An Immaterial Disclosure?
The securities laws generally require issuers to disclose material facts and events to investors.
What is material?
Technically, there is SEC guidance on the issue (see here).
The issue basically boils down to whether the information would affect the judgment of a reasonable investor in making an investment decision.
As Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) explained at the recent World Bribery and Corruption Compliance Forum (here) the concept of materiality itself has two “sub-concepts”: (i) quantitative materiality (something that impacts a company’s financial statements) – Desmet conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a “complicated gray area” to use Desmet’s words. He said that all bribes can be considered qualitatively material because they may “automatically trigger a books and records violation.” Because of this, Desmet said that it is “prudent” for any issuer to approach the SEC with any “suspicion” of bribes “as soon as” the company learns of the improper payment.
It is against this backdrop that issuers frequently disclose immaterial payments which may implicate the FCPA.
Case in point, Sensata Technologies Holding N.V. (“Sensata”) (here), a global industrial technology company that began trading on the New York Exchange in March 2010 (see here).
The company had this to say in its October 22nd 10-Q filing (here):
“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether
any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was
immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The
Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review. The FCPA (and related statutes and regulations) provides for potential monetary penalties, criminal and civil sanctions, and other remedies. The Company is unable to estimate the potential penalties, if any, that might be assessed and, accordingly, no provision has been made in the accompanying condensed consolidated financial statements.”
Since the disclosure, Sensata’s shares have climbed approximately 1.5%.
However, this has not stopped the new breed “FCPA” plaintiff lawyers from acting.
Yesterday, the Shareholders Foundation announced (here) an investigation on behalf of investors of Sensata concerning “whether certain officer and directors of Sensata […] breached their fiduciary duties and are liable for possibly violating the U.S. Foreign Corrupt Practices Act (“FCPA”).”
SciClone – An FCPA Feeding Frenzy
On August 9, 2010 SciClone Pharmaceuticals made an FCPA-related disclosure.
This post discusses what has happened since.
August 10th
Shares of SciClone plunged, at one point down 40% from the previous day’s close, closing down 31.9%. (This is clearly in stark contrast to the recent situation involving Schlumberger discussed in yesterday’s post – here).
Levi & Korsinsky LLP announce that it is investigating SciClone on behalf of shareholders for possible violations of state and federal securities laws.
The Law Offices of Howard G. Smith announce that it is investigation SciClone on behalf of shareholders for possible violations of federal securities laws.
The law firm of Kahn Swick & Foti, LLC announces the commencement of an investigation into SciClone to determine whether it has violated federal securities laws.
Roy Jacobs & Associates announce that it is investigating SciClone for potentially violating the federal securities laws.
August 11
Pomerantz Haudek Grossman & Gross LLP announce that it is investigating claims on behalf of investors of SciClone to determine whether it has violated federal securities laws.
The law firm of Statman, Harris & Eyrich, LLC announce that it is investigating SciClone for potential violations of state and federal law.
Goldfarb Branham, LLP announce that it is investigating SciClone for shareholders who purchased stock of the company and preparing a possible derivative lawsuit against company executives.
Finkelstein Thompson LLP announce that it is investigating potential shareholder claims concerning SciClone.
August 12
Robbins Umeda LLP announce that it commenced an investigation into possible breaches of fiduciary duty and other violations of the law by certain officers and directors at SciClone.
August 13
The law firm of Kahn Swick & Foti announce that the firm has filed the first securities fraud class action lawsuit against SciClone in the United States District Court for the Northern District of California, on behalf of purchasers of the common stock of the Company between May 11, 2009 and August 10, 2010.
August 19
Barroway Topaz Kessler Meltzer & Check, LLP announce that a class action lawsuit was filed in the United States District Court for the Northern District of California on behalf of purchasers of the securities of SciClone.
Brower Piven, A Professional Corporation, announce that a class action lawsuit has been commenced in the United States District Court for the Northern District of California on behalf of purchasers of the common stock of SciClone.
August 20
Kendall Law Group announce an investigating of SciClone for shareholders.
Ryan & Maniskas, LLP announce that a class action lawsuit has been filed in the United States District Court for the Northern District of California on behalf of purchasers of SciClone.
