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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.”

Authorizing Improper Payments … You Can’t Do That Either!

The FCPA’s anti-bribery provisions prohibit one from offering to pay, paying, or promising to pay “anything of value” to a “foreign official” to “obtain or retain business.”

As highlighted by the SEC’s recent settled enforcement action against Oscar Meza (the former Director of Asia-Pacific Sales for Faro Technologies, Inc.), the anti-bribery provisions also prohibit one from “authorizing” such payments or offer of payments as well.

According to an SEC complaint (see here), this is exactly what Meza did when the company’s new China Country Manager requested permission to “do business the Chinese way,” a term, the SEC alleges, Meza understood to mean that the Country Manager was requesting permission to pay kickbacks and other things of value to potential Chinese customers in order to obtain sales contracts.

The SEC’s complaint alleges that Meza’s authorizations resulted in Faro-China’s payment of approximately $450,000 in improper payments to … you guessed it …”employees of Chinese state-owned companies.” (see para. 12). According to the complaint, not only did Meza authorize these payments, but he also instructed Faro-China’s staff to alter account entries to conceal the true nature of the payments. (see paras 15-16). Further, in language sure to make any defense lawyer cringe, Meza allegedly sent an e-mail to the Country Manager lamenting that “someone will notice [the payments] one day and we may all be in trouble.” (para 14).

Based on the above conduct, the SEC charged Meza with violating the FCPA’s anti-bribery provisions and books and records and internal control provisions, and aiding and abetting Faro’s violations of these same provisions.

Without admitting or denying the SEC’s allegations, Meza consented to entry of a final judgment enjoining him from violating the FCPA and aiding and abetting such violations. According to the SEC release (see here) Meza was ordered to pay a $30,000 civil penalty as well as approximately $27,000 in disgorgement and pre-judgment interest (a figure no doubt attributed to the fact that Meza received, in addition to a base salary, a sales commission based on the value of sales contracts awarded to Faro-China – including contracts with Chinese government-owned companies).

This is not the first time FCPA followers have heard about Faro Technologies or the above factual scenario. In June 2008, the company (based on the same core set of facts as above) (i) agreed to a DOJ non-prosecution agreement and paid a $1.1 criminal penalty (see here); and (ii) consented to the entry of an SEC cease and desist order and agreed to pay $1.85 million in disgorgement and pre-judgment interest (see here).

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