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SEC Finds That Former Panasonic Executive Authorized Conduct Causing Company’s FCPA Violations, Another Former Executive Found To Engage In Improper Revenue Recognition Practices

As highlighted in prior posts (here [1], here [2] and here [3]) in April 2018 the DOJ and SEC announced a $280 million Foreign Corrupt Practices Act enforcement action against Japan-based Panasonic Corp.  and a U.S. subsidiary Panasonic Avionics Corp. (PAC).

In the words of the government “between 2007 and 2013, PAC employees, including senior executives, engaged in a scheme to retain consultants for improper purposes other than for providing actual consulting services.”

Earlier this week, the SEC returned to the same core conduct to bring administrative actions (here [4] and here [5]) against Paul Margis (pictured – a former President and CEO of PAC) and Takeshi Uonaga (PAC’s former CFO). The Margis action finds that he authorized various conduct giving rise to the company’s FCPA liability, whereas the Uonaga matter is materially different in that it is a revenue recognition matter.

Margis

In the Margis action, the SEC stated in summary fashion:

“Beginning in 2007, Paul A. Margis (“Margis”) participated in a plan whereby Panasonic Avionics Corporation (“PAC”), a wholly-owned, U.S. subsidiary of Panasonic Corporation (“Panasonic”), offered a lucrative consulting  position to a government official (“Government Official”) who assisted PAC in obtaining and retaining business from a state-owned airline (“Government Airline”). While PAC was negotiating two agreements valued at over $700 million with the Government Airline, Margis authorized PAC to offer the Government Official a $200,000 a year post-retirement consulting position. Ultimately, PAC retained the Government Official and paid approximately $875,000 for his position, which required little to no work. Margis and others arranged for the Government Official to be paid through a third-party vendor that provided unrelated services to PAC. Margis also authorized payments of more than $900,000 through the third-party vendor for the retention of two other individuals as consultants, although they provided little to no services. Through his conduct, Margis knowingly circumvented PAC’s system of internal accounting controls and knowingly falsified the company’s books and records. Margis also caused Panasonic to violate the books and records and internal accounting controls provisions of the federal securities laws. Finally, Margis made false representations to PAC’s external auditors that PAC did not have any deficiencies concerning its internal financial controls and books and records, thereby misleading the company’s auditors.”

In addition to the above, the SEC also found:

“In 1986, PAC retained a sales representative (“Sales Representative” or” Sales Rep”) to assist PAC in contract negotiations for the sale of IFE and GCS products to several airlines in its Middle East Region, despite the fact that he had no background or experience in avionics. Thereafter, PAC periodically renewed its agreements with the Sales Rep until around May 2016 when it terminated its relationship with him. The Sales Rep was engaged with the authorization of Panasonic executives, including Margis, who was also directly involved in authorizing the renewal of agreements between PAC and the Sales Rep.

Between 2007 and 2016, PAC paid the Sales Representative more than $184 million in sales commissions through his British Virgin Islands entity. During this period, the Sales Representative directly reported to Margis, who authorized monthly commission payments of $1-3 million to the Sales Representative. The Sales Representative gave Margis cash and luxury items valued at more than $60,000.

Beginning in at least 2004, PAC maintained a separate, regional office in the Middle East. The office, based in Dubai, was staffed by sales and marketing professionals and had a repair shop, field engineers, and its own finance staff. Nevertheless, PAC continued to use the Sales Rep despite concerns raised by PAC employees that the Sales Rep lacked the qualifications to negotiate technical contracts related to IFE and GCS products and other red flags regarding his conduct, such as his possession of confidential and proprietary materials of PAC’s competitors and customers. In addition, Margis was aware of allegations from its regional employees that the Sales Rep was paying bribes to win business on PAC’s behalf.”

[6]

In pertinent part, the SEC found:

“During the course of negotiations …., the Government Official solicited PAC for personal benefits. Beginning in at least April 2007, the Government Official sent numerous emails to the Sales Representative about obtaining a position with PAC, which the Sales Representative brought to Margis’s attention. Subsequently on June 17, 2007, the Government Official informed the Sales Representative that he was seeking a position with PAC, including an annual salary of £150,000 and other benefits. The Sales Representative informed Margis of the specific request.

In or around September 2007, PAC offered the Government Official a position as a consultant for $200,000 per year plus travel expenses, which would be effective after his retirement from the Government Airline. Margis authorized the offer of a consulting position to the Government Official, despite numerous red flags.

