It’s An FCPA World
For the second time in the last several months (News Corp in July was the other example), the Foreign Corrupt Practices Act was the dominant news story around the world. As a friend stated mid-day, it really is an FCPA world.
Today’s post will be a short post, but will keep you informed on Wal-Mart related developments.
The company’s stock dropped approximately 4.7% in the first day of trading after the New York Times investigative piece from the weekend. See here for the prior post discussing the Times article and here for additional analysis.
Congress is demanding answers. In this letter to Wal-Mart CEO Michael Dukes, Elijah Cummings (D-MD), Ranking Member, House Committee on Oversight and Government Reform, and Henry Waxman (D-CA), Ranking Member, House Committee on Energy and Commerce state “we are initiating an investigation into [the matters discussed in the New York Times article] and request a meeting with company officials who can respond to these allegations no later than April 27.”
Plaintiff law firms are also already demanding answers. See here, here, and here.
Others – just like in the News Corp. situation from last summer – are using Wal-Mart’s FCPA scrutiny to further their anti-FCPA reform positions – see here (“while Wal-Mart’s largest subsidiary spent millions of dollars systematically bribing Mexican officials, the company back home has been working, through big business groups like the U.S. Chamber of Commerce, to weaken the Foreign Corrupt Practices Act”); while others predict, wrongly in my estimation, that Wal-Mart’s FCPA scrutiny “will sound the death knell for any efforts to amend the Foreign Corrupt Practices Act” (see here).
It’s an FCPA world.
Analyzing Wal-Mart
This prior post discussed the New York Times lengthy Wal-Mart investigative piece published over the weekend.
This post analyzes the likely issues and the road ahead.
The Times article is both unremarkable and remarkable at the same time.
The unremarkable portion of the Times article is that a foreign subsidiary of a multi-national company operating in a FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits. According to the Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments. In short, there is nothing in the Times report to suggest that Wal-Mart’s board or top executives (with the exception of Eduardo Castro-Wright – discussed below in more detail) knew of or authorized the problematic payments.
By unremarkable I do not mean to suggest that such payments will not attract DOJ and SEC scrutiny under the FCPA’s anti-bribery provisions. They surely will, even if Congress likely intended to exclude such payments from the FCPA’s reach and even if the only case law of precedent on the issue is muddled. (Both issues were discussed in the prior post).
Even if the Mexican payments do not meet the elements of an FCPA anti-bribery violation, the enforcement agencies are likely to assert that such payments violate of the FCPA books and records and internal control provisions. For instance, the Times article suggests that the Mexican payments were routed through Mexican gestores who were told to submit invoices full of secret code words. The enforcement agencies frequently take the position that payments recorded on a subsidiary’s books and records become the parent company issuer’s problem on the theory that such subsidiary books and records are consolidated with the issuers for purposes of financial reporting.
The enforcement agencies also expect that a parent company implement effective internal controls throughout its organization, including foreign subsidiaries. On this issue, one of the most significant issues is likely to be, as the Times article details, that in 2003 Wal-Mart engaged Kroll Inc. on an apparent unrelated issue in which Kroll concluded that Wal-Mart Mexico “executives had failed to enforce their own anticorruption policies, [and] ignored certain internal audits that raised red flags.” According to the Times article, “Wal-Mart then asked Kroll to evaluate Wal-Mart de Mexico’s internal audit and antifraud units” and that “Kroll wrote another report that branded the units ‘ineffective.'”
An issue the enforcement agencies are likely to explore is how Wal-Mart reacted to the 2003 Kroll audit and if it didn’t react why not? The same general issue is present in Avon’s current FCPA scrutiny. As noted in this February Wall Street Journal article, a grand jury is probing how certain U.S. executives reacted to a 2005 internal audit by the company that concluded Avon employees in China may have been bribing officials in violation of the FCPA. As in Avon, an issue in the Wal-Mart matter, including as to individual executives who may not have participated in or authorized any Mexican payments, will likely be willful blindness as to the Mexican audit.
The remarkable aspects of the Times investigation include the conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary. Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations.
However, the payment issues at Wal-Mart Mexico apparently resulted in exactly the opposite at Wal-Mart’s corporate headquarters. Wal-Mart’s conduct will not be viewed favorably by the enforcement agencies.
For instance, under the DOJ’s Principles of Federal Prosecution of Business Organizations (here) a factor the DOJ will consider in arriving at its enforcement decision include “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.” While the FCPA does not contain any affirmative disclosure obligation, most companies the size and stature of Wal-Mart tend to disclose conduct that could implicate the FCPA, particularly given the SEC’s position that all payments in violation of the FCPA are qualitatively material, even if not quantitatively material.
