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.
Inside A Merger
A post last month on the “FCPA’s long tentacles” (see here) provided background on PBSJ Corp.’s FCPA disclosure and its recent announcement of a definitive merger agreement by which WS Atkins plc will acquire PBSJ in an all-cash transaction for $17.137 per share.
This post goes inside PBSJ and highlights how PBSJ’s FCPA inquiry caused a company with the highest bid to seek closing conditions regarding the FCPA inquiry that PBSJ found unacceptable, thereby prompting it to select a company with a lower bid price.
The glimpse inside PBSJ is courtesy of the company’s preliminary proxy statement filed with the SEC on August 27th (see here).
The proxy statement provides an informative glimpse into how FCPA issues affect real business decisions.
Among other things, interested purchasers of PBSJ: held meetings with PBSJ’s outside counsel (Greenberg Traurig) and its in-house counsel to discuss the FCPA investigation; requested the opportunity to meet with DOJ representatives regarding the FCPA investigation; and requested access to attorney-client privileged documents regarding the FCPA investigation.
As noted in the proxy statement, on July 30th, representatives of Atkins, the lower bidder that PBSJ ultimately chose, its counsel, as well as counsel to PBSJ met with DOJ representatives regarding the FCPA investigation.
[Note – DOJ seldom gives assurances to a company during a Foreign Corrupt Practices Act investigation. Thus, it is difficult to see what comfort or assurances Atkins or its counsel could receive from meeting with the DOJ. If anyone has participated in such a DOJ / company under investigation / potential acquirer company meeting as described above, please consider this an open invitation to share via a guest post your first-hand generic insight into the general issues discussed and resolved during such a meeting]
Here is the PBSJ merger story, in summary fashion, as told in the proxy statement.
“From time to time throughout 2009 […] members of senior management, primarily our then chief executive officer, John B. Zumwalt, III, held informal discussions with other companies concerning possible strategic transactions and with financial sponsors concerning possible investments in PBSJ. Although we held preliminary discussions and entered into confidentiality agreements with certain prospective strategic partners, these discussions did not result in any formal proposals.”
“On December 30, 2009, we announced that we would be unable to timely file our annual report on Form 10-K for fiscal year 2009 due to an internal investigation that was being conducted by the audit committee of our board of directors to determine whether any laws had been violated, including the FCPA, in connection with certain projects undertaken by PBS&J International, Inc., one of our subsidiaries, in certain foreign countries. Our annual report on Form 10-K for fiscal year 2009 was subsequently filed on January 13, 2010, within the extended time period permitted by SEC rules.”
“Barclays Capital, on behalf of PBSJ, contacted 23 potential bidders during the late-March to mid-April period, including Atkins, Company A [a company involved in engineering and construction investments] and Company B [an industry competitor]. These potential bidders were selected by our senior management […] in consultation with Barclays Capital. Of the 23 potential bidders, 13 were strategic buyers and ten were financial sponsors. Sixteen potential bidders, including eight strategic buyers and eight financial sponsors, executed confidentiality agreements with PBSJ between April 1 and April 20, 2010. During the end of March and the first two weeks of April, our senior management, with assistance from Barclays Capital, prepared a confidential information memorandum (“CIM”) describing PBSJ and its business. Copies of the CIM were provided to each of the potential bidders that executed a confidentiality agreement with PBSJ. Potential bidders also received a bid instruction letter from Barclays Capital, on behalf of PBSJ, requesting that initial indications of interest be submitted by April 28, 2010.”
“On April 28, 2010, ten potential bidders, including six strategic buyers and four financial sponsors, submitted initial non-binding indications of interest to acquire PBSJ. The indication of interest from Atkins, which indicated a range of $16.29 to $18.71 per share, represented the highest valuation of the indications of interest, based on the high end of its range. Company A and Company B were among the potential bidders that submitted indications of interest.”
“On April 29, 2010, our senior management […] met with representatives of Barclays Capital to review and discuss the initial indications of interest. The representatives of Barclays Capital presented their analysis of the indicated valuations of PBSJ and the transaction terms proposed by the potential bidders. Barclays Capital recommended that one of the strategic buyers and the four financial sponsors not be invited to proceed to the second phase of the sale process because their valuations of PBSJ were lower than the valuations of the other five strategic buyers.”
“On April 30, 2010, our board of directors met to review and discuss the initial indications of interest.”
“[O]ur board of directors determined to permit five of the ten potential bidders, all of which were strategic buyers, to proceed to the second phase of the sale process. These five potential bidders, which included Atkins and Company B, presented the highest indicated enterprise valuations of PBSJ in their indications of interest.”
“From May 4, 2010 to May 20, 2010, our management made separate presentations to representatives of each of these five potential bidders and conducted additional meetings with some bidders. In addition, our management participated in conference calls and meetings with Barclays Capital and potential bidders responding to questions throughout the time period up to the date refreshed indications of interest were due. On May 14, 2010, the five potential bidders were given access to an electronic “data room” that had been assembled by our management, with the assistance of Barclays Capital, in order to provide the bidders with additional confidential information regarding PBSJ. Bidders were also given an updated bid instruction letter from Barclays Capital, on behalf of PBSJ, requesting that refreshed indications of interest be submitted. On May 24 and 25, 2010, three of the five potential bidders, including Atkins and Company B, had discussions with representatives of GT [Greenberg Traurig – the company’s legal counsel] and our in-house counsel to discuss the FCPA investigation.”
“Between May 27, 2010 and June 3, 2010, four potential bidders submitted refreshed indications of interest to acquire PBSJ, including Atkins and Company B. The fifth potential bidder informed Barclays Capital that it did not wish to continue in the sale process.”
“On June 3, 2010, our senior management and Mr. Klatell [chairman of the strategic finance committee of the PBSJ board] met with representatives of Barclays Capital in order to review and discuss the refreshed indications of interest.”
“The refreshed indication of interest from Atkins, which indicated a price per share of $16.65, continued to represent the highest valuation among the indications of interest. Company B’s refreshed indication of interest indicated a price per share of $15.08 and the refreshed indication of interest from the next highest potential bidder (“Company C”) indicated a price per share of $14.18.”
“[O]ur board of directors determined to permit the three potential bidders with the highest indicated valuations of PBSJ—Atkins, Company B and Company C—to proceed to the third phase of the sale process. Barclays Capital, on behalf of PBSJ, communicated this information to the three potential bidders.”
“On June 14, 2010, Company C informed Barclays Capital that it would not be able to present a more competitive proposal to PBSJ and thus would not continue in the sale process.”
“On June 10 and 11, 2010, Barclays Capital, on behalf of PBSJ, provided Atkins and Company B, respectively, with a form of merger agreement that had been prepared by GT and our in-house counsel and requested that Atkins and Company B submit “final” bids and mark-ups of the merger agreement by July 6, 2010.”
“On July 6, 2010, both Atkins and Company B submitted to Barclays Capital bids to acquire PBSJ, as well as initial mark-ups of the draft merger agreement, which were then provided to our senior management, Mr. Klatell and GT. Atkins initially proposed to acquire PBSJ for a price per share of $15.57 and Company B initially proposed to acquire PBSJ for a price per share of $16.89. However, later that same week, after discussions between Barclays Capital and advisors for Atkins, Atkins and its advisors communicated with Barclays Capital that, subject to the completion of additional financial due diligence, Atkins would be prepared to submit a proposal to acquire PBSJ for a price per share of $17.137. Company B initially proposed that the merger consideration be paid in an unspecified mixture of cash and Company B’s common stock. Company B later proposed that the mixture of cash and Company B common stock be determined at the election of each PBSJ shareholder, provided that not less than 10% of the consideration for each PBSJ shareholder was in the form of Company B common stock. Company B also proposed to make $8.5 million in equity grants to undisclosed members of PBSJ’s management at the closing of the merger.”
“On July 11, 2010, our board of directors met in order to review and discuss the bids to acquire PBSJ. Members of our senior management and representatives of Barclays Capital and GT were also in attendance. […] The representatives of GT summarized the various concerns regarding risk allocation and deal completion certainty raised by the two bids.”
“In particular, the representatives of GT discussed the closing conditions regarding the FCPA investigation that had been included in the mark-ups to the merger agreement received from Atkins and Company B. Atkins included a closing condition in its mark-up to the merger agreement that there must not be any adverse development in the FCPA investigation, including the imposition of any sanction, fine or operating restriction on PBSJ or its subsidiaries. Further, Atkins’ mark-up included a definition of “Company Material Adverse Effect” that allocated significantly more risk to PBSJ.”
“Contrary to indications previously provided by its chairman of the board, Company B included a condition that the FCPA investigation must be resolved to Company B’s satisfaction prior to closing. Both Atkins and Company B also requested the opportunity to meet with representatives of the DOJ regarding the FCPA investigation prior to the execution of the merger agreement; representatives of the DOJ had previously indicated to PBSJ that it would accommodate a meeting with one bidder.”
“In addition, our senior management and representatives of Barclays Capital and GT discussed with our board of directors Atkins’ request that PBSJ allow representatives of Atkins to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement. The representatives of GT and our in-house counsel advised our board of directors with respect to possible consequences of complying with Atkins’ request.”
