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“Game-Changing” Day at the SEC

By on January 14, 2010 in Deferred Prosecution Agreements, Enforcement Agency Policy, Enforcement Agency Speeches, Non-Prosecution Agreement, SEC, Voluntary Disclosure

In August 2009, Robert Khuzami, the SEC’s Director of the Division of Enforcement, announced that the SEC will be creating five “national specialized units dedicated to particular highly specialized and complex areas of securities law” – including an FCPA unit. (see here).

Khuzami also announced that the SEC was working on other initiatives of interest to FCPA followers including creation of “a public policy statement that will set forth standards to evaluate cooperation by individuals in enforcement actions” as well as “recommend[ation] to the Commission that the SEC enter into Deferred Prosecution Agreements, in which the [Division of Enforcement] agree[s] in the appropriate case to forego an enforcement action against an individual or entity subject to certain terms, including full cooperation, a waiver of statutes of limitations, and compliance with certain undertakings.”

Yesterday, there were developments on each of these issues.

First, the SEC (see here) announced that Cheryl J. Scarboro will lead the FCPA unit. As indicated in the release, Scarboro is an SEC veteran having served as Associate Director, Assistant Director, Deputy Assistant Director, and Staff Attorney in the Division of Enforcement. For many years, Scarboro has been a primary SEC voice on FCPA issues and an active participant at many FCPA conferences.

Second, the SEC (see here) announced a series of measures “to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency’s investigations and enforcement actions.”

“New cooperation tools” not previously available to the SEC, will now include, among other things:

* “Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.”

* “Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.”

and

* “Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.”

The SEC release notes that “similar cooperation tools have been regularly and successfully used by the Justice Department in its criminal investigations and prosecutions.”

More details about these measures can be found in a revised and newly issued version of the SEC’s enforcement manual beginning at pg. 119 (see here).

The SEC news conference announcing these appointments and initiatives is available on the SEC’s website.

While not FCPA specific, these measures as applied to FCPA enforcement are likely to lead to even less judicial scrutiny (not that there is much judicial scrutiny at present) as to SEC interpretations of the FCPA and as to whether factual evidence actually exists to support each element of an FCPA charge.

In fact, as set forth in the manual (p. 130) “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.

For those anxious to see FCPA enforcement actions contested in an open, transparent, and adversary proceeding, yesterday’s announcements will be a blow as I expect FCPA enforcement to become even more opaque in the future.

Stay tuned as much is surely to be written about these new measures in the coming weeks and months.

Ready, Set, Go …

By on January 12, 2010 in 2010 Enforcement Actions, Extortion, FCPA Investigative Costs, Kazakhstan, NATCO Group, Oil and Gas Industry, Permits / Licenses / Customs / Tax, SEC Enforcement Action

The 2010 FCPA enforcement year has begun.

Yesterday, the SEC announced (here) resolution of an FCPA books and records and internal controls action against NATCO Group Inc. – a Houston based “worldwide leader in design, manufacture, and service” of oil and gas process equipment (see here).

The SEC complaint (here) alleges that TEST Automation & Controls, Inc., a wholly-owned subsidiary of NATCO Group, “created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan.” According to the complaint, “NATCO’s system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO’s consolidated books and records did not accurately reflect these payments.”

According to the complaint, TEST maintained a branch office in Kazakhstan and in June 2005 it won a contract which required it to hire both expatriates and local Kazakh workers. Pursuant to Kazakh law, TEST needed to obtain immigration documentation before an expatriate worker could enter the country. Thereafter, Kazakh immigration authorities claimed that TEST’s expatriate workers were working without proper documentation and the authorities threatened to fine, jail, or deport the workers if TEST did not pay cash fines.

According to the complaint, TEST employees believed the threats to be genuine and, after consulting with U.S. TEST management who authorized the payments, paid the officials approximately $45,0000 using their personal funds for which the employees were reimbursed by TEST.

The complaint alleges that when reimbursing the employees for these payments, TEST inaccurately described the money as: (i) being an advance on a bonus; and (ii) visa fines.

The complaint further alleges that TEST used consultants in Kazakhstan to assist in obtaining immigration documentation for its expatriate employees and that “one of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas.” According to the complaint, the consultant twice requested cash from TEST to help him obtain the visas and the complaint alleges that the consultant provided TEST with bogus invoices to support the payments.

Based on the above allegations, the SEC charged NATCO with FCPA books and records and internal control violations even though the complaint is completely silent as to any involvement or knowledge by NATCO in the conduct at issue. This action is thus the latest example of an issuer being strictly liable for a subsidiary’s books and records violations (see here for a prior post).