August 28
Roy Jacobs & Associates (again) announce that it is investigating SciClone for potentially violating the federal securities laws.
September 7
The Shuman Law Firm announces that a class action lawsuit has been filed in the United States District Court for the Northern District of California on behalf of anyone who purchased or otherwise acquired SciClone common stock between May 11, 2009and August 10, 2010.
September 8
Kaplan Fox & Kilsheimer LLP announce that it has filed a class action suit against SciClone alleging violations of the Securities Exchange Act of 1934 on behalf of purchasers of SciClone’s common stock during the period May 11, 2009 and August 9, 2010.
September 16
The law firm of Strauss & Troy announce that a class action lawsuit has been filed in the U.S. District Court for the Northern District of California against SciClone for potential violations of state and federal law.
September 23
The law firm of Lieff Cabraser Heimann & Bernstein, LLP announce that class action lawsuits have been brought on behalf of purchasers of the common stock of SciClone.
Given the above, you are probably wondering, geez, what did SciClone disclose – how extensive were the disclosed FCPA violations? Did the company’s CEO or CFO resign? Is the company still in business?
Well, not exactly.
On August 9th, SciClone disclosed (see here) as follows:
“On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.”
During SciClone’s August 9th earnings conference call Friedhelm Blobel (President and CEO) stated that SciClone “intends to cooperate fully with the SEC and DOJ in the conduct of their investigations, and has appointed a special committee of independent directors to oversee the Company’s efforts.” Blobel noted that “as far as timing is concerned, the lawyers tell us that these investigations typically are long lasting.” In response to the question – is the investigation disrupting day-to-day operations or ongoing sales, Gary Titus (CFO) said that “it is business as usual for SciClone, and we continue to focus on all of the priorities that we have set for the Company …”
That’s right.
All of the above occured because the SEC initiated a formal investigation of SciClone and issued a subpoena to the company and because SciClone received a letter from the DOJ as to an industry-wide investigation suggesting possible improper conduct by the company.
You be the judge.
Are the above referenced investigations and lawsuits a rational and value added exercise for shareholders of SciClone or rather indicative of an FCPA feeding frenzy where everyone, it seems, is trying to get a slice of the pie?
Has this all gotten a bit out-of-hand?
*****
Yesterday, SciClone (see here) announced “continued topline growth and strong cash position in the Third Quarter of 2010.”
Save The Date …. and … The Friday Roundup
Save The Date
Deferred prosecution agreements, affirmative defenses, companies x, y, and z.
On a daily basis this site and – those who follow it – are, to use the analogy, generally focused on the trees. However, the trees are part of a vast forest.
Against the backdrop of aggressive enforcement of bribery and corruption laws worldwide, several basic questions remain unanswered, or at least subject to dispute.
It is these big-picture questions that will be the focus of an upcoming roundtable discussion (“Bribery – What is It, What Can Be Done, What Should Be Done, and How to Comply?”) at International Law Weekend, an event presented by the American Branch of the International Law Association and the International Law Students Association. The roundtable will take place on Saturday, October 23 at 10:45 at Fordham University School of Law.
I am pleased to co-chair the panel along with Corinne Lammers (Paul, Hastings – see here). Other participants include: Bruce Bean (Michigan State College of Law – here), Daniel Chow (The Ohio State University College of Law – here), Elizabeth Spahn (New England College of Law – Boston – here), and Andy Spalding (Chicago-Kent College of Law – here).
See here for the full event schedule.
Friday Roundup
An FCPA investigation in the midst of a merger, a voluntary disclosure involving “minor” entertainment and gifts relating to a few “discrete transactions involving immaterial revenue,” World Bank debarment, and the blogging life … it’s all here in the Friday roundup.
FCPA Investigation in the Midst of a Merger
In June, Spain-based Grifols, S.A. (a global healthcare company and leading producer of plasma protein therapies) and Talecris (a U.S.-based biotherapeutics products company) announced that they signed a definitive agreement by which Grifols will acquire Talecris. See here and here.
In the meantime, Talecris is conducting a mammoth FCPA internal investigation. Here is the lastest from the recent Form F-4 Registration Statement of Grifols.