“Our board of directors, after extensive discussion with our senior management, Barclays Capital and GT regarding the bids, instructed our senior management and advisors to continue to negotiate with both Atkins and Company B in order to achieve a definitive proposal that provided the greatest combination of shareholder value and deal completion certainty.”
“On July 12, 2010, GT, through Barclays Capital, circulated revised drafts of the merger agreement to each of Atkins and Company B. The revised drafts of the merger agreement provided that developments in the FCPA investigation could serve as a basis not to close the transaction only if the developments rose to the level of a “Company Material Adverse Effect” and, in the case of Atkins, further revised its definition of “Company Material Adverse Effect” to a market standard.”
“Between July 12, 2010 and July 21, 2010, representatives of PBSJ and its advisors held discussions with each of Atkins and Company B and their advisors regarding the issues in the merger agreement, including the treatment of the FCPA investigation and Atkins’ request that PBSJ allow representatives of Atkins to review attorney-client privileged documents regarding the FCPA investigation prior to the execution of the merger agreement. GT and each of Hunton & Williams LLP (“Hunton”), counsel to Atkins, and in-house counsel to Company B continued to exchange drafts of the merger agreement and negotiate the terms thereof. During this time, both Atkins and Company B agreed to the treatment of the FCPA investigation as proposed by PBSJ and, in the case of Atkins, to a market standard definition of “Company Material Adverse Effect.” In addition, during the week of July 12, 2010, representatives of Atkins conducted additional on-site financial due diligence regarding PBSJ and representatives of Company B conducted additional on-site legal due diligence regarding PBSJ, each at PBSJ’s Tampa headquarters.”
“On the morning of July 21, 2010, Atkins submitted to Barclays Capital a revised bid to acquire PBSJ for a price per share of $17.137, consistent with its prior indication. However, Atkins’ offer continued to be conditioned on PBSJ allowing representatives of Atkins to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement. Also on July 21, 2010, Company B increased its bid to acquire PBSJ from a price per share of $16.89 to a price per share of $17.197 and reduced the value of equity grants to be made to undisclosed members of PBSJ’s management at the closing of the merger from $8.5 million to $3.5 million, having been advised that our board of directors did not consider such grants relevant in choosing a successful bidder. Company B also indicated that it would allow PBSJ shareholders to elect to receive merger consideration in any mixture of cash and Company B common stock, including all cash consideration.”
“During the evening of July 21, 2010, our board of directors met in order to review and discuss the revised bids submitted by Atkins and Company B. Members of our senior management and representatives of Barclays Capital and GT were also in attendance.”
“Representatives of Barclays Capital reviewed and discussed with our board of directors their analysis of the financial aspects of both bids, including the implied valuations of PBSJ. Our board of directors also reviewed and discussed a presentation by our chief financial officer regarding the possible alternatives to the sale of PBSJ.”
“Our senior management and representatives of GT also discussed with our board of directors the condition to Atkins’ offer that its representatives be allowed to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement and the implications that such review could have.”
“During the course of the meeting and at the instruction of our board of directors, Mr. Klatell contacted the chairman of the board of Company B to discuss Company B’s valuation of PBSJ. After discussions with Mr. Klatell, the chairman of the board of Company B indicated to Mr. Klatell that Company B would increase its bid to acquire PBSJ from a price per share of $17.197 to a price per share of $17.498 and eliminate the equity grants to be made to undisclosed members of PBSJ’s management at the closing of the merger.”
“Our board of directors, after extensive discussion with our senior management, Barclays Capital and GT regarding the proposals, including the value of the proposals to our shareholders, the uncertainty created by the requirement that Atkins’ shareholders approve the transaction, the potential adverse implications to PBSJ from Atkins’ insistence that its representatives be allowed to review attorney-client privileged documents regarding the FCPA investigation prior to execution of the merger agreement, and the business risks facing PBSJ in the execution of its short and long-term business strategies if it remained independent, unanimously authorized our senior management and advisors to finalize the terms of the merger agreement with Company B and to coordinate the requested meeting between Company B and the DOJ regarding the FCPA investigation.”
“On July 22, 2010, after Mr. Klatell notified the chairman of the board of Company B that Company B had been selected as the bidder with which PBSJ would proceed with the sale process, assuming that negotiations could be satisfactorily completed, representatives of Company B began to advise members of our senior management and representatives of Barclays Capital and GT of changes to Company B’s position regarding the FCPA investigation, including a proposal for PBSJ and Company B to enter into an exclusivity agreement until the FCPA investigation was resolved. On July 23, 2010, in-house counsel for Company B provided a revised draft of the merger agreement to GT. The revised draft of the merger agreement included substantial additional closing conditions regarding the FCPA investigation and a definition of “Company Material Adverse Effect” that would have allowed Company B to terminate the merger agreement in the event of developments in the FCPA investigation that did not rise to the level of a material adverse effect. On July 25, 2010, GT provided a revised draft of the merger agreement to in-house counsel for Company B that rejected substantially all of Company B’s additional conditions regarding the FCPA investigation. Our senior management, Mr. Klatell and our advisors continued to negotiate these matters with representatives of Company B and its advisors over the course of July 22-26, 2010; however, despite the indications provided by Company B’s chairman of the board earlier in the sale process, Company B was unwilling to propose terms to address its concerns regarding the FCPA investigation that would provide PBSJ with sufficient certainty regarding the completion of the transaction.”
“Also on July 22, 2010, representatives of Atkins informed our senior management that Atkins was withdrawing the condition that its representatives be allowed to review attorney-client privileged documents regarding the FCPA investigation prior to the execution of the merger agreement, which eliminated the need to provide Atkins with attorney-client privileged materials. Atkins also informed our senior management that, due to an increase in the market value of Atkins’ ordinary shares, Atkins’ shareholders were no longer required to approve the transaction with PBSJ because the size of the transaction with PBSJ did not exceed the threshold requiring a vote, given Atkins’ higher market capitalization. On July 23, 2010, our senior management and representatives of GT held discussions with representatives of Hunton and in-house counsel for Atkins regarding these matters and other issues in the merger agreement. On July 24, 2010, Hunton provided a revised draft of the merger agreement to GT that incorporated the developments from July 22-23, 2010. Over the course of the remainder of July 24, 2010 through July 26, 2010, representatives of Atkins and Hunton and representatives of PBSJ and GT held numerous discussions and negotiated the remaining unresolved issues in the merger agreement.”
“On July 26, 2010, our board of directors met in order to review and discuss the developments in the sale process since their July 21, 2010 meeting. Members of our senior management and representatives of Barclays Capital and GT were also in attendance. Prior to the meeting, the directors were provided with updated summaries of the draft merger agreements for each of Atkins and Company B. Our senior management and Mr. Klatell reviewed for the directors the developments since the July 21, 2010 board meeting and the then-current proposals from Atkins and Company B. The representatives of GT summarized the various changes in the structures of the two bids and the merger agreements, as well as the impact of these changes on the deal completion certainty provided by each of the bids. Representatives of Barclays Capital summarized the impact of these changes on the financial aspects of the bids.”
“Our board of directors held an extensive discussion with our senior management, Barclays Capital and GT regarding the proposals and discussed the value of the proposals to our shareholders, the certainty provided by Atkins’ proposal as a result of the withdrawal of its condition to review attorney-client privileged documents regarding the FCPA investigation and the lack of a requirement that Atkins’ shareholders approve the transaction, the uncertainty regarding Company B’s proposal as a result of its closing conditions regarding the FCPA investigation, and the business risks facing PBSJ in the execution of its short and long-term business strategies if it remained independent. While not dispositive, our board of directors also considered whether, given Atkins’ limited operations in the United States, there might be a lesser likelihood of reductions in force as a result of a transaction with Atkins than with Company B. Our board of directors determined that, in light of the foregoing, the combination of share price and deal certainty provided by Atkins’ proposal provided a superior alternative to Company B’s proposal despite Company B’s slightly higher value. Following this discussion, our board of directors unanimously authorized our senior management and advisors to finalize the terms of the merger agreement with Atkins and to coordinate the requested meeting between Atkins and the DOJ regarding the FCPA investigation.”
“Between July 26, 2010 and July 30, 2010, representatives of our management, GT, Atkins and Hunton held numerous discussions and negotiated the remaining unresolved issues in the merger agreement. On July 30, 2010, representatives of Atkins and its counsel, as well as counsel to PBSJ, met with representatives of the DOJ regarding the FCPA investigation. Over the course of the remainder of July 30, 2010 and the morning of July 31, 2010, representatives of our management, GT, Atkins and Hunton negotiated the final terms of the merger agreement and disclosure letters.”
“In the afternoon of July 31, 2010, our board of directors met to consider Atkins’ definitive proposal. Members of our senior management and representatives of Barclays Capital and GT were also in attendance. The directors had previously been provided with a substantially final draft and a detailed summary of the merger agreement. Representatives of GT briefly reminded the directors of their fiduciary duties under Florida law. The representatives of GT informed the directors that the terms of the merger agreement were substantially as the board of directors had reviewed at their July 26, 2010 meeting.”
