Previous posts here, here, and here have highlighted and analyzed the U.K. enforcement action against Standard Bank (SB) based on allegations that a former “sister company” inserted a local partner into a private placement bond offering on behalf of the Government of Tanzania that was used to facilitate improper payments to government officials.
The end result of this was that SB’s fee in the $600 million offering was not 1.4% but 2.4% (with the additional 1% being paid to the local partner).
The Judge in the U.K. matter concluded that there was insufficient evidence to suggest that any SB employees committed a bribery offense and that were was no evidence “that anyone within Standard Bank knew that two senior executives [at the former sister company] intended the payment to constitute a bribe, or so intended it themselves.”
Elsewhere the Judge repeated: “the evidence does not reveal that executives or employees of Standard Bank intended or knew of an intention to bribe.”
Nevertheless, SB was charged with a Sec. 7 violation of the Bribery Act for failing to prevent bribery (a first in the U.K. in connection with foreign bribery) and agreed to pay approximately $33 million to resolve the matter via a deferred prosecution agreement (also a first in the U.K.).
The SEC also got in on the action by announcing a $4.2 million enforcement action (via an administrative action) against Standard Bank for violating Section 17(a)(2) of the Securities Act of 1933 (’33 Act) based on the same core conduct alleged in the U.K. action.
The SEC’s release states: “The SEC did not have jurisdiction to bring charges under the FCPA because Standard was not an “issuer” as defined by that Act.”
Not to suggest that an FCPA enforcement action against SB was warranted, but truth be told the SEC has previously brought Foreign Corrupt Practices Act enforcement actions against non-issuers.
For instance, in 2010 the SEC brought a $11.3 million FCPA enforcement action against Panalpina Inc. even though the SEC acknowledged in its complaint that the company was not “an issuer for purposes of the FCPA.” Rather, the enforcement action was premised on allegations that Panalpina “while acting as an agent of its issuer customers” violated the FCPA and that Panalpina “also aided and abetted its issuer customers’ violations.” Similarly, in a $125 million FCPA enforcement action in 2010 in connection with Bribery Island, Nigeria conduct the SEC included as a defendant Snamprogetti Netherlands B.V.
Back to the SEC’s enforcement action against SB.
Unlike the FCPA which is part of the Securities Exchange Act of 1934, as indicated above, Section 17(a)(2) is the part of the ’33 Act, a statutory scheme that broadly governs the offering of securities.
Specifically, Section 17(a)(2) states, under the heading “Fraudulent Interstate Transactions,” as follows.
“It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement … by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly—
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”
Key elements of a Section 17(a)(2) violation are thus materiality and use of U.S. interstate commerce or mail. (For an informative article about Section 17(a)(2) see here).
As mentioned above, the SEC’s administrative order was based on the same core conduct alleged in the U.K. action. In summary fashion, the order states:
“This case involves Standard Bank Plc’s (“Standard”) failure to disclose payments made by Standard’s affiliate, Stanbic Bank Tanzania, Limited (“Stanbic”), in connection with $600 million of sovereign debt securities issued by the Government of Tanzania (“GoT”) in 2013. Standard (an international investment bank located in London) was aware that its affiliate, Stanbic, paid $6 million of the proceeds of the offering to an entity called Enterprise Growth Markets Advisors Limited (“EGMA”). Standard failed to disclose the existence of EGMA and the fees it was to receive. At all relevant times, EGMA’s chairman and one of its three shareholders and directors was a representative of the GoT. Several red flags indicated the risk that the portion of the offering proceeds paid to EGMA by Stanbic was intended to induce the GoT to grant the mandate for the transaction to Standard and Stanbic. Standard acted as joint Lead Manager in the offering of Tanzanian sovereign debt securities without disclosing that EGMA was involved in the transaction and would receive a substantial fee in connection with the transaction.”
Under the heading “Standard’s Failure to Disclose,” the order states:
“Standard was negligent in not taking any steps to understand what role EGMA would be playing in the transaction in return for its $6 million fee and there are no records of contemporaneous communications among Standard and Stanbic personnel concerning the ownership of EGMA, its relationship to the GoT, or why it was being made part of the transaction.
The investor representation letter failed to include material facts about the transactions namely any mention of EGMA, its shareholders’ ties to the GoT, its lack of a substantive role in the transaction, and that it was to receive a $6 million fee.
Standard did not disclose the involvement of EGMA and the fee EGMA was to receive.”
As to the jurisdictional nexus in Section 17(a)(2), the order states:
“On February 27, 2013, the GoT issued its floating-rate amortizing, unrated, unlisted, sovereign bonds through a Regulation S private placement. As set forth in the transaction documents, the gross proceeds of $600 million were transferred by the facility agent to the GoT’s account in New York, on March 8, the GoT then transferred the total 2.4% fee of $14.4 million to Stanbic in Tanzania. Stanbic deposited EGMA’s 1% fee, or $6 million, into an account EGMA had previously opened at Stanbic. After EGMA made payments of the legal costs related to the transaction, approximately $5.2 million of its $6 million was withdrawn in cash between March 18 and 27, 2013. Standard did not become aware of those cash withdrawals until after they were made, and does not have knowledge as to the ultimate disposition of those withdrawn funds.”
In conclusion, the SEC order states:
“By offering the Tanzanian sovereign bonds, Standard had a duty to disclose to investors material facts that it knew or should have known concerning the transaction.
As a result of the conduct in failing to disclose the material facts described above, Respondent committed violations of Sections 17(a)(2) of the Securities Act.”
Other than mentioning the conclusory legal term “material” three times, the SEC’s order contains no specifics regarding this required legal element. The standard definition of material is whether there is a substantial likelihood that the information would be viewed by the reasonable investor as having significantly altered the total mix of information made available concerning the security.
It is a highly dubious proposition that the 116 sophisticated, institutional investors that participated in the $600 million private placement offering would have viewed the participation of EGMA and its 1% fee as being material.
As noted in the SEC’s release:
“The SEC’s order requires Standard to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act of 1933 that prohibits obtaining money by any materially untrue statement or omission, and to pay a $4.2 million civil penalty. The order also requires Standard to pay disgorgement of $8.4 million, which the Commission has deemed satisfied by a payment of equal amount in the U.K. matter.”
In the SEC release, Gerald Hodgkins (Associate Director of the SEC’s Division of Enforcement) states:
“Standard failed to disclose EGMA’s involvement in the bond offering to investors despite red flags suggesting some of the proceeds of the offering were going to EGMA for the purpose of influencing the Tanzanian Government’s selection of bankers for the transaction. This action against Standard demonstrates that when suspicious payments made anywhere in the world result in tainted securities offerings in the United States, the SEC is fully committed to taking action against the responsible parties.”