“Talecris is conducting an internal investigation into potential violations of the FCPA that it became aware of during the conduct of an unrelated review. The FCPA investigation is being conducted by outside counsel under the direction of a special committee of the Talecris Board of Directors. The investigation into certain possibly improper payments to individuals and entities made after Talecris’ formation initially focused on payments made in connection with sales in certain Eastern European and Middle Eastern countries, primarily Belarus, Russia and Iran, but Talecris is also reviewing sales practices in Brazil, China, Georgia, Turkey and other countries as deemed appropriate.”
“In July 2009, Talecris voluntarily contacted the U.S. Department of Justice, which is referred to as the DOJ, to advise them of the investigation and to offer its cooperation in any investigation that they want to conduct or they want Talecris to conduct. The DOJ has not indicated what action it may take, if any, against Talecris or any individual, or the extent to which it may conduct its own investigation. The DOJ or other federal agencies may seek to impose sanctions on Talecris that may include, among other things, injunctive relief, disgorgement, fines, penalties, appointment of a monitor, appointment of new control staff, or enhancement of existing compliance and training programs. Other countries in which Talecris does business may initiate their own investigations and impose similar penalties. As a result of this investigation, Talecris suspended shipments to some countries while it put additional safeguards in place. In some cases, safeguards involved terminating consultants and suspending relations with or terminating distributors in countries under investigation as circumstances warranted. These actions unfavorably affected revenue from these countries in 2009 and have an ongoing unfavorable impact on revenue in 2010. Talecris has resumed sales in countries where it has appropriate safeguards in place and is reallocating product to other countries as necessary. To the extent that Talecris concludes, or the DOJ concludes, that Talecris cannot implement adequate safeguards or otherwise need to change its business practices, distributors, or consultants in affected countries or other countries, this may result in a permanent loss of business from those countries. These sanctions or the loss of business, if any, could have a material adverse effect on Talecris or its results of operations.”
What has the internal investigation cost thus far?
According to the same filing, approximately $12.9 million (see pg. 303).
The above was not the only FCPA disclosure news this week.
The Voluntary Disclosure Involving “Minor” Entertainment and Gifts Relating to a Few “Discrete Transactions Involving Immaterial Revenues”
Real estate is not generally thought of as an FCPA high-risk industry.
Yet, earlier this week CB Richard Ellis, a “global leader in real estate services” (see here), disclosed as follows in its 8-K:
“As a result of an internal investigation that began in the first quarter of 2010, the Company determined that some of its employees in certain of its offices in China made payments in violation of Company policy to local governmental officials, including payments for non−business entertainment and in the form of gifts. The payments the Company discovered are minor in amount and the Company believes relate to only a few discrete transactions involving immaterial revenues. Nonetheless, the Company believes that the payments may have been in violation of the U.S. Foreign Corrupt Practices Act or other applicable laws. Consequently, the Company voluntarily disclosed these events to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”) on February 27, 2010 and has continued to cooperate with both the DOJ and the SEC in connection with this
investigation. The Company engaged outside counsel to investigate these events and has implemented thorough remedial measures.
In addition, in the third quarter of 2010, the Company began another internal investigation, with the assistance of outside counsel, involving the use of a third party agent in connection with a purchase in 2008 of an investment property in China for one of the funds the Company manages through its Global Investment Management business. This investigation is ongoing and at this point the Company is unable to predict the duration, scope or results thereof. In light of the Company’s cooperation with the DOJ and the SEC as described above, the Company voluntarily notified both agencies of this separate internal investigation and will report back to them when the Company has more information.”
One can perhaps understand a voluntary disclosure when the payments at issue involve suitcases full of cash to government officials to obtain or retain government contracts.
But a voluntary disclosure based on “minor” entertainment and gifts involving a “few discrete transactions involving immaterial revenues?”
Has it truly come to this rather than the company internally handling such “minor” “discrete transactions involving immaterial revenue” in an effective manner?
Did FCPA counsel advise the company that voluntary disclosure was necessary in this instance? Perhaps not necessary, but preferable? How would you handle this issue if you were the company’s in-house counsel or on the company’s board?