“Our board of directors again discussed the value of Atkins’ proposal to our shareholders and the certainty provided by that proposal, as well as the business risks facing PBSJ in the execution of its short and long-term business strategies if it remained independent. Our board of directors determined that, in light of the foregoing, the relative certainty provided by Atkins’ proposal provided a greater value to our shareholders, notwithstanding the higher price per share offered by Company B.
“After extensive discussion among our board of directors, senior management and our advisors, our board of directors unanimously approved and adopted the merger agreement, approved the merger and the other transactions contemplated by the merger agreement, unanimously declared the advisability of the merger agreement, and determined that the merger, the merger agreement and the other transactions contemplated by the merger agreement are fair to and in the best interests of PBSJ and our shareholders. The board of directors further resolved to recommend to our shareholders that they vote to approve the merger agreement and the merger.”
“During the morning of August 1, 2010, the board of directors of Atkins unanimously approved the merger agreement. In the afternoon of August 1, 2010, PBSJ and Atkins executed the merger agreement. Prior to the opening of trading of Atkins’ ordinary shares on the London Stock Exchange on August 2, 2010, Atkins and we issued press releases announcing the transaction. Later on August 2, 2010, we filed a Current Report on Form 8-K with the SEC disclosing the execution of the merger agreement and attaching a copy of the definitive merger agreement as an exhibit.”
“In reaching its decision to approve and adopt the merger agreement with Atkins, approve the merger and the other transactions contemplated by the merger agreement, authorize PBSJ to enter into the merger agreement and recommend that our shareholders vote to approve the merger agreement, our board of directors consulted with its financial and legal advisors and our management. The board of directors considered a number of potentially positive factors and negative factors. The board of directors did not assign relative weights to the factors listed below or the other factors considered by it. In addition, the board of directors did not reach any specific conclusion on each factor considered, but conducted an overall analysis of these factors. Individual members of the board of directors may have given different weights to different factors.”
“Positive factors considered by the board of directors included the following material factors: […] the terms of the merger agreement and the related agreements, including:
the limited number and nature of the conditions to Atkins’ obligation to consummate the merger, including its willingness not to impose special conditions related to our previously disclosed Foreign Corrupt Practices Act (“FCPA”) investigation beyond those developments that would independently constitute a material adverse effect.”
More On Alliance One and Universal
Earlier this month (see here) the DOJ and SEC announced FCPA enforcement actions against tobacco companies – Alliance One International, Inc. and Universal Corporation.
Both the DOJ (here) and the SEC (here) issued a consolidated press release – the first time (to my knowledge) the agencies have consolidated an enforcement action against two unrelated companies in such a fashion. Perhaps the reason was, as explained below, a significant part of the improper conduct at both companies involved the same entity – The Thailand Tobacco Monopoly (“TTM”) – an alleged agency and instrumentality of the Thai government.
This is a long post, but then again, at nearly 300 pages, there was much in the DOJ and SEC resolution documents.
For instance, Alliance One’s entire exposure was based, not on anything it did, but rather successor liability theories.
Both the Alliance One and Universal enforcement actions were the product of voluntary disclosure. In fact, the Universal inquiry began when a former employee contacted the company’s internal compliance hotline. Query whether that individual today would do the same thing given Dodd-Frank’s whistlblower provisions – provisions which, if applicable, would make him / her a millionaire.
The Universal enforcement action is an FCPA first, in that it concerns conduct in Mozambique and Malawi.
There are also many remedial measures / compliance nuggets waiting to be digested from these enforcement actions.
The Alliance One enforcement action has already spawned a related individual enforcement action against Bobby Elkins (see here) and the Universal enforcement action may do the same as the DOJ’s Statement of Facts contains an alphabet soup of employees, including U.S. citizens, allegedly involved in the improper conduct.
This post describes the DOJ and SEC’s enforcement actions against Alliance One as well as the DOJ and SEC’s enforcement actions against Universal Corp.
Alliance One
The Alliance One enforcement action included a non-prosecution agreement between the DOJ and Alliance One, criminal pleas by Alliance One International AG and Alliance One Tobacco OSH, LLC, as well as an SEC enforcement action against Alliance One.
Edward Fuhr, Hunton & Williams LLP (see here), represented Alliance One entities. Colleen Mahoney, Skadden (see here), the former Deputy Director of the SEC’s Division of Enforcement, represented Alliance One’s Board of Directors and Audit Committee.
DOJ
Pursuant to a non-prosecution agreement (see here), the DOJ agreed not to prosecute Alliance One related to:
1. “improper payments (or agreements to make improper payments) made by employees and agents of its subsidiary or predecessor corporations in the form of:
a. corrupt payments made to foreign officials in Kyrgyzstan including (i) bribes paid to officials of the Kyrgyz Tamekisi; (ii) bribes paid to Akims; and (iii) bribes paid to Kyrgyz tax officials, which payments were made for the purpose of obtaining and retaining business with Kyrgyzstan government entities; and
b. corrupt payments made to foreign officials in Thailand in the form of
kickbacks paid to officials of the Thailand Tobacco Monopoly, which payments were made for the purpose of obtaining and retaining business with Thailand government entities; and
2. The accounting and record-keeping practices associated with these improper
payments.”
Pursuant to the NPA, Alliance One “admitted, accepted, and acknowledged successor corporate responsibility for the conduct of its corporate predecessors” as set forth in a Statement of Facts attached to the NPA.
In summary fashion, the Statement of Facts are as follows:
Prior to 2005, Dimon, Inc. (“Dimon”) was a publicly traded leaf tobacco merchant subject to the FCPA. Dimon also had an obligation to ensure that its wholly owned subsidiaries, including Dimon International Kyrgyzstan, Inc. (“DIK”) and Dimon International AG (“DIAG”), maintained accurate books and records.
Prior to 2005, Standard Commercial Corp. (“Standard”) was a publicly traded leaf tobacco merchant subject to the FCPA. Standard also had an obligation to ensure that its wholly owned subsidiaries, including Standard Brazil Ltd., maintained accurate books and records.
In 2005, Dimon and Standard merged to form Alliance One.
Kyrgyzstan
Dimon maintained a wholly owned subsidiary, DIK, that was organized under Kyrgyzstan law. During the relevant time period, DIK purchased and processed tobacco grown in Kyrgyzstan and shipped processed tobacco to Dimon’s customers throughout the world.
According to the Statement of Facts, “DIK maintained its principal place of business in Osh, Kyrgyzstan and made regular reports of its business operations and financial accounts to officers of Dimon located at its headquarters in Danville, Virginia. DIK regularly sought approval for management decisions from Dimon managemeut and worked with and communicated with individuals acting as DIK’s agents in Danville, Virginia, and Farmville, North Carolina, who undertook certain acts within the territory of the United States such that DIK was a “person” within the meaning ofthe FCPA.
After the merger of Dimon and Standard in 2005, Alliance changed the name of DIK to Alliance One Tobacco Osh, LLC (“Osh”) which continued to operate in Kyrgyzstan as a wholly owned subsidiary of Alliance One.
According to the Statement of Facts, “Osh is the corporate successor to DIK, and is legally accountable for the criminal acts of its predecessor corporation.
Like the DOJ and SEC’s prior enforcement action against Bobby Elkins (see here and here), the Statement of Facts focus on improper payments to “Kyrgyz Official A,” “the Akims” and the “Kyrgyz Tax Inspection Police.”
Kyrgyz Official A served as the “General Director of the Tamekisi” “an agency and instrumentality of the [Kyrgyz] government [established] to manage and control the government-controlled shares of the tobacco processing facilities throughout Kyrgyzstan.” According to the Statement of Facts, the Tamekisi agreed to issue a license to Dimon to process and export tobacco and that from October 1996 through at least February 2004, DIK delivered approximately $2.6 million in cash payments to the official. According to the Statement of Facts, these payments were intended to “influence acts or decisions” of the official in his official capacity and to secure DIK’s “continued access to the tobacco processing facilities controlled by the Tamekisi.”
According to the Statement of Facts, an Akim is a head of Kyrgyz local government with “authority over the sale of tobacco by the growers” within a specific municipality or geographic area. The Statement of Facts indicate that beginning in 1996 “it became necessary for DIK to obtain permission from local Akims to purchase tobacco from the growers in each area” and “several of the Akims demanded payment of a “commission” from DIK “in order to secure the relevant Akim’s approval” for DIK to purchase tobacco from local growers. According to the Statement of Facts, from January 1996 to at least March 2004 DIK made cash payments “to the Akims of five different municipalities totaling approximately $283,762 in order to influence the acts and decisions of the Akims and to secure DIK’s continued ability to purchase tobacco from growers in the muncipalities controlled by the Akims.”
As to the Kyrgyz Tax Inspection Police, the Statement of Facts indicate that “during periodic audits” of DIK, the police assessed penalties and threatened to shut down DIK. According to the Statement of Facts, from March 2000 to March 2003 DIK “made approximately nine cash payments to officers of the Kyrgyz Tax Inspection Police totaling approximately $82,850 in order to influence the acts and decisions” of the police and to secure DIK’s “continued ability to conduct its business in Kyrgyzstan.”
According to the Statement of Facts, DIK maintained a company bank account in Kyrgyzstan, known as the “special account” to make the above described improper payments and when a DIK employee “needed to replenish money in the special account, he sent requests for funds by electronic mail or facsimile transmission to other employees and officers of Dimon or its affiliates in the U.S.” accompanied by a wire transfer request to Dimon’s Financial Accounting Department in Virginia.
