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A Favor … Plus The Friday Roundup

By on September 10, 2010 in Africa Sting, BAE, FCPA Inc., Germany, H-P, International Initiatives, Reputational Damage, Russia, Smith and Wesson, United Kingdom

A Favor

Each year, LexisNexis honors a select group of blogs that set the online standard for a given industry.

I am pleased to share that FCPA Professor is one of the nominated blogs for the LexisNexis Top 25 Business Law Blogs of 2010.

LexisNexis invites the business law community to comment on the list of nominees so that it can narrow the field to the Top 25.

The link to submit comments is here.

To submit a comment, you must register, but registration is free and does not result in sales contacts. The comment box is at the very bottom of the page and the comment period ends on October 8, 2010.

Many of the other blogs nominated are the work of multiple bloggers and/or for-profit entities. Thus, as a single blogger, I am honored to be included on this list. My mission remains the same since I launched FCPA Professor in July 2009. That is to inject a much needed scholarly voice into FCPA and related issues, to explore the more analytical “why” questions increasingly present in this current era of aggressive enforcement, and to foster a forum for critical analysis and discussion of the FCPA and related topics among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons.

I hope you value the content delivered to you each day on FCPA Professor and I thank you for your consideration.

Friday Roundup

HP speaks, checking in with the Africa Sting case, Smith & Wesson’s reduced international shipments, BAE news, The Bribery Centre, and the International Anti-Corruption Academy … it’s all here in the Friday roundup.

HP Speaks

In April (see here) it was reported that German and Russian authorities were investigating whether Hewlett-Packard Co. (HP) executives paid millions of dollars in bribes to win a contract in Russia with the office of the prosecutor general of the Russian Federation. U.S. authorities then launched an investigation, something HP publicly acknowledged (see here). Yesterday, for the first time, HP “talked” about the investigation(s) in an SEC filing. In its 10-Q filing (see here) the company disclosed as follows:

“Russia GPO and Related Investigations

The German Public Prosecutor’s Office (“German PPO”) has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett−Packard ISE GmbH in Germany, a former subsidiary of HP, and the Chief Public Prosecutor’s Office of the Russian Federation. The €35 million transaction, which was referred to as the Russia GPO deal, spanned 2001 to 2006 and was for the delivery and installation of an IT network. The German PPO has recently requested information on several non−public sector transactions entered into by HP and its subsidiaries on or around 2006 involving one or more persons also involved in the Russia GPO deal.

The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act (“FCPA”). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation. The U.S. enforcement authorities have recently requested information from HP relating to certain governmental and quasi−governmental transactions in Russia and in the Commonwealth of Independent States subregion dating back to 2000.

HP is cooperating with these investigating agencies.”

Africa Sting

It’s been a while since I posted on the Africa Sting case (see here for numerous prior posts). You’ll recall that the 20+ defendants were snared in an undercover operation in which FBI agents posed as a Gabon “foreign official.” Entrapment is sure to be a legal issue the defendants will formally raise – and indeed it has been an issue defense lawyers have already publicly stated. As noted in this Blog of Legal Times post, during a hearing earlier this week, defense counsel “are demanding access to internal Justice Department and FBI manuals that govern the planning and execution of undercover operations.” According to the post, defense counsel have already claimed violations of DOJ/FBI policy in connection with the sting operation.

Smith & Wesson’s Reduced Shipments

Speaking of the Africa Sting case, one of the company’s indirectly, at least at this point, implicated in the matter is Smith & Wesson, the employer of Amaro Goncalves – one of the indicted individuals. In July (see here), the company disclosed the existence of a DOJ/SEC investigation and yesterday’s 10-Q filing (see here) does not seem to add much from the previous filing. However, this sentence from pg. 26 of the filing caught my eye: “Pistol sales decreased 25.3%, driven by the reduction in consumer demand as well as reduced international shipments related to our investigation of the FCPA matter.”

BAE News

The BAE bribery, yet no bribery enforcement action (see here) may be over in the U.S. and the U.K. Serious Fraud Office – BAE plea agreement may be waiting judicial approval in the U.K. (see here), but that does not mean that BAE’s potential exposure in other jurisdictions is over. For instance, this recent Businessweek article suggests that South African authorities remain interested in corruption allegations concerning the purchase of fighter jets from BAE. In addition, according to this recent story in The Prague Post “the Czech Republic has asked the United States for help in its inquiry into alleged corruption in a 2002 deal to buy 24 fighter jets from … BAE Systems.” The DOJ’s non-FCPA criminal information against BAE (see here) included allegations regarding the sale of fighter jets to the Czech Republic.

The Bribery Centre

The U.S. is not the only country with a vibrant and aggressively marketed anti-bribery sector. With implementation of the U.K. Bribery Act expected in April 2011, an industry is developing on the other side of the Atlantic as well. The Bribery Centre (here) seeks to provide a “unique resource to manage compliance to the Bribery Act 2010.” Described as a “collaboration between Ten Alps plc and Venalitas Ltd” the Centre “aims to become the predominant online resource for those companies who need assistance to become compliant with this new landmark piece of legislation.” Contributors include Clifford Chance and KPMG. As noted near the top of the site, you only have “29 weeks to implement adequate procedures.”