Without admitting or denying the SEC’s allegations, NATCO agreed to pay a $65,000 civil penalty. According to the SEC’s findings in a related cease and desist order (here), during a routine internal audit review, NATCO discovered potential issues involving payments at TEST, conducted an internal investigation, and voluntarily disclosed the results to the SEC. The order also lists several other remedial measures NATCO implemented.

I’ve noted in prior posts that one of the effects of voluntary disclosure is that it sets into motion a whole series of events including, in many cases, a much broader review of the company’s operations so that the company can answer the enforcement agencies’ “where else may this have occurred” question.

On this issue, the SEC order states that NATCO “expanded its investigation to examine TEST’s other worldwide operations, including Nigeria, Angola, and China, geographic locations with historic FCPA concerns.” However, the SEC order notes that “NATCO’s expanded internal investigation of TEST uncovered no wrongdoing.”

According to the complaint, at all times relevant to the complaint, NATCO’s stock was listed on the NYSE, but in November 2009 NATCO became a subsidiary of Cameron International Corporation (here) (an NYSE listed company) and NATCO’s NYSE listing ended.

The NATCO enforcement action is “as garden variety” of an FCPA enforcement action as perhaps one will find. Not only does moving product into and out of a country expose a company to FCPA risk, but so too does moving employees into and out of a country.

The NATCO civil penalty also demonstrates that in certain cases, the smallest “cost” of an alleged FCPA violation are the fines or penalties, figures which are so dwarfed by investigative, remedial and resolution costs.

PBSJ Corp. Unable to File Annual Report

By on January 9, 2010 in PBSJ Corp., Voluntary Disclosure

The PBSJ Corporation is a global engineering and architectural firm headquartered in Florida.

In its recent SEC filings (here and here), the company announced that it was unable to file its Annual Report due to an FCPA internal investigation “in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries.”

The filing indicates that:

“The Company is unable to determine at this time (i) whether the results of the internal investigation will indicate that its internal controls over financial reporting were not operating effectively, (ii) the impact, if any, such internal investigation may have on the Company’s annual report on internal control over financial reporting that the Company is required to include in the Form 10-K, or (iii) the effect, if any, such internal investigation may have on the Company’s financial statements to be included in the Form 10-K.”

According to the filing:

“The Company has self-reported to the Securities and Exchange Commission (the “SEC”) and the Department of Justice (the “DOJ”) the circumstances surrounding this internal investigation. Should the SEC or DOJ decide to conduct its own investigation, the Company will cooperate fully.”

PBS&J International, Inc.’s “previous international assignments have extended to nearly every corner of the world” and its “recent global pursuits have centered on prominent projects in the Middle East, North Africa, the Caribbean, Central and South America, Europe, and Australia” – according to the company’s website (see here).

While it is increasingly common for a company to disclose such FCPA issues (see here for prior posts on voluntary disclosure), it is rather unusual for the FCPA disclosure to prevent the company from otherwise meeting its disclosure requirements under the securities laws.

For local media coverage of PBSJ’s disclosure (see here).

Team of Plenty

By on January 6, 2010 in Enforcement Agency Speeches, FCPA Investigative Costs, Team Inc., Trinidad, Voluntary Disclosure

Voluntary disclosure (i.e. picking up the phone and calling the DOJ and/or SEC (if applicable) to schedule a meeting, during which a company’s lawyers disclose conduct that could potentially implicate the FCPA, even though the enforcement agencies, in many cases, would never find out about the conduct) is a tough issue.

In a November 2009 speech to an FCPA audience (see here), Assistant Attorney General Lanny Breuer acknowledged that the decision of whether to make a voluntary disclosure is “sometimes a difficult question” […] a question I grappled with as a defense lawyer.”

The Gibson Dunn Year End FCPA Report (the subject of yesterday’s post see here) has this to say about voluntary disclosure:

“To be sure, a company that voluntary discloses a potential FCPA violation to DOJ and the SEC will be better situated than one that otherwise finds itself across the table from the government having not disclosed the conduct.”

[…]

“On the other hand, there is substantial debate about just how “tangible” the benefits of voluntary disclosure truly are.”

[…]

“Although some corporate defendants that self-reported misconduct have certainly received relatively lenient treatment, it is not clear that voluntary disclosure was the reason for any particular settlement term.”

[…]

“Although it is certain that companies do receive some benefit for self-reporting FCPA violations, the real question is whether the company considering a voluntary disclosure is better off for having made the disclosure, which is not necessary one-and-the-same. Because voluntary disclosure makes the government aware of alleged improper conduct that it otherwise may have never discovered on its own, the likelihood of the government uncovering the misconduct through other means, such as a whistleblower, foreign government investigation, tip from a competitor or business partner, or industry-wide investigation, is a critical factor in determining whether to make a voluntary disclosure.”