According to the Statement of Facts, “the financial reporting on the special account from DIK and all other Dimon subsidiaries went directly to Dimon’s corporate headquarters in the U.S.” and in July 2002 “an internal audit report to Dimon headquarters stated that DIK management continued to be challenged by a ‘cash environment’ and cited corruption in Kyrgyzstan as a financial risk because of the potential control issue with cash payments.”
According to the Statement of Facts, between January 1996 and December 2004, “the Kyrgyzstan business operations of DIK generated profits of approximately $4.8 million for its parent corporation, Dimon.”
Thailand
Prior to 2005, Dimon maintained a wholly owned subsidiary, DIAG, which was organized under Swiss law and conducted business in the U.K., Brazil, Thailand, the U.S. and elsewhere. According to the Statement of Facts, “during the relevant time period, DIAG provided financial, accounting and management services to other Dimon subsidiaries that purchased tobacco grown in Brazil, and sold it to Dimon’s customers including the [TTM].” According to the Statement of Facts, DIAG, which maintained its principal place of business in the U.K., “made regular reports of its business operations and financial accounts to officers of Dimon located at its headquarters in Danville, Virginia” and DIAG “regularly sought approval for management decisions from Dimon management and worked with and communicated with individuals acting as DIAG’s agents” in Virginia and North Carolina “who undertook certain acts while in the territory of the United States such that DIAG was a “person” within the meaning ofthe FCPA.
Prior to 2005, Standard maintained a wholly owned subsidiary, Standard Brazil Ltd (“Standard Brazil”), which was organized under the laws of the Isle of Jersey, Channel Islands, and conducted business in Brazil, Thailand, and elsewhere. During the relevant period, Standard Brazil provided financial, accounting and management services to other Standard subsidiaries that purchased tobacco grown in Brazil, and sold it to Standard’s customers including the TTM. Standard Brazil regularly sought approval for management decisions from Standard management and worked with and communicated with individuals at Standard, acting as Standard Brazil’s agents in the United States and undertaking certain acts within the territory of the United States such that Standard Brazil was a “person” within the meaning of the FCPA.
The Statement of Facts concern improper payments to TTM (see here) “an agency and instrumentality” of the Thai government established to “manage and control the government-owned tobacco industry in Thailand.” According to the Statement of Facts, the TTM “supervised the cultivation of domestic tobacco crops, purchased imported tobacco and manufactured cigarettes and other tobacco products in Thailand.”
According to the Statement of Facts, the TTM was headed by a Managing Director (“Thai Official A”), appointed by the Finance Ministry, who reported through a Board of Directors directly to the Minister of Finance of Thailand and, as such, was a “foreign official” within the meaning of the FCPA. (See here for TTM’s current organizational chart).
According to the Statement of Facts, during the relevant time period, Dimon purchased tobacco from growers in Brazil and sold the Brazilian tobacco to the TTM through DIAG and Standard sold the Brazilian tobacco to the TTM through Standard Brazil. To help facilitate these sales, Dimon and Standard Brazil retained sales agents in Thailand and the companies paid sales commissions to the agents in varying amounts as a percentage of its tobacco sales to the TTM.
According to the Statement of Facts:
“Beginning in or around 2000 and continuing through at least in or around 2004, Dimon and Standard, through their agents, subsidiaries and affiliates, collaborated together and with a competing tobacco merchant, Company A, [presumably Universal Corp.] to apportion tobacco sales to the TTM among themselves and to coordinate their sales prices in order to ensure that each company would share in the Thai tobacco market. Beginning in or around 2000 and continuing through at least in or around 2004, Dimon, Standard and Company A agreed among themselves to pay bribes to officials of the TTM in exchange for their purchase of tobacco. The three companies agreed to pay ‘special expenses,’ calculated at an agreed rate per kilogram of tobacco sold to the TTM, that were paid as kickbacks to Thai Official A and other TTM officials to induce the TTM to purchase tobacco and to secure an improper advantage for Dimon, Standard and Company A.”
According to the Statement of Facts, between 2000 and 2004 “Dimon realized net profits of approximately $4.3 million from the sale of Brazilian tobacco to the TTM” and paid “special expenses totaling approximately $542,950 as kickbacks to Thai Official A and other TTM officials…” According the Statement of Facts, during the same time period, “Standard realized net profits of approximately $2.7 million from the sale of Brazilian tobacco to the TTM” and paid “special expenses totaling approximately $696,160 as kickbacks to Thai Official A and other TTM officials…”
According to the Statement of Facts, the companies and individuals involved “knew and intended that the corrupt special expenses paid to Thai Official A and other TTM officials” would “secure an improper advantage for Dimon and Standard by influencing the TTM’s decision to purchase Brazilian tobacco from Dimono and Standard.”
According to the Statement of Facts:
“After the merger of Dimon and Standard in 2005, Alliance One consolidated the assets, liabilities, and business affairs of Standard Brazil with DIAG and renamed the subsidiary corporation Alliance One International AG” (“Alliance One AG”). According to the Statement of Facts, as the successor corporation, Alliance One AG “is legally accountable for the criminal acts of both DIAG and Standard Brazil” and Alliance One AG “continued to operate in the U.K. and elsewhere as a wholly owned subsidiary” of Alliance One and accordingly is a “person” within the meaning of the FCPA.”
The Statement of Facts then lists several acts in furtherance of the improper payments that had a U.S. nexus such as e-mail messages and wire transfers to or from the U.S.
According to the DOJ, it agreed to enter into the NPA with Alliance One based, in part, on the following factors: “(a) Alliance’s timely, voluntary and complete disclosure of the conduct and events at issue; (b) Alliance’s thorough, real-time cooperation with the Department and the Securities and Exchange Commission, including its voluntary production of documents; (c) the remedial compliance efforts undertaken and to be undertaken by Alliance; and (d) no further criminal conduct has occurred since the merger that created Alliance.”
During the three-year NPA, Alliance One shall, among other things, cooperate in any related DOJ or SEC investigation. Pursuant the NPA, Alliance One must also strenghen its internal controls and retain an independent corporate monitor.
The criminal informations against Alliance One AG (here) and Osh (here) concern the same core conduct described above.
The criminal information against Alliance One AG concerns Thailand conduct and charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Dimon and Standard; (ii) substantive FCPA anti-bribery violations; and (iii) aiding and abetting FCPA books and records violations.
The Alliance One AG Plea Agreement (here) notes that the benefit received from the improper conduct was approximately $7 million. The company received a “culpability score” credit for “self-reporting, cooperation, acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $4.2 – $8.4 million. The DOJ and Alliance One AG agreed that the appropriate sentence should be $5.25 million. The plea agreement notes that the plea was “the result of the voluntary disclosure made by [Alliance One AG] and its parent [Alliance One] to the Department beginning in May 2004, and the disclosure of evidence obtained as a result of the extensive investigation subsequently conducted by [Alliance One] into the operations of [Alliance One AG], its parent, affiliates, and subsidiaries.” The agreement states that “at the time of the initial disclosure, the conduct was unknown to the Department.”
The criminal information against Osh concerns Kyrgyzstan conduct and charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Dimon; (ii) substantive FCPA anti-bribery violations; and (iii) aiding and abetting FCPA books and records violations.
The Osh Plea Agreement (here) notes that the benefit received from the improper conduct was approximately $4.8 million. The company received a “culpability score” credit for “self-reporting, cooperation, acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $4.2 – $8.4 million. The DOJ and Osh agreed that the appropriate sentence should be $4.2 million. The plea agreement notes that the plea was “the result of the voluntary disclosure made by [Osh] and its parent [Alliance One] to the Department beginning in May 2004, and the disclosure of evidence obtained as a result of the extensive investigation subsequently conducted by [Alliance One] into the operations of [Osh], its parent, affiliates, and subsidiaries.” The agreement states that “at the time of the initial disclosure, the conduct was unknown to the Department.”
In the DOJ’s Consolidated Sentencing Memorandum (here), it notes that the “corporations have executed a tolling agreement that provides that the statute of limitations was tolled on May 24, 2004, the date on which the corporation first notified the Department that they were undertaking an internal investigation.”
As to the ultimate fine amounts, the DOJ states that it “and the defendant corporations have negotiated a fine that is at or above the minimum fine in the range.”
As to Osh’s $4.2 million fine, the DOJ states:
“The Department submits that a fine at the low end of the Guidelines range is
appropriate in this case given the company’s prompt and timely self-disclosure of the potentially corrupt payments as soon as they were discovered, the remedial measures taken and the nature and extent of the company’s cooperation throughout the
government’s investigation. The company retained outside counsel to conduct an extensive internal investigation and voluntarily produced thousands of pages of documents and memoranda of witness interviews. The company’s remedial measures, outlined below, included the termination of all employees found to have authorized or participated in the improper payments.”
As to Alliance One AG’s $5.25 million fine, the DOJ states:
“This fine is above the minimum of the range partly to account for the fact
that two subsidiaries (DIAG and Standard Brazil) participated in the commission of the offense, along with a third unrelated company, although they were subsidiaries of different parent corporations at the time. Further, because DIAG, Standard Brazil and Company A collaborated to fix prices and pay bribes to the Thai officials, the conduct was not limited to a few employees or confined to a single business unit.”
