ($1.1 billion) to settle claims that it paid a middleman alleged bribes to secure business from Libya’s sovereign-wealth fund during the final years of dictator Moammar Gadhafi’s rule. […] Société Générale apologizes to the LIA and hopes that the challenges faced at this difficult time in Libya’s development are soon overcome,” it said in a joint statement with LIA.”

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