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The “Control Person” Theory Of Liability “Trend” That Never Occurred


This recent law review article titled “Laxity at the Gates: The SEC’s Neglect to Enforce Control Person Liability” does not mention the Foreign Corrupt Practices Act, but it did get me thinking about control person liability in connection with SEC FCPA enforcement actions.

As highlighted in this post, in the aftermath of a 2009 SEC individual FCPA enforcement action based on “control person” liability some predicted the start of a new trend. However, this “trend” never occurred.

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Will The SEC Be Put To Its Burden Of Proof In The Jackson And Ruehlen Enforcement Action?

As discussed in this previous post, in November 2010, Noble Corporation was one of several companies to resolve FCPA enforcement actions in what I called CustomsGate – enforcement actions largely focused on alleged payments to Nigerian customs officials to receive various permits.  The Noble enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $8.2 million ($2.6 million criminal fine via a non-prosecution agreement; $5.6 million in disgorgement and interest via a SEC complaint).

As noted in the previous post, in the Noble Corporation enforcement action it was stated, not once but twice, that the payments at issue “would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.”  I noted then that one can reasonably conclude that if the DOJ felt the need to express such a statement twice, that the FCPA’s facilitating payment exception should probably be on the minds of many in connection with the CustomsGate enforcement  actions.

Against the backdrop of recent and well-deserved scrutiny of the DOJ’s FCPA enforcement program, the SEC reminds us all that it too can enforce the FCPA.  [As an aside, Professor Barbara Black (University of Cincinnati College of Law) recently released her forthcoming scholarship – see here – “The SEC and the Foreign Corrupt Practices Act:  Fighting Global Corruption is Not Part of the SEC’s Mission].

Last Friday, the SEC announced here charges against “three oil services executives with violating the FCPA by participating in a bribery scheme to obtain illicit permits for oil rigs in Nigeria in order to retain business under lucrative drilling contracts.”

In this complaint filed in the S.D. of Texas, the SEC charged Mark Jackson (former Noble Corporation CEO) and James Ruehlen (current Director and Division Manager of Noble’s subsidiary in Nigeria) based on the same core set of facts relevant to the prior corporate enforcement action – namely that Noble and its wholly-owned subsidiary (Noble-Nigeria) “authorized its customs agent to pay bribes” on the companies behalf “to Nigerian government officials to influence or induce them to (1) favorably process false paperwork, (2) grant temporary import permits (TIPs) based on the false paperwork, and (3) favorably exercise or abuse their discretion in granting extensions to these illicit TIPs.”

The complaint (a meaty 46 pages) next states, in summary fashion, as follows.

“Defendants approved payment of the bribes.  Defendant Ruehlen also assisted the customs agent in preparing false documents, processed the customs agent’s invoices for the bribes, and signed the checks reimbursing the customs agent for the bribes he paid to Nigerian government officials.  Defendants acted in this way to obtain TIPs and TIP extensions and retain business under drilling contracts in Nigeria.  As a consequence, Defendants violated the anti-bribery provisions [of the FCPA.]  Defendants also took steps to circumvent Noble’s internal controls and to falsely record these bribes as legitimate operating expenses on Noble’s books.  Defendant Jackson failed to implement internal accounting controls to prevent the bribery and false recording of the bribes.  As a consequence, Defendants violated the records falsification and internal control provisions of the Exchange Act and aided and abetted Noble’s violations of the books and records and internal control provisions [of the FCPA].  Defendant Jackson misled Noble’s auditors about the bribes and signed certifications required by the Sarbanes-Oxley Act of 2002 falsely stating that he had created and maintained effective internal controls, and that there were no internal control weaknesses, fraud or FCPA violations.  As a consequence, Jackson violated Rules 13b2-2 and 13a-14 of the Exchange Act.  During the violations, Jackson was Noble’s Chief Financial Officer, Chief Operating Officer, and ultimately President and Chief Executive Officer, and Chairman of the Board of Directors.  Jackson directly or indirectly controlled Noble, Defendant Ruehlen, and others, and therefore is liable as a control person under Section 20(a) of the Exchange Act for all of their violations.”

[For previous Section 20(a) control person (or similar) FCPA enforcement actions – see here and here.]

Unlike the vast majority of FCPA defendants (corporate and individual) charged in an SEC enforcement action, Jackson and Ruehlen appear poised to launch a defense.