The Government’s Sentencing Memorandum concludes as follows:
“Alliance’s cooperation was both timely and thorough. During the course of the government’s investigation, Alliance and its outside counsel fully cooperated in good faith with the Department, and produced thousands of pages of documents and financial records. Alliance tenninated or sought resignations from all employees who were found to have knowledge of or participated in the improper payments. Alliance voluntarily produced memoranda of employee interviews conducted by counsel. Alliance and their counsel have been available to meet with Department attorneys to brief them on the progress and findings of their internal investigation. The agreed dispositions, described above, reflect the Department’s recognition of Alliance’s timely and thorough cooperation.”
“Alliance took remedial actions including enhancement of its corporate compliance program, replacement of responsible management, and discipline or termination of wrongdoers. Specifically, Alliance took the following remedial actions:
• The Special Account maintained in the name of employees was closed.
• On May 24, 2004, the Audit Committee directed management to deliver a “clear and proactive message” that:
o “Illegal acts will not be tolerated in Dimon;”
o “any potentially illegal act should be brought to the attention of the CLO prior to execution of the transaction;” and
o “any individual that believes that an illegal act may have occurred should contact the CLO immediately.”
• Management issued a directive to regional executives and all accounting personnel that any questionable expenses or payments and expenses without adequate
explanation or documentation must be reported to the Corporate Compliance Officer.
• The Audit Committee implemented a new policy requiring CFO or Controller pre-approval of any material payment in cash.
• Management issued a direction to employees that “[n]o payments to public officials or political parties are to be made in any form without the express advance approval of the Corporate Compliance Officer.”
• Compliance Officer required all personnel to re-take an online training course covering the FCPA provided by Integrity Interactive.
• Responsible personnel, including senior management in Europe and Kyrgyzstan were terminated or left company voluntarily. Other employees were reprimanded.
• Corporate Accounting required supporting information for all payments made in cash from any entity where such payments exceed $2500 annually, and issued a directive to minimize cash payments for anything other than incidental expenses.
• All cash accounts must be maintained in the company’s name.
• All cash transactions are required to be documented by receipts and signed by the recipient and they established a periodic review and approval process for all
non-incidental types of expenses paid in cash to ensure payments would comply with Company policy and the law.
A sentencing hearing is scheduled for October 21, 2010.
SEC
The SEC’s settled civil complaint (see here) alleges the same core Kyrgyzstan and Thailand conduct as the DOJ’s enforcement action.
As to books and records and internal controls, the SEC alleges that “Dimon’s Country Manager authorized, directed, and made” the improper payments in Kyrgyzstan through a DIK bank account held under his name (the above mentioned special account), that “Dimon’s Regional Financial Director authorized all fund transfers from a Dimon subsidiary’s bank account to the Special Account” and that “Dimon’s International Controller formalized the accounting methodology used to record the payments made from the Special Account for purposes of internal reporting by Dimon.”
In summary fashion, the SEC also alleged as follows:
“Despite their extensive international operations, Dimon and Standard lacked sufficient internal controls designed to prevent or detect violations of the FCPA. During the 2000-2004 period, Dimon and Standard each had a policy manual prohibiting bribery, but the training and guidance provided to their employees regarding compliance with the FCPA were not adequate or effective. Dimon and Standard each also failed to establish a program to monitor compliance with the FCPA by its employees, agents, and subsidiaries.”
As I’ve indicated in prior posts, before a company settles an FCPA enforcement action, it usually has to answer the enforcement agencies’ “where else” question – as in, if you engaged in improper conduct or had internal control problems in Kyrgyzstan and Thailand, where else did you engage in improper conduct or have internal control problems. To answer this broad question, the company is forced to conduct a world-wide review of its operations and that is why one sees, as in the SEC’s complaint against Alliance One, a laundry list of other alleged improper conduct.
In summary fashion, the SEC’s complaint also alleges as follows:
“By at least May 2005, Standard provided gifts, travel, and entertainment expenses to foreign government officials in the Asian Region, including China and Thailand.” “For example, in 2002 and 2003, contemporaneous documents show that Standard employees provided watches, cameras, laptop computers, and other gifts to Chinese and Thailand tobacco officials. Standard also paid for dinner and sightseeing expenses during non-business related travel to Alaska, Los Angeles, and Las Vegas for Chinese and Thailand government delegations.”
“In 2004, Standard made a $50,000 payment to a political candidate who was also Standard’s agent for tobacco sales in Thailand.” “The $50,000 payment was falsely recorded in Standard’s books as payment for consulting work.”
“In April 2003, Dimon’s subsidiary in Greece made a payment of $96,000 to a Greek tax official in exchange for the tax official’s agreement not to pursue certain irregularities discovered during an audit, thus significantly reducing Greece’s tax liability. Separately, the controller of Dimon’s subsidiary in Indonesia made a $44,000 cash payment to an Indonesian tax official in exchange for receiving a tax refund.”
The SEC complaint charges Alliance One with violations of the FCPA’s anti-bribery provisions, books and records and internal control provisions.
The SEC release (here) notes that Alliance One, without admitting or denying the SEC’s allegations, consented to entry of a permanent injunction enjoining future FCPA violations and agreed to pay a disgorgement penalty of $10 million.
In an Alliance One press release (see here) R. E. Harrison, the Company’s Chairman and Chief Executive Officer, stated:
“Our Company is committed to the highest standards of conduct in all transactions in all jurisdictions where we do business throughout the world. In these cases, although occurring prior to our merger in May, 2005, the conduct by those predecessor companies did not meet our standards and we believe it to be in the best interest of the Company, our shareholders and our other stakeholders to put these issues behind us by means of these negotiated agreements. As indicated in our agreement with the DOJ, we have cooperated fully throughout the course of this investigation and believe that since our merger we have demonstrated our complete commitment to conducting our business in accordance with the highest standards of legal and ethical conduct.”
Universal
The Universal enforcement action included a non-prosecution agreement between the DOJ and Universal, a criminal plea by Universal Leaf Tabacos Ltda. (“Universal Brazil”), as well as an SEC enforcement action against Univeral.
Patrick Hanes, Williams Mullen (see here) represented Univeral.
DOJ
Pursuant to a non-prosecution agreement (see here) the DOJ agreed not to prosecute Univeral Corp. related to:
“the making of improper payments, by employees and agents of Universal and/or its subsidiaries to officials of the Government of Thailand in connection with Universal Brazil’s efforts to secure business, namely, to secure the improper sale of leaf tobacco to the Thailand Tobacco Monopoly, from 2000 to 2004, and the accounting and record-keeping associated with these improper payments.”
Pursuant to the NPA, Universal Corp. “admitted, accepted, and acknowledged responsibility for the conduct of its subsidiaries” as set forth in a Statement of Facts attached to the NPA.
In summary fashion, the Statement of Facts are as follows:
Universal is a publicly traded company headquartered in Richmond, Virginia which, through its subsidiaries, is a worldwide purchaser and supplier of processed leaf tobacco. As an issuer, Universal was required to make and keep accurate books, records and accounts reflecting its transactions and disposition of assets of Universal and its subsidiaries including Universal Brazil.
Universal Brazil, a wholly owned subsidiary of Universal, was a Brazilian corporation, headquartered in Santa Cruz do Sul, Brazil. Universal Brazil was a “person” under the FCPA, and individuals and entities affiliated with and acting on behalf of Universal Brazil while in the territory of the United States, used and caused the use of the mails and means and instrumentalities of interstate commerce and performed other acts in furtherance of an offer, promise, authorization, or payment of money or anything of value to foreign government officials for the purpose of assisting in obtaining or retaining business.
The Statement of Facts refers to the same general kickback scheme involving TTM officials as alleged in the Alliance One enforcement action. The Statement of Facts indicate that “from in or around March 2000 to in or around July 2004, the TTM awarded Universal Brazil five orders for the sale of Brazilian leaf tobacco. To obtain these orders, between June and December 2004, Universal Brazil paid approximately $697,800 in kickbacks to representatives of the TTM through Agent X (a Thai national).”
The Statement of Facts then details the kickback scheme including the involvement of Employee A (a U.S. citizen who was the President of Universal Brazil); Employee B (a Brazilian citizen who was the Commercial Director for Universal Brazil); Employee C (a Brazilian citizen who was a Sales Manager for Universal Brazil); Employee D (a Zimbabwean citizen who was a Sales Director for Universal Brazil); Employee E (a Brazilian citizen who was the Finance Director for Universal Brazil); Employee F (a Brazilian citizen who was the Export Superintendent for Universal Brazil); Employee G (a Brazilian citizen who was a Sales Manager for Universal Brazil); Employee H (a Zimbabwean citizen who was the Sales Director for Universal Leaf Asia); Employee I (a Brazilian citizen who was an account manager in Brazil); Employee J (a U.S. citizen who was a Vice President of Universal Leaf Tobacco – a wholly owned subsidiary of Universal Corp. – who approved wiring instructions for payments to Agent X); Employee K (a U.S. citizen who was the Controller of Universal who approved wiring instructions for payment to Agent X); and Employee L (a U.S. citizen who was the Director of Financial Accounting for Universal Leaf Tobacco who approved wiring instructions for payments to Agent X).