Lacking such a voluntarly disclosure, a company should, at the very least, thoroughly investigate the alleged wrongdoing and implement effective remedial measures, including by disciplining and terminating culpable employees. Once again, the Principles of Prosecution state that “the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies” is a factor the DOJ will consider in arriving at its enforcement decision. As to this factor, the relevant comment in the Principles of Prosecution states as follows. “In determining whether or not to prosecute a corporation, the government may consider whether the corporation has taken meaningful remedial measures. A corporation’s response to misconduct says much about its willingness to ensure that such misconduct does not recur. Thus, corporations that fully recognize the seriousness of their misconduct and accept responsibility for it should be taking steps to implement the personnel, operational, and organizational changes necessary to establish an awareness among employees that criminal conduct will not be tolerated. Among the factors prosecutors should consider and weigh are whether the corporation appropriately disciplined wrongdoers, once those employees are identified by the corporation as culpable for the misconduct.”
On this issue, another remarkable aspect of the Times investigation is how Eduardo Castro-Wright (at the critical time period the CEO of Wal-Mart Mexico) was known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously thereafter promoted by Wal-Mart. For instance, as noted in this January 7, 2005 release, Wal-Mart announced that “Eduardo Castro-Wright, currently president and chief executive officer of Wal-Mart Mexico, will become executive vice president and chief operating officer of the Wal-Mart Stores Division in the United States.” In the release, Wal-Mart President and CEO Mike Duke stated as follows. “Eduardo is a proven leader who has helped Wal-Mart Mexico achieve outstanding results. His experience, perspective and management skills will be a valuable addition to our division here in the United States.” In this June 2010 release, the company announced that “Vice Chairman Eduardo Castro-Wright has been appointed President and CEO of Global.com and Global Sourcing.” Wal-Mart President and CEO Mike Duke stated as follows. “Eduardo has made extraordinary contributions to Walmart U.S. over the past five years, and many contributions are still to come. He is a visionary thinker who has strengthened our overall business and built a foundation that positions us well for the future.”
As to other Wal-Mart executives, while there is no suggestion at this point that they knew of or authorized the Mexican conduct while it was occurring, their conduct since learning of the misconduct is likely to attract regulatory scrutiny. Such scrutiny is likely to include certification issues under Sarbanes-Oxley (SOX) as well as other executive statements to the market since 2005 when they became aware of the payments at issue. You can bet that the SEC in particular will be analyzing every SEC filing, specifically the Management Discussion & Analysis section, and all other statements to the market since 2005 by executives regarding Wal-Mart Mexico.
As to SOX certification issues, as noted in this prior post, in 2011 the SEC charged Paul Jennings, the former CEO and CFO of Innospec. Jennings was charged in connection with the payments, but also charged with violating Exchange Act Rule 13b2-2 by making false statements to accountants and violating Exchange Act Rule 13a-14 by signing false personal certifications required by SOX that were attached to annual and quarterly Innospec public filings. As to these charges, the SEC alleged as follows. “From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy, and that he was unaware of any violations of the Code of Ethics by anyone else. […] Jennings also signed annual and quarterly personal certifications pursuant to SOX in which Jennings made false certifications concerning the company’s books and records and internal controls. Jennings also signed false management certifications to Innospec’s auditors indicating that the books and records were accurate and that Innospec had appropriate internal controls.” Then SEC FCPA Unit Chief, Cheryl Scarboro stated as follows: “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”
Also perhaps relevant is the 2009 SEC FCPA enforcement action against Nature’s Sunshine Products (“NSP”) including its executives Douglas Faggioli (President and Chief Executive Officer of NSP and a member of its board of directors during the relevant time period) and Craig Huff (the company’s CFO). The SEC complaint did not allege that these executives knew of or participated in the improper payments at issue, but the SEC nevertheless charged the executives on a control person theory of liability. The complaint charged that Faggioli and Huff, as “control persons” of NSP, violated the FCPA’s books and records and internal control provisions and generally alleged that both Faggioli and Huff had “supervisory responsibilities” over NSP’s senior management and policies, yet as “control persons,” “failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP” and failed to devise and maintain an adequate system of internal accounting controls.