Jackson’s lawyer, David Krakoff (here – BuckleySandler) stated as follows.  “We unequivocally deny the SEC’s baseless allegations. Mr. Jackson will vigorously defend himself in court where the evidence will show what the SEC already knows, that at all times Mr. Jackson acted in good faith at Noble. He looks forward to clearing his good name in this proceeding.”

Ruehlen’s lawyer F. Joseph Warin (here – Gibson Dunn & Crutcher) told the Wall Street Journal  that his client was the one who initially raised concerns about the payments and that Ruehlen “fully cooperated throughout the investigation and always acted in an ethical and transparent manner.”  Warin stated that “the claims against Mr. Ruehlen are wrong and they will be proven so at trial.”

This will be most interesting to follow as the SEC is rarely put to its burden of proof in FCPA enforcement actions (or any of its actions for that matter).  This is due to the SEC’s long-standing policy of allowing defendants to settle SEC complaints without admitting or denying the SEC’s allegations.  For recent judicial scrutiny of this settlement device, see this prior post.

The last time the SEC is believed to have been put to its burden of proof in an FCPA enforcement action was in the Eric Mattson and James Harris enforcement action also filed in the S.D. of Texas.  Like the Jackson and Ruehlen enforcement action, the Mattson and Harris enforcement action involved conduct outside the context of foreign government procurement.  As detailed in this Memorandum and Order, the SEC had its FCPA anti-bribery charges dismissed in that case.  The case involved alleged goodwill payments to an Indonesian tax official for a reduction in a tax assessment.  The SEC claimed that the FCPA’s unambiguous language plainly encompassed the goodwill payment and the issue before the Court was whether the plain language of the FCPA prohibited goodwill payments for the purpose of reducing a tax assessment.  When Mattson and Harris was decided, the S.D. of Texas in U.S. v. Kay case had already dismissed that case finding that the plain language of the FCPA does not prohibit goodwill payments to foreign government officials to reduce a tax obligation.  The SEC attempted to distinguish the trial court’s Kay ruling by arguing that in the civil enforcement context, the Court should interpret the FCPA’s language more liberally than in criminal cases.  The Court rejected the SEC’s arguments and followed the trial court’s analysis in Kay that the payments at issue to the Indonesian tax official did not violate the FCPA because it did not help Mattson’s and Harris’s employer (Baker Hughes) “obtain or retain business.”

Of course, the 5th Circuit overturned the Kay trial court ruling and held that making payments to a “foreign official” to lower
taxes and custom duties in a foreign country can provide an unfair advantage to the payer over competitors and thereby assist the payer in obtaining and retaining business.  However, the Kay court emphatically stated that not all such payments to a “foreign official” outside the context of directly securing a foreign government contract violate the FCPA; it merely held that such payments “could” violate the FCPA. The 5th Circuit then listed several hypothetical examples of how a reduction in custom and tax liabilities could assist a company in obtaining or retaining business in a foreign country. On the other hand, the court also recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.  The court specifically stated:  “[i]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

The point of this extended discussion in the context of Jackson and Ruehlen is two-fold:  (1) that the SEC has already lost a non-government procurement FCPA case in the S.D. of Texas; and (2) even with the 5th Circuit precedent in Kay, and even taking the SEC’s allegations as true, payments in connection with TIPs would seem to be only to increase the profitability of an existing profitable company and thus – following the logic of the Fifth Circuit – fall outside of the FCPA’s anti-bribery provisions.

It will be interesting to see how this plays out should the SEC’s FCPA anti-bribery charges be fully litigated in the Jackson and Ruehlen enforcement action.

As noted in the SEC’s release last week, the Noble executive enforcement action also involved a separate complaint (here) against Thomas O’Rourke (the former controller and head of internal audit at Noble).  The complaint alleged that O’Rourke: (1) aided and abetted Noble’s violations of the FCPA anti-bribery provisions, books and records and internal controls provisions; and (2) directly violated the FCPA’s internal controls provisions and false records provisions of the Exchange Act.