Given the alleged involvement of others, including U.S. citizens, it will be interesting to see if additional DOJ or SEC enforcement actions against such individuals are forthcoming.
According to the Statement of Facts:
“The scheme ended in or about April 2005 when the TTM switched to an ‘electronic auction’ process to award orders. The electronic auction process increased the transparency of all of the bids received by the TTM, allowed for more open competition, and prevented Universal Brazil [and others] from including additional amounts in the price of their tobacco sales, thereby eliminating the ability of the companies to mask kickback payments used to secure sales orders.”
According to the Statement of Facts – “from in or around 2000 through in or around 2004, Employee E and others falsely characterized Universal Brazil’s kickback payments to TTM representatives in Universal Brazil’s books, records and accounts (which were incorporated into the books, records and acconts of Universal Corp. for purposes of preparing year-end financial statements) as “commission payments” to Agent X.”
As to Universal’s internal controls, the Statement of Facts indicates as follows:
“Universal Brazil’s employees, including Employees E and F, directed that
kickback payments be paid through LATCO, a wholly owned Universal subsidiary. The financial records of LATCO were maintained with insufficient oversight or review by Universal’s legal, finance, or compliance departments and were never audited by Universal during the period from 2000 to 2004. Universal Brazil’s Finance Department and executives and employees from either Universal Corp. or Universal Leaf Tobacco, including Employee J, Employee K, and Employee L approved or directed the transfer of the multiple ‘commission’ payments to Agent X even though: (a) some of the payments were described as ‘special expense’ payments; (b) there was no contractual basis for the payment of the additional commission amounts; (c) the payments were to accounts unassociated with the Agent; (d) the instructions that were provided when wiring the money indicated that Universal Corp. should not identify the agent or that the amounts were for ‘special expenses;’ and (e) the payments were above the standard five (5) percent commission typically paid by Universal Brazil to its agents.
The Statement of Facts also indicate that “Universal Brazil did not conduct sufficient due diligence prior to engaging Agent X.”
According to the DOJ, it agreed to enter into the NPA with Universal based, in part, on the following factors: “(a) Universal’s discovery of the violations through its own internal hotline process; (b) timely, voluntary, and complete disclosure of the facts; (c) Universal’s extensive, thorough, real-time cooperation with the Department and the SEC; and (d) the remedial efforts already undertaken and to be undertaken by Universal.”
During the approximate three-year NPA, Universal Corp. shall, among other things, cooperate in any related DOJ or SEC investigation. Pursuant the NPA, Universal Corp. must also strenghen its internal controls and retain an independent corporate monitor.
The criminal informations against Universal Brazil (see here) concerns the same core conduct described above.
The criminal information against Univeral Brazil charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Universal; and (ii) substantive FCPA anti-bribery violations.
The Universal Brazil Plea Agreement (here) notes that the benefit received from the improper conduct was between $1 million – $2.5 million. The company received a “culpability score” credit for “self-reporting, cooperation, and acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $$6.3 million – $12.6 million. The DOJ and Univeral Brazil agreed that the appropriate sentence should be $4.4 million. The plea agreement states that the fine amount (30% below the bottom of the sentencing guidelines range) “was appropriate” based on the following factors:
“Universal Corporation and Universal Brazil’s extensive cooperation
during the course of the investigation, including the provision of relevant documents and information; Universal Corporation and Universal Brazil’s substantial assistance with other related Department investigations regarding the bribery of foreign government officials; and Universal Corporation and Universal Brazil’s remedial efforts, including enhancing the companies’ compliance resources and compliance policies, procedures, and internal controls.”
The plea agreement further states that the investigation was “a result of the voluntary disclosure made by Universal Brazil and its parent corporation Universal Corporation, through their counsel, to the Department and the disclosure of evidence obtained as a result of the investigation subsequently conducted through their counsel and the extraordinary cooperation by Universal Brazil and its parent Universal Corporation throughout the Department’s investigation” and that “at the time of the initial disclosure, the conduct was unknown to the Department.”
The Agreed Sentencing Memorandum (here) sheds light on how the facts at issue were first uncovered. The memo states:
“The government’s investigation began with a self-disclosure by counsel for Universal in 2006. In 2006, a former Univeral Brazil employee with knowledge of the bribery scheme in Brazil reported the conduct to Universal through Universal’s website. Based on the tip provided by the former employee, Universal’s counsel and outside auditors investigated the matter, identified a series of suspicious payments, and reported this information to the Department. Thereafter, Universal and Univeral Brazil cooperated in the Department’s and the U.S. Securities and Exchange Commission’s joint investigation of this matter.”
In footnotes, the DOJ states as follows:
“The Department encourages companies to disclose evidence of potential FCPA violations promptly. The agreed disposition with Universal Brazil and its parent Universal partly reflect credit given for Universal’s timely self-disclosure, thorough investigation, and ongoing cooperation.”
“Pursuant to Universal’s internal compliance program, Universal maintained on its website an employee ‘hotline’ that allowed current and former employees to report improper conduct. It is because of this useful compliance initiative that the improper conduct came to light. The agreed upon disposition partly reflects credit given for Universal’s pre-existing compliance program.”
According to the sentencing memo, Universal Brazil realized net profits of approximately $2.3 million on four contracts secured through the $697,800 in kickbacks to TTM officials.
As to the $4.4 million fine amount, the DOJ stated “that a fine below the Guidelines range is appropriate in this case given the company’s prompt and timely self-disclosure of the potentially corrupt payments as soon as they were reported, the nature and extent of the company’s cooperation throughout the government’s investigation, and the remedial measures taken.”
The sentencing memo details timely disclosure and cooperation as follows:
“Universal and Univeral Brazil’s cooperation was both timely and thorough. The company retained outside counsel to conduct an extensive internal investigation. Universal, Universal Brazil, and their counsel were consistently available to meet with Department attorneys to brief them on the progress and findings of their internal investigation. During the course of the government’s investigation, Universal and Univeral Brazil and its outside counsel fully cooperated in good faith with the Department and produced thousands of pages of documents and financial records and made employees available for interviews. Further, Universal and Univeral Brazil terminated or reprimanded employees who were determined to have authorized and facilitated the improper payments.”
As to remedial measures, the sentencing memo states:
“The company’s remedial measures, outlined below, included the implementation of an enhanced compliance program. Further, Universal Brazil, pursuant to the plea agreement, and its parent, Universal, pursuant to an Non-Prosecution Agreement (NPA), have agreed to further strengthen their internal controls, implement a rigorous compliance program and engage an independent corporate monitor (“monitor”) who will conduct a comprehensive review of the Universal and Univeral Brazil’s compliance standards and procedures and its internal controls. The monitor will prepare an initial report and two follow-up reports of his or her findings and make recornmendations for improvements in the companies’ compliance programs over the three-year term. Universal and Univeral Brazil took remedial actions including enhancement of the corporate compliance program, replacement of responsible management, and discipline of wrongdoers.
Specifically, Universal and Univeral Brazil took the following remedial
actions:
• Management established a Compliance Committee comprised of the Chief Financial Officer, the General Counsel, the Head of Internal Audit, the Treasurer, the Controller, and the Principle Sales Director. The Compliance Committee meets on a monthly basis to review and evaluate Universal’s compliance programs and training.
• Management established a Chief Compliance Officer who is responsible for the day-today operations of Universal’s compliance program and Chairs the Compliance Committee.
• Management issued a revised and updated Code of Conduct and translated the Code into fourteen (14) languages.
• Management required sales, finance, and executive-level personnel to attend a day long in-person training session devoted to FCPA and local anti-bribery laws.
• Management revised and enhanced its payment approval policy which now requires an ‘approving officer’ to review all supporting documentation for a payment and to understand the purpose of the payment prior to approval. The ‘approving officer’ must certify that he or she has reviewed the existing documentation and obtained an understanding of the legitimate business purpose of the payment. The policy also requires that employees investigate any questionable payments and determine that they
are legal, legitimate, and appropriate prior to approving the payment.
• Management revised and enhanced its due diligence process for agents. Initially, Universal suspended all commission payments to agents worldwide subject to legal department confirmation that each requested payment was adequately supported. Thereafter, Universal instituted a formal and standardized process for the assessment and approval of existing and proposed sales agents, which is coordinated by Universal’s Legal Department. As part of this policy, an officer of Universal, known as a ‘Relationship Officer,’ must complete a ‘Sales Agent Due Diligence Checklist’ for each prospective sales agent. This detailed checklist includes disclosure of relationships with foreign governments by owners, officers, directors and employees of the third-party agent or their family members, reference checks, and a list of potential red flags.
• Management conducted, and has pledged to continue to conduct, compliance and/or FCPA training at every global conference held for Universal employees.
• Management terminated and reprimanded certain employees involved in the improper
conduct.”
SEC
The SEC’s settled civil complaint (see here) alleges the same core Thailand conduct as the DOJ’s enforcement action.
Further to the “where else” issue discussed above, the SEC’s complaint also alleges conduct related to Mozambique and Malawi business.
