Rockwell Automation Resolves SEC Action
[Note – because of my involvement in the below Rockwell matter while in private practice, this post is devoid of my customary commentary and analysis as to the enforcement action]
Yesterday, the SEC announced (here) a cease and desist proceeding and imposition of a cease and desist order as to Rockwell Automation, Inc.
As stated in the SEC’s order, the matter involved “violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Rockwell, through one of its former subsidiaries in China, Rockwell Automation Power Systems (Shanghai) Ltd. (“RAPS-China”), which was divested by Rockwell in January, 2007.”
In summary fashion, the SEC found as follows.
“From 2003 to 2006, certain employees of RAPS-China paid approximately $615,000 to Design Institutes, which were typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers. The payments were made through third-party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the Design Institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products. While the Design Institutes did provide some bona fide engineering and other services in connection with RAPS-China’s end-user contracts, RAPS-China could not substantiate the specific services rendered or the value of those services. Also during the same period, employees of RAPS-China paid approximately $450,000 to fund sightseeing and other non-business trips for employees of Design Institutes and other state-owned companies.”
“Rockwell realized approximately $1.7 million in net profits on sales contracts with end-user Chinese government-owned companies that were associated with payments to the Design Institutes.”
“Rockwell failed to accurately record the payments in its books and records, and failed to implement or maintain a system of internal accounting controls sufficient to prevent and detect the payments.”
Under the heading, “Discovery, Self-Reporting and Remediation” the SEC order states as follows.
“Rockwell discovered the DI Payments and the third-party payment mechanism in 2006 through its normal financial review process. This process was part of Rockwell’s global corporate compliance/internal controls program, which had targeted China for enhanced FCPA training and scrutiny starting in 2004. Upon discovery of the issue, Rockwell hired counsel and investigated the DI Payments with the oversight of its Board of Directors. It voluntarily self-reported the DI Payments to the Commission and voluntarily provided the Commission Staff with all relevant facts found in the investigation, and otherwise cooperated with the Commission. As a result of the discovery of this matter, Rockwell undertook numerous remedial measures, including employee termination and disciplinary actions, enhancements to its internal controls and compliance program and conducted a broad, global review of its other operations.”
The SEC order further states as follows.
“In connection with the payments described above, Rockwell failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act.”
“Further, as evidenced by the DI Payments (as described above) and leisure travel payments, Rockwell failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act.”
As noted in the SEC order, Rockwell, without admitting or denying the SEC’s findings, agreed to “pay disgorgement of $1,771,000, prejudgment interest of $590,091and a civil money penalty of $400,000.”
The SEC order concludes by noting that “the Commission is not imposing a civil penalty in excess of $400,000 based upon [Rockwell’s] cooperation” in the investigation.
See here for Rockwell’s press release.
David Simon (Foley & Lardner – here) and Greg Bruch (Willkie Farr & Gallagher – here) represented Rockwell.
*****
The Rockwell matter represents the second time in the past month (approximately) that the SEC has resolved an FCPA inquiry via the administrative cease and desist route. See here for the prior post regarding Ball Corporation.
*****
Other FCPA enforcement actions focused on alleged improper travel and entertainment benefits to employees of Chinese state-owned enterprises include: Lucent Technologies (see here) and UTStarcom Inc. (see here).
*****
Other FCPA enforcement actions focused (in whole or in part) on allegedly improper payments to employees of so-called Chinese “Design Institutes” include: ITT Corp. (see here); and Avery Dennison (see here).
Questions Abound In IBM Enforcement Action
Last week, the SEC announced (here) a settled FCPA enforcement action against International Business Machines Corporation (“IBM”).
This post summarizes the enforcement action and then addresses the many questions raised by the enforcement action.
Summary of Enforcement Action
According to the SEC complaint (here): “During the period from 1998 through 2009, in violation of the Foreign Corrupt Practices Act of 1977, employees of certain of [IBM’s] subsidiaries and a majority-owned joint venture provided cash payments, improper gifts, as well as improper travel and entertainment to government officials in South Korea and China.”