For example, PAC had no apparent need for the Government Official’s services. During the six years that he was paid as a consultant, the Government Official performed little to no work.

Additionally, the Sales Representative informed Margis and other PAC executives that the Government Official did not want any one contacting him due to his current status with his employer, the Government Airline.

In response, a senior PAC executive told Margis and others by email that, “We should be very sensitive to [Government Official’s] current position . . . . I will get in trouble if we act like a small company. What we are doing for [the Government Official] is a large risk for a corporation like Panasonic. I think we still should for good reasons, but we must get this done above the table with complete transparency.”

Finally, based on his prior interactions with the Government Airline, Margis was aware that the Government Official played a key role in the business relationship between the Government Airline and PAC, including in connection with the negotiations …

During the course of the negotiations … and while seeking personal benefits from PAC, the Government Official was providing PAC commercial and proprietary information that helped PAC secure an improper advantage in obtaining and retaining business from the Government Airline. This included confidential information of the Government Airline and PAC’s competitors, tips on negotiating with the Government Airline, and advice on how to secure additional business from the Government Airline.

Rather than following PAC’s standard procedures for retaining consultants, Margis arranged for PAC to retain the Government Official and pay him through an unrelated third-party vendor that otherwise prepared product manuals for PAC (“Vendor”).

Ultimately, between April 2008 and January 2014, the Government Official provided little to no services, and PAC paid over $875,000 to the Vendor for the Government Official’s position. Margis was aware that the Government Official was providing few, if any, services. For instance, in May 2009, PAC employees requested to terminate the agreement with the Government Official because his services were not required. Nevertheless, Margis authorized the renewal of the agreement with the Government Official, and continued to authorize monthly payments to the Vendor for the Government Official through January of 2014.”

Similar to this recent enforcement action [7] involving a former SQM and his discretionary budget, the SEC found in the Margis action:

“From at least 2007 through at least January 2014, Margis and others authorized the engagement of various individuals as consultants in circumstances in which the consultants provided few, if any, services. Rather than following PAC’s standard procedures for engaging consultants, these individuals were retained through the Vendor and paid through the Vendor from an Office of the President budget that Margis controlled.

The Office of the President budget was set annually by a senior PAC finance executive in consultation with Margis, based on the prior year’s costs and anticipated changes to expenses. Expenditures from this budget were never meaningfully reviewed or approved by any Panasonic or PAC personnel, and there were no reasonable internal accounting controls in place surrounding its use.

[…]

Margis authorized nearly all payments made out of the Office of the President Budget, including payments totaling more than $1.76 million to the Government Official, Consultant One, and Consultant Two, who provided few, if any, services to PAC. These payments were falsely recorded in PAC’s general ledger as consulting payments to the Vendor and the consultants and incorporated into Panasonic’s books, records, and accounts as “selling and general administrative expenses.”

During the period that Margis used the Office of the President budget to pay the aforementioned consultants, PAC had established policies and procedures concerning the engagement of consultants. These policies and procedures set out a number of requirements, including defining the scope of work, engaging PAC Human Resources in the retention process, and limiting a contract’s duration to six months. In fact, during this period, Margis authorized the engagement of several other consultants pursuant to PAC’s consultant retention policies and procedures. Conversely, Margis circumvented those very same policies and procedures when authorizing the engagement of the Government Official, Consultant One, and Consultant Two.

Panasonic failed to maintain internal accounting controls reasonably designed to ensure that payments to the consultants only were made in exchange for the described consulting services, that services actually had been rendered, and that its books and records fairly reflected the transactions and disposition of Panasonic’s assets. Panasonic also lacked sufficient internal accounting controls to effectuate its policies and procedures concerning the selection and engagement of these consultants.

Margis caused Panasonic to violate the books and records and internal accounting controls provisions of the federal securities laws by authorizing the engagement of the consultants through the Vendor and using the Vendor as a conduit for payments to the consultants, which were made from the Office of the President Budget that he controlled.”

Regarding Margis misleading PAC’s external auditors, the order finds:

“As a wholly-owned subsidiary of Panasonic, PAC senior executives provided annual certifications of its financial statements, known as “subcertifications,” to PAC’s external auditors (“Auditors”) each quarter. Similarly, PAC senior executives also provided the Auditors with quarterly management representations letters confirming, among other things, that the company did not have any deficiencies concerning its books and records and its internal financial controls.