Not only will the DOJ and SEC likely be examining the conduct of Wal-Mart executives, but so too will plaintiff law firms representing shareholders who will likely scour Wal-Mart’s SEC filings and other statements to the market in bringing derivative claims alleging breach of fiduciary duty and potential Section 10(b) claims based on material omissions concerning Wal-Mart Mexico. On this score, shareholders are likely to allege, among other things, that Wal-Mart’s officers and directors demonstrated conscious disregard for fiduciary duties by failing to act diligently in the face of known facts suggesting a duty to act.
Whether remarkable or unremarkable, the information revealed in the Times article is likely to be a long and costly exercise for Wal-Mart and certain of its executives. Wal-Mart’s statement over the weekend indicated that it already is conducting a world-wide review of its operations and such “where else” investigations frequently uncover additional problematic conduct. Among other things, the enforcement agencies are likely to take a keen interest in how Wal-Mart obtained foreign licenses or permits in other FCPA high-risk jurisdictions around the world. This world-wide review will take time and for this reason FCPA scrutiny of the type that Wal-Mart is currently under is likely to last 2-4 years.
Okada Cites “Federal Interest In The Uniform Interpretation Of The FCPA” In Seeking To Remove Wynn Complaint To Federal Court
Previous posts here, here and here have discussed the battle royale between Wynn Resorts and its Director Kazuo Okada and his companies. The dispute has included Okada accusing Wynn of conduct that could implicate the FCPA and Wynn also accusing Okada of separate and distinct conduct that could implicate the FCPA. It is a rare instance of the FCPA being used offensively to seemingly accomplish business objectives.
Yesterday, attorneys for Kazuo Okada’s companies, Aruze USA, Inc. and Universal Entertainment Corporation, filed a notice of removal (here) in the U.S. District Court, District of Nevada. The notice of removal asserts that the wide-ranging civil complaint previously filed by Wynn Resorts in Nevada state court depends “on the resolution of a substantial, disputed federal question regarding the scope and interpretation of the Foreign Corrupt Practices Act.” The notice of removal states that Wynn’s state court complaint seeks a “judicial declaration confirming [Wynn’s] conclusion that Defendants are ‘unsuitable’ because they violated the FCPA.”
Under the heading “Uniform Interpretation of the FCPA”, the notice of removal states that “there is an important federal interest in the uniform interpretation of the FCPA” and “given the exclusive federal jurisdiction over criminal and injunctive relief for FCPA violations, and the potential for conflicting interpretations of the ambiguous statutory language, [the federal court] should retain subject matter jurisdiction to ensure that the federal law relating to the FCPA is interpreted in a uniform manner.”
FCPA caselaw is sparse. Because of the “carrots” and “sticks’ relevant to resolving criminal FCPA enforcement actions (as well as the SEC’s neither admit nor deny settlement policy), few corporate or individual FCPA defendants put the enforcement agencies to their burden of proof and thus many FCPA enforcement theories escape judicial scrutiny.
This is what makes the Wynn-Okada dispute so tantalizing for FCPA followers. The civil dispute implicating the FCPA is between well funded rivals who are staking out litigation positions (including as to the FCPA) that are likely to result in judicial scrutiny.
Separately yesterday, attorneys for Kazuo Okada’s companies, Aruze USA, Inc. and Universal Entertainment Corporation filed an expansive counterclaim and answer. As to Wynn’s $135 million donation to the University of Macau (see here for the prior post), the counterclaim and answer states as follows. The donation “suspiciously … covers essentially the same 10-year period” as Wynn Macau’s current gaming concession, that Okada was “concerned about the lack of deliberation of the boards of Wynn Resorts and Wynn Macau” in approving the donation, and that the “Chancellor of University of Macau is also the head of Macao’s government, with ultimate oversight of gaming matters.” As to the Freeh Report (see here for the prior post), the counterclaim and answer states that “Freeh was not preparing an objective report of the facts by an ‘independent’ investigator – he was providing the [Wynn] Board with an argumentative document as an advocate against Mr. Okada.”
Friday Roundup
Reader mail, an Olympic loophole, this week’s disclosure(s), the SEC speaks, and so do executives … it’s all here in the Friday Roundup.
Reader Mail
At times, even I ask myself why I spend countless hours maintaining a free website. Then I receive an e-mail from a reader such as the one below (the reader encouraged me to share it) and I keep writing.
“I just wanted to thank you for your blog. My son-in-law, [former Africa Sting defendant], was involved in the sting case.