The conduct at issue focused on:
IBM-Korea, Inc. (“IBM-Korea”), a South Korean corporation “wholly-owned indirectly by IBM International Group B.V, which, in turn is wholly-owned by IBM;”
LG IBM PC Co. Ltd. (“LG-IBM”), a South Korean joint venture formed in 1996 by IBM-Korea (51% owner of the JV) and LG Electronics (“LG”) (49% owners of the JV); and
IBM (China) Investment Company Limited and IBM Global Services (China) Co. Ltd. (collectively “IBM-China”) – entities “owned by IBM China/Hong Kong Limited, a Hong Kong company that is ultimately owned by IBM.”
In summary fashion, the SEC alleged as follows.
“From 1998 to 2003, employees of [IBM-Korea] and [LG-IBM] made payments to various government officials in South Korea. The purpose of these payments was to secure the sale of IBM products through IBM-Korea and LG-IBM’s business partners. During the relevant period, these managers paid approximately KRW 216,832,500 (South Korean Won), or $207,000, in cash bribes to South Korean government officials, including providing improper·gifts and payments of travel and entertainment expenses.”
“From at least 2004 to early 2009, employees of [IBM-China] engaged in a widespread practice of providing overseas trips, entertainment, and improper gifts to Chinese government officials. The misconduct in China involved several key IBM-China employees and more than 100 IBM China employees overall.”
As to IBM, the parent-company issuer, the SEC alleged as follows.
“Despite its extensive international operations, IBM lacked sufficient internal
controls designed to prevent or detect these violations of the FCPA. During the period 1998 to 2009, IBM had corporate policies prohibiting bribery and procedures relating to compliance with the FCPA; however, deficient internal controls allowed employees of IBM’s subsidiaries and joint venture to use local business partners and travel agencies as conduits for bribes or other improper payments to South Korean and Chinese government officials over long periods of time.”
“During the period 1998 to 2009, IBM failed to make and keep books and records that accurately reflected the improper payments made in South Korea and China. Instead, these payments were recorded as legitimate business expenses.”
The body of the SEC’s complaint alleges various “things of value” provided to alleged South Korean “foreign officials” including shopping bags filled with thousands of dollars, cash-filled envelopes exchanged in parking lots and free personal computers, and travel and entertainment expenses.
According to the SEC, such “things of value” were: “in exchange for designating IBM-Korea a preferred supplier of mainframe computers to [an alleged government entity] and for placing orders with IBM-Korea at higher prices;” “in exchange for (1) maintaining IBM-Korea as the supplier of mainframe computers to [an alleged government entity]; and (2) for helping an IBM-Korea business partner win bids to supply mainframe computers and storage equipment to [an alleged government entity] worth more than [$21 million]; “in exchange for [an alleged “foreign official’s] assistance to IBM-Korea in obtaining a contract with [an alleged government entity] worth approximately [$13 million] for the installation of a mainframe computer in 2002;” “to entice [foreign official’s] to purchase IBM products:” “to win a contract to supply 657 (later increased to 825) personal computers valued at [approximately $1.4 million]; “in exchange for providing LG-IBM with certain confidential information regarding the product specifications on [an alleged government entity’s] request for procurement;” “to persuade employees of [an alleged government entity] to purchase IBM products;” and to entice alleged foreign officials “to purchase IBM products or to provide information to assist LG-IBM in the bidding process.”
The body of the SEC’s complaint as to China conduct alleges as follows.
“From at least 2004 to early 2009, IBM-China employees created slush funds at local travel agencies in China that were then used to pay for overseas and other travel expenses incurred by Chinese government officials. In addition, IBM-China employees created slush funds at its business partners to provide a cash payment and improper gifts, such as cameras and laptop computers, to Chinese government officials. IBM failed to record accurately these payments in its books and records.”
Specifically, the SEC alleged as follows:
“Between 2004 and 2009, IBM’s internal controls failed to detect at least 114
instances in which (1) IBM-China employees and its local travel agency worked together to create fake invoices to match approved [Delegation Trip Requests] DTRs; (2) trips were not connected to any DTRs; (3) trips involved unapproved sightseeing itineraries for Chinese government employees; (4) trips had little or no business content; (5) trips involved one or more deviations from the approved DTR; and (6) trips where per diem payments and gifts were provided to Chinese government officials.”