The subcertifications and management representation letters were presented to the Auditors in connection with the company’s annual and quarterly reviews. The Auditors relied on these subcertifications and management representation letters as part of the normal course of their audits of the company and for the preparation of PAC’s financial statements, which were incorporated into Panasonic’s financial statements and included by Panasonic in its periodic Commission filings.

From at least 2007 through 2015, Margis provided annual subcertifications as well as management representation letters each quarter to the Auditors. At no time during this period did Margis disclose to the Auditors, or direct anyone else to disclose, the foregoing issues concerning the payments to the Government Official and other consultants, PAC’s and Panasonic’s lack of sufficient internal accounting controls, or the resulting falsification of PAC’s and Panasonic’s books and records.

Instead, Margis provided false subcertifications and management representation letters to the Auditors. For example, in the subcertifications Margis falsely stated, “no deficiencies have been identified and the internal control [sic] over financial reporting have effectively functioned….” Similarly, in the management representation letters, Margis falsely stated, “there are no material transactions that have not been properly recorded in the accounting records,” and “[t]here are no significant deficiencies or material weaknesses in the design or operation of internal controls over financial reporting….” Both of these certifications were false.

As a result of this conduct, Margis made materially false or misleading statements to the Auditors in connection with their audits of the company’s financial statements and internal financial controls.”

Based on the above, the SEC found that Margis knowingly circumvented internal controls, caused Panasonic’s books and records and internal controls violations, and made false and misleading statements to the company’s accountants. Without admitting or denying the SEC findings, Margis agreed to pay a $75,000 penalty.

Uonaga

Whereas the Margis action found that he authorized various conduct giving rise to the company’s FCPA liability, the Uonaga matter is materially different in that the SEC stated in summary fashion:

“This matter concerns accounting, books and records, internal accounting controls and reporting violations involving Panasonic Corporation (“Panasonic”) and Takeshi “Tyrone” Uonaga, the Chief Financial Officer of Panasonic’s wholly-owned subsidiary, Panasonic Avionics Corporation (“PAC”). In July 2012, PAC improperly recognized approximately $82 million in revenue from a contract with one of its largest customers, a state-owned airline (“Government Airline”), by backdating the contract to indicate that it had been signed prior to the quarter ending June 30, 2012. Although Uonaga was aware that a signed contract was necessary to recognize revenue and that the contract had not been signed prior to the end of the quarter, Uonaga provided a false certification and management representation letter to PAC’s external auditor stating that PAC’s financial statements for the quarter had been prepared in conformity with prevailing audit standards and that there were no deficiencies concerning PAC’s internal accounting controls and books and records.

By engaging in this conduct, Uonaga knowingly circumvented PAC’s internal accounting controls concerning revenue recognition and caused the company’s books and records to contain false information. Also as a result of his conduct, Uonaga caused Panasonic to violate the books and records, internal accounting controls, and reporting provisions of the securities laws. PAC’s financial results – including the improperly recognized revenue – were incorporated into Panasonic’s books and records and consolidated financial statements for that quarter and included in financial statements Panasonic filed with the Commission. As a result of Uonaga’s actions, Panasonic falsely recorded revenue on its books and records, failed to maintain reasonable internal accounting controls, and filed a materially false report with the Commission.”

Based on the above, the SEC found:

“By engaging in this conduct, Uonaga knowingly circumvented PAC’s internal accounting controls concerning revenue recognition and caused the company’s books and records to contain false information. Uonaga also caused Panasonic to violate the books and records, internal accounting controls, and reporting provisions of the federal securities laws by circumventing the company’s internal accounting controls concerning revenue recognition, thereby causing Panasonic to improperly record revenue from Amendment Six in the First Quarter. That revenue, in turn, was improperly reported by Panasonic in its consolidated financial statements filed with the Commission in August 2012, which resulted in the company violating the reporting provisions of the federal securities laws.”

Without admitting or denying the SEC’s findings, Uonaga agreed to pay a $50,000 penalty. In addition, the SEC’s order also suspends Uonaga “from appearing or practicing before the Commission as an accountant, which includes not participating in the financial reporting or audits of public companies.”

In this release [8], Antonia Chion (Associate Director of the SEC’s Enforcement Division) stated: “Holding individuals accountable, particularly senior executives, is critical. Compliance starts at the top and senior executives who fail in their duty to comply with the federal securities laws will be held responsible.”

According to this release [9], in November 2017 digEcor [10] appointed Margis as its non-executive chairman of its board of directors. In an e-mail, a digEcor representative had no comment to my question whether Margis remains on the company’s board and more broadly as to the SEC’s findings against him.

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