After his arrest we found your website and learned alot from it. We had never heard of the fcpa before all of this happened. Your site was the most informative and easy for nonlawyers to understand. I would check it everyday for updates! It was my lifeline! Thank you again for writing so much about the case. I’m just glad it is over and life can go back to normal.
Sincerely,
[Relative of former Africa Sting defendant]”
Olympic Loophole
A recent article in the Wall Street Journal (A Battle for Mongolia’s Copper Lode – Feb. 22nd) reminded me of a post lost in the unpublished archives.
Last August, Rio Tinto PLC, which manages the Oyu Tolgoi mine in Mongolia, announced (here) that the company “signed an agreement with the Mongolian National Olympic Committee (MNOC) to be a Gold Partner sponsor for the Mongolian National Team competing at the London 2012 Olympic and Paralympic Games.” In the release, Rio Tinto Country Director Mongolia, David Paterson, stated “we are sponsoring the National Olympic Team as part of our long-term commitment to Mongolia and Oyu Tolgoi.” The release further stated as follows. “Rio Tinto’s Olympic sponsorship is just one of many ways the company is contributing to Mongolia’s development. For example, Rio Tinto invests in numerous programmes that assist regional and local communities and young Mongolians in the areas of education and training, local procurement practices and sustainable development.”
An August 2011, Wall Street Journal article discussing Rio Tinto’s sponsorship states that Mongolia “is a key battleground for mining companies, which are vying to extract its rich mineral deposits” and that the Oyu Tolgoi project “is expected to yield 1.2 billion metric tons of copper and 650,000 ounces of gold a year in its first 10 years, as well as silver and other metals.”
For more on Rio Tinto’s involvement at Oyu Tolgoi, see here from the company’s website.
On one level, engaged corporate citizens with a committment to community welfare and development is a good thing and ought to be encouraged.
But, on another level, and FCPA jurisdictional issues aside (although Rio Tinto’s ADR’s are traded on a U.S. exchange), is a company’s sponsorship of a country’s Olympic team any less problematic than a company providing a laptop computer or an expensive bottle of wine to an employee of a state-owned or state-controlled enterprise? What about pre-paid gifts cards (oops, getting ahead of myself, that is coming up next)? Such instances have never been the sole basis for an FCPA enforcement action, but such allegations (or those similar) are frequently included in FCPA enforcement actions suggesting that the enforcement agencies do indeed view such conduct as problematic.
Strange as it may sound, the FCPA’s anti-bribery provisions are only implicated when something of value is provided, directly or indirectly, to a foreign official to influence the official in obtaining or retaining business. The FCPA’s anti-bribery provisions are not implicated when the thing of value is provided to a foreign government itself. Even the DOJ recognizes this. See here for DOJ Opinion Procedure Release 09-01 in which the DOJ states that the proposed course of conduct “fall[s] outside the scope of the FCPA in that the [thing of value] will be provided to the foreign government, as opposed to individual government officials …”.
Is this an FCPA loophole? If so, ought it be closed?
This Week’s Disclosure(s)
Back to those pre-paid gift cards.
On Feb. 16th in this prior post, I commented (somewhat tongue-in-cheek) that every week another company seems to be disclosing FCPA scrutiny. So far two weeks have passed and there have been two new disclosures. This week’s disclosure is from W.W. Grainger Inc. (consistently ranked as one of the “world’s most admired companies” by Forbes). In a recent SEC filing, the company (a broad-line distributor of maintenance, repair and operating supplies and other related products and services) stated as follows.
“The Company is conducting an inquiry into alleged falsification of expense accounts submitted by employees in certain sales offices of Grainger China LLC, a subsidiary of the Company. In the course of the investigation the Company learned that sales employees may have provided prepaid gift cards to certain customers. The extent and value of the gift cards are subject to further inquiry. The Company’s investigation includes determining whether there were any violations of laws, including the U.S. Foreign Corrupt Practices Act. Consequently, on January 24, 2012, the Company contacted the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) to voluntarily disclose that the Company was conducting an internal investigation, and agreed to fully cooperate and update the DOJ and SEC periodically on further developments. The Company has retained outside counsel to assist in its investigation of this matter. Because the investigation is on-going, the Company cannot predict at this time whether any regulatory action may be taken or any other potential consequences may result from this matter.”
Finally on the disclosure front, in August 2011, Brucker Corp. made an FCPA disclosure concerning its Brucker Optics subsidiary in China. Recently, the company further disclosed as follows.