Based on the above allegations, the SEC charged IBM with violating the FCPA’s books and records and internal control provisions. As noted in the SEC release, IBM, without admitting or denying the SEC’s allegations, consented to the entry of a final judgment permanently enjoining the company from future FCPA violations. IBM agreed to pay $10 million (disgorgement of $5.3 million, $2.7 million in prejudgment interest, and a $2 million civil penalty).
Peter Barbur and Evan Chessler (Cravath, Swaine & Moore – here and here) represented IBM.
Questions Abound
For starters, this is not the first time IBM has been the focus of an FCPA enforcement action.
In December 2000 (see here), the SEC found, in a cease and desist proceeding, that IBM violated the FCPA books and records provisions in connection with a $250 million contract to integrate and modernize computer systems in Argentina. As part of the settlement, “IBM consented to the entry of an Order that requires IBM to cease and desist from committing or causing any future violation of [the FCPA’s books and records provisions].
Given that IBM was charged last week with FCPA books and records violations, IBM has clearly violated this 2000 court order.
In my recent “Facade of FCPA Enforcement” article (here), I highlight various pillars that contribute to the facade of FCPA enforcement.
Pillars include, unsupported legal conclusions serving as the foundation for an enforcement action, including as to “foreign official” and disgorgement issues; the tendency of factually similar cases being resolved materially different ways; and bribery, yet no bribery.
These pillars are present in the IBM enforcement action.
For starters, who were the “government officials in South Korea and China.” Were they traditional bona-fide government officials or employees of alleged state-owned or state-controlled enterprises and thus “foreign officials” under the enforcement agencies’ interpretation – an interpretation currently the subject of judicial challenges?
As to the South Korean officials, the complaint merely alleges that the “foreign government officials involved worked for sixteen South Korean government entities.” These officials included the “Chief of Operations for the Electronic Operations Division” of an entity; an employee of the same entity; a “manager of the government-controlled entity”; the “Director of Planning” of another entity; employees of an entity; an employee of a “state-owned agency of the South Korean government;” a “Director of Information Technology” at another entity; employees of another entity; and “key decision makers at ten other” entities.
As to the Chinese officials, the complaint merely alleges that the individuals were associated with “government-owned or controlled customers in China for hardware, software, and other services.”
Based on the descriptions in the complaint, it seems as if the “foreign officials” were all employees of SOE entities. If so, two out of three corporate FCPA enforcement actions in 2011 (IBM and Maxwell Technologies – see here) involve SOE employees.
Why no FCPA anti-bribery charges against IBM or the relevant subsidiaries (accepting of course the SEC’s “foreign official” interpretation)?
According to the SEC, the conduct at issue took place between 1998 and 2009. Further, according to the SEC, “in connection with the conduct described herein, IBM, directly or indirectly, made use of the mails or the means or instrumentalities of interstate commerce in connection with the acts, transactions, practices and courses of business alleged in this Complaint.”
Why no DOJ involvement?
It is very common for the DOJ and SEC to announce FCPA enforcement actions on the same day. Thus, one can assume (perhaps future events will prove otherwise) that the DOJ elected to sit this one out.
Why?
The SEC’s complaint alleges vivid instances of bribery (not always seen in FCPA enforcement actions) in connection with multi-million dollar contracts.
Yet, no bribery – not even civil FCPA anti-bribery charges.
Is this another instance where the U.S. enforcement agencies look first at the corporate offender, its customers, and its products, and then craft a resolution that will hurt the least?
After all, one of IBM’s largest customer segments is the government (federal, state, etc.) see here.
Did this play any role in how the enforcement action was resolved?
The SEC charged IBM only with FCPA books and records and internal controls violations. Yet, as in several other cases, the SEC pursued a disgorgement remedy. As noted in my Facade article (pages 981-984) non-FCPA disgorgement case law clearly holds that disgorgement may not be used punitively. It is difficult to see how mis-recording of a payment (a payment the SEC does not allege violated the FCPA’s anti-bribery provisions) can properly give rise to a disgorgement remedy. See also here from Philip Urofsky and Danforth Newcomb on this issue.
