A typical Foreign Corrupt Practices Act enforcement action resolution vehicle is negotiated between the company and the DOJ/SEC.
Conduct at issue and how it is framed, charges, settlement amount, post-enforcement action obligations can all be the subject of negotiation.
Rarely though is the back and forth of negotiations – including as to settlement amount – in the public domain.
This recent post discussed how Clear Channel generally prevailed in an FCPA-related insurance coverage dispute.
The judicial decision by a Delaware Superior Court judge also highlights the back and forth negotiations between Clear Channel and the SEC ultimately resulting in the September 2023 $26.1 million enforcement action (disgorgement of $16,355,567, prejudgment interest of $3,760,920, and a civil monetary penalty in the amount of $6,000,000).
The decision states:
“The [SEC enforcement action] also followed extensive negotiation based on the information the SEC obtained. In December 2021, the SEC made a “reverse proffer” seeking $32.44 million in disgorgement, $8.8 million prejudgment interest on that amount, and civil penalty of $18.8 million.
The disgorgement amount consisted of $30.66 million “in estimated benefit based on advertising contracts with state-owned affiliated entities from 2013-2017” that the SEC “characterized as obtained through improper cash payments in the customer development scheme” and $1.78 million “in revenue obtained in Shanghai and Hangzhou from end of 2016 through January 2018,” which the SEC “tied to entertainment expenses, business development assistance fees, and special fees.”
Clear Channel and the SEC disagreed regarding the appropriate methodology for calculating disgorgement, particularly with respect to the SEC’s initial $30.66 million customer development expenses calculation. For its calculation of “tainted revenue,” the SEC relied on evidence of improper consultant payments and extrapolated to a broader geographic area and timeframe.
Clear Channel contended that this extrapolation method “is inconsistent with governing case law” which requires that disgorgement “not exceed net profits from the improper activity.” In Clear Channel’s view, disgorgement could be based only on “actual, documented revenue.”
This disagreement and the disgorgement calculation were the subject of extensive discussion and analysis by Clear Channel and the SEC. Clear Channel also disagreed that any civil penalty was warranted.
Based on these disagreements, in April 2022, Clear Channel made a counteroffer to settle the matter for disgorgement of about $4.6 million, prejudgment interest of $1.07 million, and a civil penalty of $1.4 million.
Following Clear Channel’s counteroffer, with the parties’ positions set forth, negotiations “stalled.” In an effort to break the impasse, in September 2022, the SEC reached out to Clear Channel to consider whether, “t[aking] a step back and look[ing] at the big picture,” the parties might be able to “agree on a range of a number and figure out a way to get to that number.”
That outreach caused the parties to resume negotiations. The SEC made an offer that included $16.75 million in disgorgement and a $10 million civil penalty, which it subsequently reduced to $16.35 million and $7 million. Clear Channel was able to negotiate the civil penalty further down to $6 million but, in Clear Channel’s counsel’s recollection, the SEC “made clear that [it] would not reduce the disgorgement amount any lower.”
In the end, the SEC “determined to accept” the offer reflected in the Cease-and-Desist Order, including approximately $16.35 million in disgorgement and a $6 million civil monetary penalty.”
If you are scoring at home, the negotiations generally went as follows.
- SEC requests $60 million
- Five months later, Clear Channel agrees to settle for $7.1 million
- Negotiations “stall” – five months later SEC reaches out to Clear Channel and requests approximately $30.5 million.
- SEC requests approximately $27.5 million.
- Clear Channel agrees to settle for approximately $26.2 million
The settlement negotiation process took approximately 1.8 years.