“As previously reported, in 2011 the Audit Committee of our Board of Directors commenced an internal investigation, with the assistance of independent outside counsel and an independent forensic consulting firm, in response to certain anonymous communications received by us alleging improper conduct in connection with the China operations of our Bruker Optics subsidiary. The Audit Committee’s investigation, which included a review of compliance by Bruker Optics and its employees in China and Hong Kong with the requirements of the Foreign Corrupt Practices Act (FCPA) and other applicable laws and
regulations, has been completed. The investigation found evidence indicating that payments were made that improperly benefited employees or agents of government-owned enterprises in China. The investigation also has found evidence that certain employees of Bruker Optics in China and Hong Kong failed to comply with our corporate policies and standards of conduct. As a result, we have taken personnel actions, including the termination of certain individuals. We have also terminated our business relationships with certain third party agents, implemented an enhanced FCPA compliance program, and strengthened the financial controls and oversight at our subsidiaries operating in China and Hong Kong. We have also initiated a review of the China operations of our other subsidiaries, which is being conducted with the assistance of an independent audit firm.
“In the fiscal year ended December 31, 2011, $4.3 million was recorded for legal and other professional services incurred related to the internal investigation of these matters.”
As noted in Brucker’s initial filing, in 2010, the China operations of Bruker Optics accounted for less than 2.5 percent of the Company’s consolidated net sales and less than 1.0 percent of its consolidated total assets.
SEC Speaks
The Subject to Inquiry Blog published by McGuireWoods has this post regarding the recent SEC Speaks event. Regarding anti-corruption enforcement, the post states as follows.
The Commission now has a “cross-border group” charged with ferreting out corruption in corporations that trade on US exchanges, but are headquartered abroad. The group is particularly interested in the accounting policies and financial disclosures of cross-border companies, many of which rely on “small US audit firms.” As a result, the SEC is leaning on audit firms, which the SEC regards as “gatekeepers.” To that end, the SEC issued guidance in 2010 and again in 2012, advising that they conduct risk-based analyses of their overseas clients. According to Kara Brockmeyer, head of the SEC’s FCPA Unit, the SEC has seen a spike in Form 8-K reports of accounting irregularities, as well as a jump in Rule 10A reports. She expects additional 10A reports to flow in through the Office of the Whistleblower.
Brockmeyer noted that the SEC is also devoting significant resources to Foreign Corrupt Practices Act (FCPA) enforcement. The SEC’s FCPA Unit is focusing heavily on international cooperation, teaming with regulators around the world. She highlights the FCPA Unit’s cooperation with Switzerland, Russia, and China, each of which recently enacted anticorruption laws. The FCPA Unit brought 20 FCPA enforcement cases 2011, including 19 against companies and one against an individual. Brockmeyer cautioned, however, that the 2011 numbers should not be seen as a model. Indeed, in 2012 the SEC has already charged 14 individuals with FCPA violations, compared with only five companies charged.
From the Executive’s Mouth
Some excerpts from earnings conference calls that caught my eye.
From Bill Utt (President, CEO and Chairman of KBR Inc.) during a recent call. “I would also like to report that in February KBR successfully concluded our three-year independent corporate monitorship related to KBR’s 2009 plea under the US Foreign Corrupt Practices Act case. Overall, the engagement with our corporate monitor was a positive experience for KBR. We remain committed to consistently doing the right thing every time, and our commitment to compliance is a fundamental part of KBR’s culture. In fact, our compliance programs are paying off in terms of new work as we were recently awarded an international project where our compliance program was a differentiating factor in KBR securing the work.”
From Kevin Royal (Senior VP, CFO of Maxwell Technologies) during a recent call. “Now I would like to provide an update regarding the shareholder derivatives. As we have disclosed in past public filings in 2010, two shareholders had alleged that certain of our past and current officers and directors failed to prevent us from violating the US Foreign Corrupt Practices Act, or FCPA. It is important to note that the Company is only a nominal defendant in this suit. In December 2011 mediation was held and a proposed settlement was reached wherein $3 million would be paid to plaintiff’s counsels, with $2.7 million to be paid by our insurance carrier, and $290,000 would be paid by the Company. In addition, we would be required to insure that certain corporate governance measures are in place and in force. The agreement is subject to among other things, court approval and notice to our shareholders. Without admitting any wrongdoing, the defendants to this suit are willing to enter into this settlement in order to expedite resolution of the matter, and to relieve the defendants and the Company from further financial burden. We are pleased that this suit is near final settlement, and look forward to putting this matter behind us.” [For a recent post on FCPA-related civil litigation titled “A Purpose or Parasitic” – see here].