In a transparent legal system, similar facts are supposed to be resolved with similar charges. However, it is questionable whether this fundamental principle (one that inspires trust and confidence in a legal system) is followed in many FCPA enforcement actions.
The China-related charges against IBM regarding excessive travel and entertainment expenses are nearly identical to two previous FCPA enforcement actions – the December 2007 enforcement action against Lucent Technologies and the December 2009 enforcement action against UTStarcom, Inc.
Lucent was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging only FCPA books and records violations (here).
UTStarcom was resolved via a DOJ non-prosecution agreement (here) and an SEC enforcement action charging FCPA anti-bribery as well as books and records and internal controls violations (here).
IBM, as detailed above, is presumably being resolved without any DOJ involvement and an SEC enforcement action charging only FCPA books and records violations.
Three cases – all involving in whole or in part allegations of providing excessive travel and entertainment expenses to Chinese “foreign officials” – resolved in three different ways.
*****
And now, as one reader put it, the question all FCPA Professor blog readers (at least this particular reader) are dying to know.
Butler or Wisconsin?
I am a born and raised cheesehead and graduate of the University of Wisconsin Law School.
However, my allegiance is to my employer – Butler University. Let’s face it, Butler is an awesome, feel-good story. Student-athletes in every sense of the word, home games at historic Hinkle Fieldhouse, a coach who, a few years ago, left his job selling pharmaceuticals to become a volunteer coach (since promoted), and a small, cozy campus to top it off.
BU-TLE- R U a Bulldog – hell ya!
Significant China Law Development
The June 2010 OECD Working Group on Bribery Annual Report (here) notes that China’s “Ministry of Supervision informed the [OECD] Secretariat that China had begun considering how it would establish an offence of bribing a foreign public official, but was not yet at the stage of drafting legislation.”
As this recent Covington & Burling alert highlights: “on February 25, 2011, the legislature of the People’s Republic of China (“PRC”), the National People’s Congress, passed a slate of 49 amendments to the Criminal Law, one of which is a provision that criminalizes paying bribes to non-PRC government officials and to officials of international public organizations (“the Amendment”).” The alert explain that “this Amendment represents the first instance in which PRC law has prohibited PRC nationals and PRC companies from paying bribes to non-PRC government officials.”
Eric Carlson (here), an attorney based in Covington’s Beijing office who specializes in anti-corruption compliance with a particular focus on China and other regions of Asia and one of the authors of the alert, answered the following questions.
Is this China’s version of the FCPA?
At one level, the Amendment’s aim appears to be similar to the FCPA’s — prevent citizens and companies based in the country from bribing government officials outside the country. This is China’s first foray into this area, however, and the provisions are not as detailed or developed as in certain other countries’ anti-bribery laws. The PRC Amendment is a rather high-level law, whereas the text of the FCPA includes considerably more detail, even if the interpretation of those details is being actively debated and litigated. The absence of clear definitions, exceptions, and affirmative defenses also would appear to require PRC prosecutors to exercise somewhat more discretion in interpreting and enforcing the law.
Is China really going to enforce this law against its own companies operating outside of China?
Unclear. China’s enforcement of its domestic bribery laws historically has been somewhat uneven and focused mainly on the demand side (i.e., prosecuting officials who take bribes). Recently, however, the government has shown an increasing willingness to target bribe-payers as well, as corruption remains a primary concern of the general population and thus a concern for the government and ruling Communist Party, which is at its core focused on social stability. It remains to be seen whether the Amendment will actually be enforced in a way that deters bribe-paying by PRC companies and citizens. (To be fair, a goodly number of countries have strict laws criminalizing bribery of foreign officials outside their countries but have done little to enforce these laws.)
How will this new law affect multinationals operating in China?
The impact will obviously depend on how a multinational structures its operations in China. The Amendment (like the underlying Criminal Law) applies to all PRC citizens, wherever located, all natural persons of any nationality within China, and all companies, enterprises, and institutions organized under PRC law, which generally includes, in addition to PRC domestic companies, Sino-foreign joint ventures, wholly foreign-owned enterprises (WFOEs), and representative offices. Under the Amendment, a joint venture between a PRC company and a non-PRC company organized under PRC law, or a WFOE, could be prosecuted for paying bribes to non-PRC government officials. (Paying bribes to Chinese government officials is of course already illegal under pre-existing law.)