In summary fashion, the SEC’s complaint alleges:
“From 2000 through 2007, Universal Corporation violated the Foreign Corrupt Practices Act of 1977 (the “FCPA”) by paying, through its subsidiaries, over $900,000 to govemment officials in Thailand and Mozambique to influence acts and decisions by those foreign officials to obtain or retain business for Universal. Those payments were directed by employees at multiple levels of the company, including management in its corporate offices and at its wholly-or majority-owned and controlled foreign subsidiaries. The Company had inadequate internal controls to prevent or detect any of these improper payments, and improperly recorded the payments in its books and records.”
“Between 2000 and 2004, Universal subsidiaries paid approximately $800,000 to bribe officials of the government-owned Thailand Tobacco Monopoly (“TTM”) in exchange for securing approximately $11.5 million in sales contracts for its subsidiaries in Brazil and Europe. From 2004 through 2007, Universal subsidiaries made a series ofpayments in excess of $165,000 to government officials in Mozambique, through corporate subsidiaries in Belgium and Africa. Among other things, the payments were made to secure an exclusive right to purchase tobacco from regional growers and to procure legislation beneficial to the Company’s business.”
“In addition, between 2002 and 2003, Universal, subsidiaries paid $850,000 to high ranking Malawian government officials. Those payments were authorized by, among others, two successive regional heads for Universal’s African operations. Universal did not accurately. record these payments in its books and records.”
As to the Mozambique payments, the complaint alleges:
(i) that two $10,000 payments were made to the “wife of an official in Mozambique’s Ministry of Agriculture and Fisheries” to obtain the official’s “assistance in revising legislation to impose a 20% export tax on unprocessed tobacco” – legislation that would have “benefited Universal over competitors because Universal was building a tobacco processing plant in the country;
(ii) that “Universal Leaf Africa directed that Universal’s Belgian subsidiary pay $50,000 to the brother of an official of in Mozambique’s Ministry of Agriculture and Fisheries” to “enable the Company’s Mozambican subsidiary to avoid incurring an export tax that it otherwise would have incurred for shipping unprocessed tobacco out of Mozambique;”
(iii) that “Univeral Leaf Africa made a series of payments totaling $86,830 from its own account and the account of the Mozambican subsidiary to secure a land concession given the subsidiary exclusive rights to purchase tobacco from growers on that land from the 2006 growing season.” According to the complaint Universal Leaf made “cash payments to a Governor in Mozambique; and gave gifts including supplies for a bathroom renovation, and personal travel on a Company jet.” and
(iv) that “Universal Leaf Africa forgave a debt and directed an additional series of payments from its own accounts and the account of the Mozambican subsidiary totaling $19,061” – according to the complaint the “debt forgiveness and payments were provided to Mozambican government officials and their family members in exchange for continued business favors.”
As to the Malawi payments, the complaint alleges as follows:
“Between approximately October 2002 and November 2003, Universal Leaf Africa made payments totaling $500,000 to one high-ranking Malawian government official; $250,000 to a second high-ranking government official; and $100,000 to a political opposition leader.”
As to Universal’s books and records and internal controls, the SEC alleges in summary fashion that Universal made payments under circumstances in which the Company lacked adequate internal controls to ensure that such payments were not being transmitted to government officials in order to obtain or retain business and that Universal’s books and records falsely characterized the payments.
The SEC complaint charges Universal with violations of the FCPA’s anti-bribery provisions, books and records and internal control provisions.
The SEC release (here) notes that Universal, without admitting or denying the SEC’s allegations, consented to entry of a permanent injunction enjoining future FCPA violations and agreed to pay a disgorgement penalty of approximately $4.6 million.
In a Universal press release (see here) George C. Freeman, III, Universal’s Chairman, President, and Chief Executive Officer, states:
“Universal prides itself on conducting business with honesty and integrity. These past payments were – and are – contrary to the policies and standards of Universal and its subsidiaries. We have absolutely no tolerance for this type of activity. Our Audit Committee conducted a rigorous and thorough investigation, we voluntarily reported this matter to federal authorities, and we have fully cooperated with federal authorities at each step of the investigation. We have since taken steps to strengthen our culture of ethical and legal compliance, and our efforts are supported by our operations around the world. Our regional management is fully committed to our culture.”
The FCPA’s Long Tentacles
There are numerous reasons to comply with the Foreign Corrupt Practices Act.
One reason is that mere existence of an FCPA inquiry can significantly throw a wrench into a company’s ability to sell itself. Another reason is that mere existence of an FCPA inquiry can cause an analyst to downgrade a company’s stock.
Both are discussed in this post starting with a real-world case study.
The case study involves Allied Defense Group, Inc. (here).
It turns out that Smith & Wesson (see here) is not the only publicly traded company affected by the Africa Sting case (see here for prior posts).
Also affected is ADG – a “multinational defense business focused on the manufacture and sale of ammunition and ammunition related products for use by the U.S. and foreign governments.” According to its website, ADG has “has two operating units in the Weapons & Ammunition industry: Mecar, S.A. and Mecar USA.”
On January 19, 2010, ADG agreed to be acquired by Chemring Group PLC (see here). See here for the release.
January 19, 2010 turned out to be an eventful day at ADG because on that same day, the company received a subpoena from the DOJ requesting that it produce documents relating to its dealings with foreign governments. ADG learned that the subpoena was related to an employee of Mecar USA being indicted in the Africa Sting case. The employee (reportedly Mark Frederick Morales) was terminated the next day and ADG stated that Mecar USA transacted business, either directly or indirectly, with six individuals indicted in the Africa Sting case.
In a June 2010 press release (see here), ADG stated as follows:
“The DOJ recently advised ADG that it is conducting an industry-wide review, and therefore the DOJ’s investigation of ADG will be ongoing. As a result, Chemring indicated that it was unwilling to consummate the merger pursuant to the terms of the merger agreement.”
Cherming Group noted (see here) that because of the DOJ’s expanded review “it could not complete the acquisition of ADG pursuant to the Merger Agreement.”
Instead, Cherming “entered into a new conditional agreement with ADG to acquire ADG’s two principal operating businesses – Mecar S.A., based in Nivelles, Belgium and Mecar US, based in Marshall, Texas (collectively “Mecar”). Pursuant to this new agreement, Chemring agreed to acquire the entire issued share capital of Mecar S.A. and the business and assets of Mecar US for a total cash consideration of $59 million.
Fast forward to last week.
ADG filed its definitive proxy statement regarding the merger.
In pertinent part it stated as follows:
“ADG’s audit committee, with the assistance of independent outside counsel, is conducting an internal review of the matters raised by the DOJ’s subpoena and the related indictment of Mecar USA’s former employee. ADG has been cooperating with the DOJ and is working to comply with the DOJ’s subpoena. ADG has also been providing regular updates to Chemring on the progress of the internal review and has been responding to Chemring’s requests for additional information.”
“As a result of the DOJ subpoena, the special meeting of stockholders to adopt the Merger Agreement with Chemring, originally scheduled for April 8, 2010, was postponed twice and then adjourned several times, most recently to June 30, 2010. As discussed below, our board of directors determined that these postponements and adjournments were desirable, for among other reasons, to continue ADG’s internal review, to respond to requests from Chemring for additional information and, with respect to the later adjournments, to provide additional time for ADG and Chemring to discuss restructuring Chemring’s acquisition of ADG.”
Restructuring did indeed occur.
As stated in the proxy materials:
“After Chemring indicated it would not complete the originally contemplated merger pursuant to the Merger Agreement, we entered into the Sale Agreement to restructure the acquisition as a purchase of our assets in order to address Chemring’s concerns about the uncertainties arising out of the DOJ subpoena. This revised transaction structure allows us to complete the sale of our operating assets to Chemring while retaining liabilities and expenses associated with the DOJ subpoena.”
[Note – in an asset sale an acquirer ordinarily does not acquire the selling entity’s liabilities, in a stock sale or merger the acquirer ordinarily does]
“Our board of directors’ original decision to enter into the Merger Agreement, and its subsequent decision to restructure the acquisition as the proposed Asset Sale, were the result of a decision-making process that evaluated ADG’s strategic alternatives, including its prospects of continuing as a stand-alone company, and that followed a market test process with the assistance of our financial advisor.”
The proxy materials then state:
“Our board of directors recommends that you vote FOR the authorization of the Asset Sale.”
The special meeting of shareholders is currently scheduled for August 31, 2010.
The ADG – Chemring saga is an interesting case study of the FCPA’s long tentacles.
It is particularly relevant given the recent General Electric settlement of a SEC FCPA enforcement action for $23.4 million. As noted in this prior post, GE’s exposure was primarily based on the conduct of two entities GE acquired after the conduct at issue occurred. Yet, as the SEC alleged, GE acquired the liabilities of these entities, along with assets, in the acquisition and that GE is the successor to the liability of these entities.
ADG – Chemring is not the only deal in which the FCPA is an issue.
For another real-world example look no further than The PBSJ Corporation – WS Atkins merger.
Remember PBSJ?
In January, the company disclosed the existence of an internal investigation to “determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with certain projects undertaken by PBS&J International, Inc., one of our subsidiaries with revenue of $4.3 million in fiscal year 2008 and $3.9 million in fiscal year 2009, in certain foreign countries.” (See here).