Under the heading “defendants’ violations” the SEC alleged, among other things, that O’Rourke: (1) “understood that Noble-Nigeria had used false paperwork to obtain TIPs, and that Noble-Nigeria paid its customs agent for ‘special handling charges’ that were passed through to Nigerian officials; (2) “knew that the ‘special handling charges’ were entered into Noble-Nigeria’s books as legitimate operating expenses, and he knew or was reckless in not knowing that those entries were improper”;  (3) “knowingly allowed TIP-related payments to government officials to be improperly accounted for as legitimate operating expenses.

Like the vast majority of FCPA defendants in SEC enforcement actions, O’Rourke chose to settle the SEC’s complaint without admitting or denying the SEC allegations.  According to the SEC release, O’Rourke consented to entry of a court order requiring him to pay a $35,000 civil penalty and permanently enjoining him from future violations.


Last week I participated in a discussion with Howard Sklar regarding a potential FCPA compliance defense (see here for the webcast.)  In the aftermath of the SEC’s charges against the Noble executives, Sklar penned a Forbes blog (here) and stated as follows.  “One example Mike brings to prove his point [that the FCPA should be amended to include a compliance defense] is the Panalpina line of cases, including Noble.  I don’t think he’ll be able to use the Noble case as an example after today.  These complaints are against the CEO (who formerly held the CFO spot) and the country leader for Nigeria.  Plus, there’s Thomas O’Rourke. Thomas O’Rourke was Noble’s Director of Internal Audit, Controller, and VP of Internal Audit.”

Nice try Howard, but you are off-target.

Sklar is correct that I discuss the Noble Corp. enforcement action (and other related CustomsGate enforcement actions) in my “Revisiting a Foreign Corrupt Practices Act Compliance Defense” article (see here at pgs. 9-12 ).  However, that discussion is focused on specific reasons warranting an FCPA compliance defense, including that in many markets, companies subject to the FCPA must navigate challenging environments replete with barriers and other conditions that serve as breeding grounds for payments implicating (at least in the eyes of the enforcement agencies) the FCPA.

In discussing harassment bribes, I then talk about the notoriously corrupt Nigerian Customs Service (“NSC”) and how business interactions with NSC officials have been the basis for several FCPA enforcement actions including the coordinated enforcement actions from November 2010 involving Noble Corp. and others.  Anticipating the counter-argument that the FCPA does not need a compliance defense due to the harassment bribery conditions many companies face in foreign markets because the FCPA already contains a facilitating payments exception, I then stated that so long as the DOJ refuses to recognize a facilitating payments exception to the FCPA, that Congressional intent on the facilitating payments issue is best advanced through an FCPA compliance defense in which a company can assert, as a matter of law, that its pre-existing FCPA policies and procedures sought to prevent such payments in foreign markets.

In short, I was using the Noble Corporation enforcement action in connection with a discussion of facilitating payments, not using that particular enforcement action to support an FCPA compliance defense because it somehow was based on low-level employee conduct.  Indeed, in the DOJ’s non-prosecution agreement (here) which I discussed in this previous post, “Senior Executive,” “Executive A” and “Executive B” are all specifically mentioned as participating in the alleged improper conduct and an FCPA compliance defense would not apply to corporate conduct engaged in by executive officers.

The point of the Noble Corp. reference in my article was that the company should not have been the subject of an FCPA enforcement action based on the alleged conduct because Congress intended to exempt such payments from the FCPA’s anti-bribery provisions (regardless of who made, directed, or authorized the payments).

More On Control Person (And Similar Theories of Liability) / The National Law Journal (see here) recently ran an interesting Q&A with the former Assistant Chief of the DOJ Fraud Section regarding the recent Nature’s Sunshine Products Inc. (“NSP”) enforcement action (see here for my prior post). While the NSP enforcement action may well be the first FCPA enforcement action in which the SEC charged a corporate executive with an FCPA violation under a Section 20(a) “control person” theory of liability, the SEC has previously charged corporate executives under other indirect theories including aiding and abetting a company’s FCPA violations by invoking Section 20(e).

For instance, in 2007, the SEC charged Monty Fu (the founder and, at various times, the Chief Executive Officer and Chairman of the Board of Syncor International Corporation) with aiding and abetting Syncor’s FCPA books and records and internal control violations.

The evidence against Fu?

As alleged in the SEC complaint (see here), “…Fu had the authority to maintain compliance with existing internal controls, and to implement additional internal controls designed to comply with the FCPA’s books and records and internal controls provisions, YET FAILED TO DO SO.” (see para. 2, emphasis added).