[…]

“Given the multitude of factors to consider when making a voluntary disclosure decision, it is often challenging to make such a significant decision with any degree of confidence that a particular course of action is the right one. This task is made even more difficult by the uncertainty of obtaining any particular benefits for disclosing.”

As raised in a prior post (see here), a company’s decision in deciding whether or not to voluntarily disclose conduct to the enforcement agencies that could potentially implicate the FCPA is made even more difficult given the potential conflict of interest FCPA counsel has in advising the company as to the important disclosure issue – particularly where the disclosure only involves a potential FCPA violation?

I raised this lurking “elephant in the room” question in connection with Dyncorp International’s recent disclosure of potential FCPA issues.

One could raise the same question in connection with Team Inc.

In August 2009, Team (a Texas-based provider of specialty industrial services) disclosed (here) that an internal investigation conducted by FCPA counsel “found evidence suggesting that payments, which may violate the Foreign Corrupt Practices Act (FCPA), were made to employees of foreign government owned enterprises.”

The release further noted that “[b]ased upon the evidence obtained to date, we believe that the total of these improper payments over the past five years did not exceed $50,000. The total annual revenues from the impacted Trinidad branch represent approximately one-half of one percent of our annual consolidated revenues. We have voluntary disclosed information relating to the initial allegations, the investigation and the initial findings to the U.S. Department of Justice and to the Securities and Exchange Commission, and we will cooperate with the DOJ and SEC in connection with their review of this matter.”

In the prior post, I noted that a voluntary disclosure often sets into motion a series of events and the next thing the company knows it is paying for a team of lawyers (accompanied by forensic accountants and other specialists) even though the voluntary disclosure that got the whole process started involved conduct that may not actually violate the FCPA.

Fast forward to yesterday as Team disclosed (here) as follows:

“As previously reported, the Audit Committee is conducting an independent investigation regarding possible violations of the Foreign Corrupt Practices Act (“FCPA”) in cooperation with the U.S. Department of Justice and the Securities and Exchange Commission. While the investigation is ongoing, management continues to believe that any possible violations of the FCPA are limited in size and scope. The investigation is now expected to be completed during the first calendar quarter of 2010. The total professional costs associated with the investigation are now projected to be about $3.0 million.”

A $3 million dollar internal investigation concerning non-material payments made by a branch office that represents less than one-half of one percent of the company’s annual consolidated revenues?

Wow!

Double-wow because the payments may not even violate the FCPA because they were made to “employees of foreign government owned enterprises” (see here for several prior posts on the enforcement agenices untested and unchallenged interpretation of the “foreign official” element)!

Others have scratched their heads about this as well (see here and here).

Of course, the FCPA does not contain a de minimis exception and of course the FCPA contains books and records and internal control provisions applicable to issuers like Team. Thus, even if the payments were not material in terms of the company’s overall financial condition, there still could be FCPA books and records and internal control exposure if they were misrecorded in the company’s books and records or made in the absence of any internal controls.

But then again, the FCPA books and records and internal control provisions would be implicated if a Team employee took his Cousin Randy to the company’s corporate suite for the ballgame but recorded the costs as “marketing expenses” on his reimbursement request causing the company to misrecord the payment. Yet, no one would suggest disclosing this potential FCPA violation!

A Post-Holiday Stocking Stuffer

By on January 5, 2010 in Bobby Benton, FCPA Statistics

January can be a dismal month. The joy of the holiday season has diminished, our waistlines have expanded, it’s cold, and for many readers of this blog – it is time to start cranking out the billable hours again upon realizing, at this point, you are “annualized” at 600 hours.

But for FCPA watchers, it’s a different story as the holiday season has traditionally extended into the first week of January – the week in which Gibson, Dunn & Crutcher releases its Year-End FCPA Report (see here).

Part year in review, part marketing document, the report is a useful resource for those interested in following FCPA developments.

A couple of thoughts.

The number of DOJ FCPA enforcement actions noted in the report (26) is significantly inflated by separately including corporate prosecutions and related individual prosecutions. While this number is a good attention grabber, it is subject to debate whether 2009 was a record-enforcement year as corporate FCPA prosecutions by the DOJ slowed to a trickle in the second half of 2009. Since July 2009, there have been only two substantive DOJ FCPA enforcement actions against corporations (Control Components and UTStarcom). Whether the widely reported 100+ cases in the “pipeline” are taking longer to resolve, being resolved informally with no public disclosure, or about to burst onto the scene in 2010 is an open question and remains to be seen.

I’ve noted before that FCPA enforcement is a “unique creature.” I’ll say it again after reading this sentence in the report concerning the SEC’s charges against Bobby Benton (see here for a prior post) – “the fact that Benton did not settle the charges against him is remarkable in and of itself.”

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