In its May 10-Q filing (see here) PBSJ stated that the “udit Committee completed the internal investigation in May 2010. The results of that investigation suggest that FCPA violations may have occurred.”
According to this recent filing, the company has spent $7 million on the FCPA investigation … that’s nearly twice the FY 2009 revenue of the relevant subsidiary!
Yesterday, PBSJ announced (see here) “that it has entered into a definitive merger agreement by which WS Atkins plc, [headquartered in the United Kingdom] the world’s 11th largest design firm, will acquire PBSJ in an all-cash transaction for $17.137 per share of PBSJ.”
The merger agreement (see here) states that PBSJ “has fully disclosed to [WS Atkins] all information that would be material to a purchaser’s assessment of the FCPA Investigation or that has been prepared or gathered in connection with the FCPA Investigation that could reasonably be expected to have a Company Material Adverse Effect.” The agreement further states that the parties “agree that neither the existence of the FCPA Investigation nor any particular development in the FCPA Investigation shall, in and of itself, constitute a Company Material Adverse Effect, but any significant effect, event, development or change relating to the FCPA Investigation may be considered in determining whether there has been a Company Material Adverse Effect.”
One more example of the FCPA’s long tentacles?
Analysts may downgrade a company because of FCPA issues.
That is exactly what Cowen & Co. recently did with Raytheon Company.
Among the reasons for the downgrade to neutral from outperform was the FCPA.
In a report authored by Cai von Rumohr, Gautam Khanna, and Mark Hokanson the authors state:
“Since second-quarter 2009, Raytheon has conducted ‘a self-initiated review’ of FCPA issues with ‘possible areas of concern’ regarding ‘a jurisdiction where we do business.’ It’s unclear when the review might end or if it’s related to early retirement of D. Smith, president of IDS when Raytheon signed the $3.3 billion UAE Patriot order. FCPA issues are a risk given: (1) increased Department of Justice priority; (2) rising size of FCPA fines (top four year-to-date average equals $300 million-plus); (3) noncompliance is fined even with voluntary disclosure and strict ethics programs; and (4) whistleblower provision in Financial Reform Law.”
The company’s most recent 10-Q filing (see here) states as follows:
“We are currently conducting a self-initiated internal review of certain of our international operations, focusing on compliance with the Foreign Corrupt Practices Act. In the course of the review, we have identified several possible areas of concern relating to payments made in connection with certain international operations related to a jurisdiction where we do business. We have voluntarily contacted the SEC and the Department of Justice to advise both agencies that an internal review is underway. Because the internal review is ongoing, we cannot predict the ultimate consequences of the review. Based on the information available to date, we do not believe that the results of this review will have a material adverse effect on our financial position, results of operations or liquidity.”
Raytheon “is a technology and innovation leader specializing in defense, homeland security and other government markets throughout the world.” The company is one of the largest defense contractors to the U.S. government and the majority of its revenue comes from U.S. government contracts.
FCPA Enforcement and Credit Ratings
Fitch Ratings (see here) is a global rating agency that provides credit opinions, research and data to the world’s credit markets.
It recently issued a report titled “U.S. Foreign Corrupt Practices Act – No Minor Matter.”
The report contains some interesting and informative non-legal perspectives on FCPA enforcement which are excerpted below.
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“Aside from management distraction and reputational risk, additional compliance costs and fines [arising from FCPA violations] could have rating implications for those companies with modest FCF [free cash flow] and/or liquidity. It should also be noted that it can take years from the discovery of a violation to the time a plea agreement is reached. In the interim, corporate credit profiles, liquidity, and ratings may weaken. The fine that could be easily paid with cash on hand today might not be readily payable years down the road if a company’s credit profile has weakened and liquidity becomes constrained.”
The report notes that many FCPA fines are “imposed on large investment grade corporations whose substantial cash balances easily afforded them the ability to absorb the payments with no or minimal increases in leverage.”
However, the report notes, “there have also been violations by non-investment grade companies.”
The report then discusses Willbros Group, Inc. “which borrowed from banks on a secured basis.” The report notes that when the company became aware of its FCPA issues (see here for prior posts on Willbros) the issues resulted “in the restatement of its annual financial statements at December 2002 and 2003, as well as the first, second, and third fiscal quarters iof 2004 and 2003.”
The report continues:
“In its 2005 10-K [Willbros] noted that it required an amendment on an indenture due to late filing and several amendments on its bank credit facility. In the July 1, 2005 Second Amendment and Waiver Agreement the credit facility was reduced from $150 million to $100 million.”
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The report also discusses the fiscal consequences of “deferring the legal consequences” of an FCPA violation – as so often happens given the frequency in which non-prosecution and deferred prosecution agreements are used to resolve FCPA enforcement actions. Pursuant to these agreements, the non-prosecuted or deferred charges could go “live” if the company fails to adhere to its obligations under the agreement. “This means,” according to the report, “that investors and analysts cannot take a deep breath or relax until” the time period in the NPA or DPA has expired.
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The report also discusses how FCPA issues can become a “sticking point in acquisitions/dispositions of businesses.”
The report notes:
“Sellers may have contingent liabilities related to violations even after assets or businesses are sold. Prices could be less than expected and may hamper sellers who need to receive a certain level of cash or offload debt to deleverage or meet covenants. Additionally, buyers who have not done enough due diligence up front may find themselves with an unexpected obligation and higher litigation expenses in the future.”
For a recent example of a company halting a planned acquisition because of an FCPA issue (see here).
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As to “management distraction” resulting from an FCPA inquiry, the report notes:
“Fines, penalties, widespread adverse publicity with potential damage to corporate reputations, having an independent compliance monitor, and building up the compliance organization can all pose an enormous distraction to management. More importantly, while many companies tend to have significant financial resources at the
start of an inquiry, it generally takes years before there is a conclusion. In that interim, it is possible that a corporation’s financial profile could weaken.”
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The report contains an informative chart detailing “Fitch-Rate Issuers” that tracks the date the FCPA issue first went public.
Noteworthy examples include:
Accenture Ltd. (identified a potential FCPA issue in July 2003 – in its March 2010 SEC filing the company stated that there has been no new developments);
Bristol-Myers Squibb Company (the SEC notified the company in October 2004 of an inquiry of certain pharma subsidiaries in Germany – in its 2009 10-K the company stated that it is cooperating with the SEC);
Eli Lilly & Co (the SEC notified the company in 2003 that it was investigating whether certain Polish units has violated the FCPA – in its 2009 10-K the company stated that the DOJ and SEC had issued subpoenas relating to other countries).
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As to “credit implications,” the report notes, among other things:
That, because the time from discovery of FCPA violations to resolution can take years, a company’s credit profile could weaken – perhaps reflecting a weak economic cycle. When allegations of bribery separately arise, “for most corporations if the credit profile weakens, potential fines and/or legal contingencies would be among the items of concern in the Rating or Outlook.”
The report then talks specifically about Avon and its FCPA issues (see here for a prior post).
The report notes:
“The cost of investigations and ongoing compliance can be sizeable, and each company’s liquidity and metrics over the medium term would need to be considered. Avon, with $10 billion in 2009 revenues, had $120 million in FCF. In April 2010 the company disclosed that the cost of the investigation would be in the $85 million – $95 million range, up from $35 million in 2009. The additional cost of widening the investigation represents a significant percentage of the company’s 2009 FCF. While the company has more than $1 billion in cash on hand, Fitch’s expectation of moderate FCF in the medium term was part of the rationale for the downgrade to ‘A-’ from ‘A’ on Feb. 2, 2010. Additional layers of investigatory or compliance-related expenses could hamper FCF for Avon and other companies that violate the FCPA. Continued relative weakness in FCF and/or increased leverage typically can provide the impetus for a downgrade or change in outlook for many corporations.”
All in all, the Fitch Report is an interesting and informative read.
A couple of observations.
Some FCPA enforcement actions, per the enforcement agencies’ allegations, involve conduct that goes “all the way to the top” – the Siemens enforcement action comes to mind. In this type of FCPA enforcement action, the company’s credit ratings, and much else about the company’s business, ought to be negatively impacted by the FCPA enforcement action.
However, enforcement actions like Siemens are clearly outliers.
The far more common FCPA enforcement action involves allegations of improper conduct by a single employee or a small group of employees – often in a foreign subsidiary. Even so, because of respondeat superior, the parent company issuer faces FCPA exposure. In such a situation – a common FCPA scenario – is it proper for company’s credit rating to be negatively impacted by the enforcement action?
Add to this the fact that most FCPA enforcement actions are resolved through non-prosecution or deferred prosecution agreements. These agreements are privately negotiated, subject to no (or little) judicial scrutiny, and do not necessarily represent the triumph of one party’s legal position over the other. In such a situation – again a very common FCPA scenario – is it proper for the company’s credit rating to be negatively impacted by the enforcement action?
In my forthcoming piece “The Facade of FCPA Enforcement,” I discuss why the facade of FCPA enforcement matters.
The Fitch Report has informed me of another reason why the facade of FCPA enforcement matters – and that is because FCPA enforcement actions can negatively impact a company’s credit rating.