From Bernard Duroc-Danner (President and CEO of Weatherford International in response to a question about the company’s FCPA inquiry) “Well, there’s not a lot to say about, that I can say, about the DOJ process. To a degree, I think it fell off the screen as it were. For us it moves slowly, that’s all I can tell you. So, I don’t have much of an update that I can tell you. And actually even if I could, I wouldn’t have much of an update period.”
*****
On that note, a good weekend to all.
Innospec – Were The DOJ and SEC Duped?
Suppose A is ordered to pay B $160. However, A claims an inability to pay that amount and based on this inability to pay B agrees to accept only $25. The following year, a year during which A publicly discloses evidence of financial health, A pays C $45. You might conclude that B was duped.
Convert the above numbers to millions, insert Innospec for A, insert the DOJ and SEC for B, and insert NewMarket (a competitor corporation) for C, and you now have a real scenario.
As highlighted in this prior post, in March 2010 Innospec agreed to resolve a DOJ and SEC enforcement action by paying $25.3 in combined fines and penalties after pleading guilty to FCPA and other offenses, based largely on conduct in Iraq and Indonesia.
The total amount of fines and penalties could have been much higher as the minimum U.S. Sentencing Guidelines amount was $101.5 million and the SEC ordered the company to pay approximately $60 million. However, Innospec received a pass on approximately $135 million in fines and penalties based on its claimed inability to pay.
The DOJ’s sentencing memorandum (here) stated as follows. “Innospec has represented that it is unable to pay, and, even with the use of a reasonable installment schedule, is not likely to be able to pay, a $101.5 million fine. Over the course of nearly a year, Innospec has provided the Department, the SEC [and other U.S. and non-U.S. authorities] with detailed presentations regarding its current financial condition and available assets. Those representations have been analyzed in detail by qualified accounting professionals within the SEC […]. Innospec has represented that, were the company to pay more than the amount agreed, the continued viability of the company would be threatened, as follows: (1) Innospec would breach the limits of its credit facilities; (2) Innospec would be unable to make up a deficit in funding its pension plan, resulting in an $85 million shortfall; (3) Innospec would be unable to remediate certain environmental damage caused by its manufacturing facility in the United Kingdom; (4) Innospec would be unable to invest sufficiently in research and development; and (5) Innospec would be forced to close facilities around the world, resulting in dozens of employees losing their jobs.”
The SEC’s release (here) stated, in pertinent part, as follows: “Innospec has consented to the entry of a court order […] ordering it to pay $60,071,613 in disgorgement, provided that the Commission waive all but $11,200,000 of disgorgement and permitting payment in four installments based upon Innospec’s sworn Statement of Financial Condition…”.
Since March 2010, I highlighted in a series of posts (here, here, and here) that despite receiving the above pass based on inability to pay Innospec has consistently reported positive financial results.
This previous post highlighted a civil case filed against Innospec by a competitor (NewMarket Corp.) alleging that Innospec’s conduct, as described in the DOJ and SEC enforcement actions, violated the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act. According to news reports, NewMarket learned of Innospec’s actions after reading the documents released in connection with the March 2010 enforcement action in which, among other things, the DOJ and SEC alleged that Innospec’s bribe payments in Iraq ensured that a field test of a competitor’s fuel additive failed. NewMarket claimed that the competitor was a subsidiary company Ethyl Petroleum Additives Inc. which now goes by the name Afton Chemical Corp.
As reported earlier this week by Joe Palazzolo (Wall Street Journal Corruption Currents), Innospec recently announced a settlement of the civil action. In This 8-K filing the company stated as follows. “NewMarket and the Company have agreed to settle these actions pursuant to the terms of a settlement agreement between them signed on September 13, 2011 which provides for mutual releases of the parties and dismissal of the actions with prejudice. Under the settlement agreement, the Company will pay NewMarket an aggregate amount of approximately $45 million, payable in a combination of cash, a promissory note and stock, of which $25 million is payable in cash by September 20, 2011, $15 million is payable in three equal annual installments under the promissory note (carrying simple interest at 1% per annum) the first installment of which is due on September 10, 2012, and approximately $5 million is payable in the form of 195,313 shares of the Company’s common stock by September 20, 2011.”
Innospec’s immediate $25 million cash payment to NewMarket, as well as its committment to pay an additional $15 million in installments, raises the question of whether the DOJ and SEC were duped by Innospec last year when the agencies gave the Innospec a pass on $135 million in fines and penalties based on the company’s claimed inability to pay.