For most multinationals whose China operations don’t do any business outside of China, the larger risk may be China’s existing criminal and commercial bribery laws. (Many multinationals operating in China are not aware of local commercial bribery laws, which prohibit both public- and private-sector bribery.)
*****
As suggested above, having a law on the books and enforcing a law can sometimes be two different things. However, based on numerous media reports (see here for instance) there would seem to be plenty of enforcement opportunities when China’s law comes into force.
Maxwell Technologies is the First Corporate Enforcement Action of 2011
In early January, Maxwell Technologies Inc. (“Maxwell”), announced that the U.S. Department of Defense awarded the company a $1.7 million contract (here), “for the initial phase of a multi-phase program to develop a lighter, longer-lasting, energy source for field radios and other portable electronic equipment carried by military personnel.”
On January 31st, Maxwell became the first company in 2011 to settle an FCPA enforcement action.
The Maxwell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $14.4 million ($8 million criminal fine via a DOJ deferred prosecution agreement; $6.4 million in disgorgement and prejudgment interest via a SEC settled complaint).
Maxwell previously disclosed (see here) that “discussions with the SEC and DOJ have resulted in an estimate of potential settlement of up to $20.0 million – representing the combined first offer of settlement put forth by the SEC and DOJ.” Presumably, the company’s disclosure of the government’s settlement offer did not sit well with the DOJ and on July 30, 2009, Maxwell issued this strange press release.
As set forth more fully below, the alleged recipients of the bribe payments at issue were all employees of alleged Chinese state-owned or state-controlled enterprises. Also of note, the SEC’s charges include disclosure violations not often seen in FCPA enforcement actions, based on allegation that Maxwell’s bribe payments allowed the company to offset losses and fund product expansions that are now a source of revenue for the company.
DOJ
The DOJ enforcement action involved a criminal information (here) against Maxwell resolved through a deferred prosecution agreement (here).
Criminal Information
The criminal information, a short eight pages, alleges that “from at least July 2002 through in or about May 2009, Maxwell and its subsidiaries paid approximately $2,789,131 to Agent 1 [a Chinese national, third-party agent responsible for Maxwell S.A.’s (a wholly-owned subsidiary of Maxwell) high voltage capacitor sales to Chinese customers] to be distributed to Chinese foreign officials, in return for securing contracts that profited Maxwell.”
The Chinese foreign officials?
You guessed it, employees of alleged state-owned entities such as:
“Pinggao Group Co. Ltd. [formerly Pingdingshan High Voltage Switchgear Works) … a state owned manufacturer of electric-utility infrastructure in Henan Province, China” (see here for the company’s website)
“New Northeast Electric Shenyang HV Switchgear Co., Ltd. … a state-owned manufacturer of electric-utility infrastructure in Liaoning Province, China” (see here for company information) and
“Xi-an XD High Voltage Apparatus Co., Ltd., … a state-owned manufacturer of electric-utility infrastructure in Shaanxi Province, China” (see here for the company’s website).
According to the information, “Maxwell and its subsidiaries accomplished [the bribe] payments by using Agent 1 to market and sell Maxwell’s high voltage capacitors to Chinese consumers … substantially all of which were Chinese state-owned entities.” The information alleges that Agent 1 “requested quotes from Maxwell S.A. on behalf of prospective Chinese state-owned entities” and that “upon Agent 1’s instruction, Maxwell S.A. added an extra 20 percent to the quoted amounts to arrive at a higher price for Maxwell S.A.’s high-voltage equipment.” The information alleges that Agent 1 then distributed the extra amount “to officials at the Chinese state-owned entities” including employees of the above referenced companies.
Under the heading, “Knowledge Within Maxwell’s U.S. Management,” the information alleges that “Maxwell’s management within the United States discovered, tactitly approved, concealed and caused to be concealed the bribery scheme.” According to the information, following discovery of the payments by Maxwell senior management in the U.S. including by Executive A, Executive B, and Executive C (all U.S. citizens), under Executive E’s (a Swiss citizen and Maxwell S.A’s Vice President and General Manager) oversight and supervision, the payments at issue to Agent 1 actually increased from approximately $165,000 in 2002 to nearly $1.1 million in 2008.