In charging Fu both with direct violations of the FCPA’s books and records and internal control provisions (albeit by alleging in the alternative that Fu knew or was reckless in not knowing that the problematic payments were improperly recorded on the company’s books and records) and with aiding and abetting Syncor’s violations, the SEC alleged that Fu “knowingly failed to implement a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded in Syncor’s books and records” in accordance with the FCPA (see para 22). As a result, the SEC charged that Fu “knowingly provided substantial assistance to Syncor” in connection with its violations (see para’s 28 and 33).

Whether the SEC invokes section 20(a) or 20(e), the FCPA enforcement trend is clearly greater scrutiny of corporate executives and a greater SEC expectation that corporate executives play a meaningful role in ensuring enterprise-wide FCPA compliance.

In other words, if you are an executive of an issuer and you don’t know what the acronym FCPA stands for, you better get educated.

Gray Sky Over Nature’s Sunshine As It Settles FCPA Enforcement Action

Companies have varying degrees of FCPA risks. Generally, at the high-end of the spectrum is a resource extraction company operating in a third-world country with an unstable government. At the low-end of the spectrum, it would seem, is a Utah-based company which got its start as a small family business selling encapsulated cayenne and other herbs to health food stores.

Yet, as evidenced by the SEC’s recent FCPA enforcement action against Nature’s Sunshine Products, Inc. (“NSP”), even a company with a relatively low FCPA risk profile can run afoul of the FCPA.

As described in the SEC’s Litigation Release (see here) NSP, without admitting or denying the allegations in an SEC civil complaint, agreed to pay a $600,000 civil penalty to resolve allegations that it violated (among other securities laws – see below) the FCPA’s anti-bribery, books and records, and internal control provisions.

According to the SEC complaint (see here), Brazil was NSP’s largest foreign market, but in approximately 2000, the Brazilian governmental agency responsible for regulating nutritional products reclassified certain of NSP’s products as medicines, thus requiring a registration process prior to import and sale of the products in Brazil. As alleged in the SEC complaint, NSP’s wholly-owned subsidiary in Brazil (“NSP Brazil”) circumvented the registration process by making approximately $1 million in cash payments to customs brokers, some of which was later used to pay Brazilian customs officials so that they would allow NSP Brazil to import unregistered product into Brazil. According to the SEC, these payments were booked by NSP Brazil as “importation advances,” but without supporting documentation. Thereafter, as alleged by the SEC, NSP Brazil purchased fictitious supporting documentation for the payments.

As suggested above, in addition to the FCPA charges, the SEC complaint also charges other securities laws violations not typically found in an FCPA enforcement action such as fraud in connection with the purchase and sale of securities and false filings with the SEC. These other charges appear to be based on the allegation that NSP, in a prior Form 10-K filing with the SEC, stated that NSP Brazil experienced a significant decline in sales “due to import regulations imposed by the Brazilian government” but which failed to disclose any material information related to the above-mentioned cash payments.

Also charged in the SEC complaint were Douglas Faggioli, the current President and Chief Executive Officer of NSP and a member of its board of directors who during the relevant time period was NSP’s Chief Operating Officer, and Craig Huff, NSP’s former CFO. The complaint alleges that Faggioli and Huff, as “control persons” of NSP, violated the FCPA’s books and records and internal control provisions. In language that is sure to induce a cold sweat for any executive, the SEC generally alleged that both Faggioli and Huff had “supervisory responsibilities” over NSP’s senior management and policies, yet as “control persons,” “failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP” and failed to devise and maintain an adequate system of internal accounting controls. Without admitting or denying the SEC’s allegations, Faggioli and Huff each agreed to pay a $25,000 civil penalty.

According to an NSP press release (see here) no “current NSP officers, directors, or employees are alleged to have participated in or had knowledge of any of the improper conduct” alleged in the SEC complaint. The press release also notes that NSP voluntarily disclosed the conduct at issue to both the SEC and the DOJ and fully cooperated in the government’s investigation. The press release also states that NSP “anticipates no action by the DOJ” as to the disclosed conduct.

The NSP FCPA enforcement action, and other such enforcement actions against traditionally low FCPA risk companies, should serve notice to all that no industry is immune from FCPA scrutiny.

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