Interesting questions indeed.
For more on voluntary disclosure and the role of FCPA counsel see this prior post.
World Bank Debarment
The EU and US debarment directives and regulations may be “toothless,” but the World Bank is in charge of its own debarment decisions when it comes to World Bank financed or executed projects.
A prior post (here) discussed the World Bank’s debarment of Macmillan Limited and recently the World Bank announced (see here) that its Sanctions Board debarred “four companies and two individuals for fraudulent practices in projects in India and Afghanistan” following “inquiries by the World Bank’s Integrity Vice Presidency (INT), which is responsible for investigating fraud and corruption in World Bank-financed projects.”
According to the release:
“In India, the World Bank Group debarred Ambalal Sarabhai Enterprises Limited (ASE) and Chemito Technologies Pvt. Ltd. (Chemito) for having engaged in fraudulent practices relating to the Food and Drugs Capacity Building project. Both ASE and Chemito are ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for three years. The debarment may be reduced to two years if the companies put in place and implement effective corporate compliance programs.”
“The third decision relates to fraudulent practices by Global Spin Weave Limited (GSW) and its Director Sudhir Agrawal. The company’s misconduct was substantiated in relation to three Bank-financed projects in India; namely: First Reproductive and Child Health Project, Second National HIV/AIDS Control Project and the Malaria Control Project. According to the Sanctions Board decision, GSW is ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for five years. The debarment may be reduced to four years if GSW puts in place and implements an effective corporate compliance program. Mr. Agrawal’s period of ineligibility is three years.”
“In relation to the Urban Water Supply and Sanitation Project in Afghanistan, the Sanctions Board debarred Ronberg Gruppe LLC, AG (Ronberg) and its Director Nikolay V. Vakorin for having engaged in fraudulent practices. Ronberg and Mr. Vakorin are ineligible to be awarded contracts under any Bank Group-financed or Bank Group-executed project or otherwise participate in the preparation or implementation of such projects for three years.”
The World Bank release notes that the above “cases are eligible for cross debarment under the April 2010 Agreement for Mutual Enforcement of Debarment Decisions entered into by the African Development Bank Group, Asian Development Bank, the European Bank for Reconstruction and Development, the World Bank Group and the Inter-American Development Bank Group.” For more on that Agreement see here.
The Blogging Life
Interested in blogging?
See here for my recent interview with Jerod Morris of Corporate Compliance Insights. We also talk a bit about the FCPA!
A good weekend to all.
Friday Roundup
In one way, shape or form, whistleblowing is the theme of this week’s Friday Roundup.
SEC Timeline on Various Dodd-Frank Provisions
The SEC has a lot on its plate in implementing various rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).
Included on that list is the new whistleblower provisions established by Dodd-Frank (see here for a prior post).
Interested in following the SEC’s progress?
If so, here are the important dates (or months as the case may be) to keep in mind.
October – December 2010
SEC plans to “propose rules to implement a Whistleblower Incentives & Protection Program,” “report to Congress on Whistleblower Program,” and “Establish Whistleblower Office.”
January – March 2011
SEC plans to “adopt rules to implement a Whistleblower Incentives & Protection Program.”
Another Dodd-Frank provision many in the FCPA universe are following is Section 1504 – “Disclosure of Payments by Resource Extraction Issuers” (see here for a prior post).
Here is the planned timeline for that provision.
October – December 2010
SEC to “propose rules regarding disclosure by resource extraction issuers”
January – March 2011
SEC to “adopt rules regarding disclosure by resource extraction issuers”
Khuzami on the SEC’s Whistleblower Program
Earlier this week Robert Khuzami (Director, Division of Enforcement – SEC) had this to say about the SEC’s whistleblower program in testimony before the Senate:
“The Division currently is in the process of drafting the proposed rules applicable to the Whistleblower Program, including rules setting forth the procedures for whistleblowers to submit original information to the Commission and for the Commission to make awards to whistleblowers. We also have begun the process of staffing the Commission’s Whistleblower Office. As we create the Program and the Office, we will be mindful of competing interests, including: (i) a desire to encourage whistleblowers to provide the Commission with high-quality tips regarding potential violations of the federal securities laws, and (ii) a need to avoid creating undue burdens on the Commission and the constituencies that we protect and regulate that could result from groundless whistleblower submissions.”