According to the information, Maxwell’s financial statements and reports described the bribe payments as “sales-commission expenses.”
Based on the above allegations, the information charges Maxwell with FCPA anti-bribery violations and knowingly violating the FCPA’s books and records provisions.
DPA
The DOJ’s charges against Maxwell were resolved via a deferred prosecution agreement.
Pursuant to the DPA, Maxwell admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.
The term of the DPA is three years and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Maxwell.
Among the factors stated are the following.
(a) Maxwell voluntarily disclosed its FCPA violations to both the DOJ and the SEC;
(b) Maxwell cooperated with the Department’s investigation of Maxwell and others;
(c) Maxwell undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …;
(d) Maxwell agreed to cooperate with the Department in any ongoing investigation of the conduct of Maxwell and its employees, agents, consultants, contractors, subcontractors, subsidiaries, and others relating to violations of the FCPA; and
(e) the impact on Maxwell, including collateral consequences, of a guilty plea or criminal conviction.
As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $10.5 million to $21 million. Pursuant to the DPA, Maxwell agreed to pay a monetary penalty of $8 million (25% below the minimum amount suggested by the guidelines).
Pursuant to the DPA, Maxwell agreed to self-report to the DOJ “periodically, at no less than 12-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in the DPA.
As is standard in FCPA DPAs, Maxwell agreed not to make any public statement “contradicting the acceptance of responsibility” by Maxwell as set forth in the DPA and Maxwell further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
As to debarment issues, paragraph 22 of the DPA states as follows:
“The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Maxwell’s cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on Maxwell’s behalf, but rather is providing facts to be evaluated independently by the debarment authorities.”
See here for the DOJ release.
SEC
The SEC’s civil complaint (here) alleges, in summary, as follows.
“From 2002 through May 2009, Maxwell violated the anti-bribery, books and records and internal control provisions of the Foreign Corrupt Practices Act (“FCPA”) when it repeatedly paid bribes to Chinese officials in order to obtain and retain sales contracts for high voltage capacitors from several Chinese state-owned entities. Maxwell engaged in bribery to maintain its high-voltage capacitor business in China, which accounted for material revenue and profits during the relevant time period.”
According to the complaint, “the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officers and Maxwell failed to accurately record these payments on its books and records, and failed to implement or maintain a system of effective internal accounting controls to detect or prevent the payments.”
The complaint alleges that “the improper payments generated nearly $15.4 million in sales contracts, from which Maxwell realized profits ofover $5.6 million.”
According to the SEC:
“Maxwell violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in China in order to sell its high-voltage capacitors to several Chinese state-owned enterprises. Maxwell violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-l, and 13a13 thereunder by failing to disclose in its annual and periodic filings that the material revenues and profits associated with its long-standing bribery scheme enabled Maxwell to better financially position itself until new products could be commercially developed and sold. Maxwell violated [the FCPA’s internal control provisions] by failing to maintain internal controls to prevent or detect the bribes paid to officials at Chinese state owned-entities. Finally, Maxwell violated [the FCPA’s books and records provisions] by failing to accurately reflect the nature of the improper payments in Maxwell’s books, records, and accounts.”
The SEC’s complaint contains an allegation not often seen in FCPA enforcement actions about how the company’s alleged bribery scheme helped offset losses in other areas and helped fund future product development.
According to the SEC:
“Maxwell greatly depended on the revenue from Maxwell SA’s high-voltage capacitor sales to China in order to help fund Maxwell’s expansion into new product lines that are now expected to become Maxwell’s future source of revenue. Maxwell engaged in the bribery scheme because it enabled the company to obtain material revenue needed to financially position itself to help fund the very products that today are sustaining Maxwell’s future growth.”
As to “Discovery of the Illicit Payments” the complaint states as follows.
“Potential FCPA and accounting concerns came to the attention of Maxwell’s finance department in September 2008, during an internal review of Maxwell SA’s commission expenses involving the Chinese Agent. Maxwell’s management team asked about these commission payments after learning of the unusually high Chinese Agent commissions, which included the Extra Amounts. During this review, Executive A informed Maxwell’s finance department that the payments made to the Chinese Agent were recorded as sales commissions. Maxwell’s finance department then sought and obtained a signed FCPA certificate from the Chinese Agent in which he represented that he was familiar with the U.S. FCPA and local laws and regulations regarding corrupt payments” and that he had not in the past and will not in the future make any improper payments.
However, according to the SEC, “after obtaining the representations, Maxwell’s finance department took no further corrective action regarding the commissions and Extra Amounts paid to the Chinese Agent …”.
In February 2009, Maxwell’s new CEO, became aware of the issues with the Chinese Agent and he “immediately notified Maxwell’s audit committee and outside counsel.”
According to the SEC:
“During the relevant period, Maxwell’s controls designed to prevent illicit payments to foreign officials were wholly inadequate. At the time, Maxwell’s Code of Conduct contained a brief section on FCPA issues, but there is no evidence that employees received any FCPA training prior to the company’s remedial steps.”
As to Maxwell’s internal controls failures, the complaint states as follows:
“Maxwell (1) failed to question why the contract prices were artificially inflated by 20% above the bid prices; (2) did not request supporting documentation for the invoices or track where the commission payments ultimately were distributed; (3) performed no due diligence on the agent; (4) did not require FCPA training for all relevant employees; and (5) failed to take any action even though it appears that certain former officers and senior managers of Maxwell had knowledge of the bribes paid by Maxwell SA and its agent since at least November 2002.”
Without admitting or denying the SEC’s allegations, Maxwell agreed to an injunction prohibiting future FCPA violations and agreed to $5,654,576 in disgorgement and $696,314 in prejudgment interest.
In the SEC release (here) Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows: “Maxwell’s bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold. This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws.”
Jeffrey Higgins (here) of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP and Jerome Roth (here) of Munger Tolles & Olson LLP represented Maxwell.
Since announcement of the January 31st enforcement action, Maxwell’s shares are up approximately 6%.
As I explored in this recent post, 60% of 2010 corporate FCPA enforcement actions involved (in whole or in part) employees of alleged state-owned or state-controlled enterprises (“SOE”). In these cases, the enforcement agencies generally allege that such enterprises are “instrumentalities” of a foreign government and that such employees are therefore “foreign officials” under the FCPA.
So far in 2011, it’s 100%.
Faro’s Monitor – Late and Expensive
In June 2008, Faro Technologies, Inc. (here) agreed to settle an FCPA enforcement action relating to conduct in China. The company paid a $1.1 criminal penalty via a DOJ non-prosecution agreement (see here and here). In a related SEC enforcement action, the company agreed to pay $1.85 million in disgorgement and prejudgment interest via an administrative order (here).
The June 2008 non-prosecution agreement (appendix c) stated that within 60 calendar days of the execution of the agreement, “Faro Technologies, Inc. and its subsidiaries and affiliates agree to engage an independent corporate monitor for a period of two years to monitor the company’s compliance with respect to the Foreign Corrupt Practices Act and other relevant anti-corruption laws.”
It took nearly two years for Faro and the DOJ to agree on a monitor.
Faro’s November 4th 10-Q filing (here), states as follows:
“During the second quarter of 2010, the Company, in conjunction with the SEC and the DOJ, completed the selection of the FCPA monitor. The Company is cooperating with the monitor as the monitor implements a work plan to assess the Company’s compliance with the requirements for the settlement agreements.”
How much has the monitor cost Faro thus far?
Approximately $1 million.
During a November 4th earnings conference call, Faro President and CEO Jay Freeland stated as follows:
“During the third quarter, we had the first review by the monitor that was assigned to us in connection with our settlement with the SEC and DOJ over the FCPA matter from 2006. The cost to FARO in the third quarter was approximately $1 million, which obviously had a substantial impact on the bottom line. The monitor and her team visited several of our remote offices as well as our regional and global headquarters, conducting interviews and reviewing, policies, procedures and adherence to them. Overall, we believe the review went well and look forward to reviewing the monitor’s report. The monitor will return one more time next year, probably in the third quarter again. We don’t expect that review to be as costly as the one we just finished. And, assuming things go well, that will complete the process.”