Furmanite Corporation
Kendall Law Group is one of the new breed of FCPA “plaintiff” firms that have sprung up in recent months. The sequence is usually predictable. A company discloses an FCPA issue or inquiry. Within days the firm, or one of the other firms that is also seeking to capitalize on what, at times, seems like an FCPA feeding frenzy, issues a press release such as this one. These releases have become so common, that it is easy to gloss over them.
However, Kendall Law Group’s September 16th release (here) regarding Furmanite Corporation was a bit different. Here is what it said, in relevant part:
“The Kendall Law Group was recently notified by a confidential source of potential violations of the Foreign Corrupt Practices Act (FCPA) by Furmanite. The company was allegedly made aware of potential violations of the FCPA as early as 2008. The firm’s source indicates that cash gifts were given to representatives of state-owned enterprises to maintain and develop customer relations. Furmanite has two subsidiaries in China, Furmanite Mechanical Technology Services Co. Ltd. which operates out of Shanghai and Furmanite East Asia Ltd. which is based in Hong Kong. Furmanite has entered into business relationships with state-owned enterprises in China, such as the recently announced delivery of equipment to China HuanQiu Contracting and Engineering Company, a branch of the China National Petroleum Corporation, China’s largest integrated oil and gas company.”
Is Kendall Law Group representing a whistleblower in connection with Dodd-Frank’s new whistleblower provisions? Pursuant to the new whistleblower provisions, a whistleblower may be represented by counsel.
Furmanite, “the worldwide innovator and leader in comprehensive on-site and on-line plant and pipeline maintenance” according to its website (here), is an issuer on the New York Stock Exchange.
To my knowledge Furmanite has not issued a release / disclosure about this issue.
*****
A good weekend to all.
A Noisy Exit
Robert Bruce, a former Director and Chair of the Audit Committee of China North East Petroleum, is not the only individual to have recently made a noisy exit (see here for the prior post at the FCPA Blog).
Peter Barker-Homek was the Chief Executive Officer of Abu Dhabi National Energy Company PJSC – also known as TAQA (see here) and TAQA New World Inc. (see here).
In an explosive complaint (see here) recently filed in U.S. District Court for the Eastern District of Michigan (Southern Division), Barker (a former pilot in the U.S. Marine Corps and Gulf War veteran as well as State Department official) alleges as follows:
“When Barker tried to put a stop to the kickbacks, bribery, accounting fraud and corruption at TAQA, the Defendants [TAQA, TAQA New World, […] (a NY licensed attorney and chief attorney for and General Counsel of TAQA] fired him. Instead of abiding by the terms of Barker’s employment contract, they summoned him to a meeting and presented him with a so-called ‘severance agreement,’ a one-sided agreement in which Barker purportedly agreed to step down as CEO and forfeit millions of dollars owed to him. Defendant […], a New York-licensed attorney, chief attorney for and General Counsel of TAQA, demanded that he sign the ‘severance agreement’ on the spot, comply with its provisions, or be arrested and sent to prison. Worried for his life and the well-being of his family, Barker signed the ‘severance agreement.’ Thereafter, he was harassed and lived in fear of a ‘knock’ on the door by police, received mysterious phone calls and was followed, until finally he and his family escaped to the safety of the United States.”
According to the complaint, 75% of TAQA’s stock is owned by the Abu Dhabi Ruling Family and 25% is owned by investors and is publicly-traded on the Abu Dhabi Stock Exchange. The complaint asserts that TAQA has offices in North America, including in Ann Arbor, Michigan, and that TAQA does business by and through various subsidiaries including TAQA New World Inc., a Delaware corporation based in Ann Arbor.
In terms of the Foreign Corrupt Practices Act, TAQA New World is a “domestic concern.” The complaint also asserts that TAQA “conducts several of its global business functions out of its Ann Arbor office including: human resources; accounting; tax management; and regulatory affairs.”
While Barker’s complaint does not appear to directly implicate the FCPA, given his general allegations, this case may draw DOJ interest.