International Anti-Corruption Academy

The IAAC as it is known (see here) recently had its coming out party. As described on its website, the IAAC is “a joint initiative by the United Nations Office on Drugs and Crime, the Republic of Austria, the European Anti-Fraud Office, and other stakeholders” and it “is a pioneering institution that aims to overcome current shortcomings in knowledge and practice in the field of anti-corruption.”

Located near Vienna, Austria, the academy “will function as an independent centre of excellence in the field of anti-corruption education, training, networking and cooperation, as well as academic research.”

*****

A good weekend to all.

In The Blink Of An Eye … Along Comes A Securities Fraud Suit

By on August 19, 2010 in FCPA Inc., Related Civil Litigation, Reputational Damage, SciClone Pharmaceuticals

In last week’s roundup (see here) it was noted that on Monday August 9th, SciClone Pharmaceuticals Inc. disclosed in an 10-Q filing as follows:

“On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.”

As indicated in the prior post, news of the FCPA inquiry sent SciClone’s shares, at one point, down 41% to a 52 week low.

As indicated in this press release on Friday, August 13th, Kahn Swick & Foti, LLC and Former Louisiana Attorney General Charles C. Foti, Jr. filed a securities fraud class action lawsuit against SciClone in the United States District Court for the Northern District of California, on behalf of purchasers of the common stock of the Company between May 11, 2009 and August 10, 2010.

As noted in the law firm release,

“The Complaint alleges that throughout the Class Period, defendants were engaged in illegal and improper sales and marketing activities in China and abroad regarding its products. This ultimately caused the Company to become the focus of a joint investigation by the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) for possible violations of the Foreign Corrupt Practices Act (“FCPA”). It was only at the end of the Class Period, however, that investors ultimately learned the truth about the Company’s operations after it was reported that the SEC and DOJ were investigating the Company for violations of the FCPA. At that time, shares of the Company declined almost 40% in the single trading day, on abnormally large trading volume.”

This has got to set a record for the least amount of time between disclosure of an FCPA inquiry and collateral civil litigation …. less than 100 hours!

As Nathan Vardi at Forbes correctly notes (see here) plaintiff lawyers have indeed “joined the bribery racket.” (In April, Vardi penned a provocative feature article – “The Bribery Racket.” See here for my prior post which links to the article).

Six Months For The Greens … Plus The Friday Roundup

By on August 13, 2010 in China, Debarment, FCPA Sentences, Giffen, Greens, H-P, Reputational Damage, SciClone Pharmaceuticals, Siemens

In September 2009, Gerald and Patricia Green were found guilty by a federal jury of substantive FCPA violations, conspiracy to violate the FCPA, and other charges. According to the DOJ release (see here) the Los Angeles-area film executives were found guilty of engaging in “sophisticated bribery scheme that enabled the defendants to obtain a series of Thai government contracts, including valuable contracts to manage and operate Thailand’s yearly film festival.”

As noted in the DOJ release:

“The conspiracy and FCPA charges each carry a maximum penalty of five years in prison, and each of the money laundering counts carries a maximum penalty of up to 20years in prison. The false subscription of a U.S. income tax return carries a maximum penalty of three years in prison and a fine of not more than $100,000.”

Sentencing was originally set for December 17, 2009, was delayed several times, and, at one point, was removed from the calendar altogether (see here).

U.S. District Court Judge George Wu of the Central District of California reportedly wanted to learn more about other FCPA sentences as well as Mr. Green’s health issues.

The DOJ requested a 10 year sentence for both Gerald and Patricia Green.

The DOJ stated that the “court must decline defendants’ remarkable invitation to join the wholesale speculation of FCPA ‘pundits’ as to whether corporate settlements are ‘shielding’ to corporate executives from punishment.”

In closing, the DOJ urged the court to “disregard defendants’ efforts to obscure the landscape of FCPA sentencing, which generally reflects significant prison terms for convicted individuals.”

According to this report, Judge Wu yesterday sentenced the Greens, before a packed courtroom, to six months in prison, followed by three years probation (six months of which must be served as home confinement).

According to the report, Judge Wu “also set a restitution figure of $250,000” but “if the Greens, who have had their accounts frozen and assets seized since being arrested in 2007, can prove that none of the $1.8 million they paid in bribes to Thai officials can be recovered, then they will only have to pay $3,000 in restitution.”

Does the “landscape of FCPA sentencing” truly reflect “significant prison terms” as stated by the DOJ?

True, any prison term is significant for a defendant and his/her family and friends.

But with a top sentence of 60 months (Charles Jumet – see here), the 366 day sentence for Frederic Bourke in November 2009 (see here), the 15 month sentence for Jason Edward Steph and the 366 day sentence for Jim Bob Brown both in January 2010 (see here) and now the 6 month sentence for the Greens – is this yet another instance in which DOJ’s FCPA rhetoric does not match reality?

*****

H-P news that does not involve its former CEO, what others are saying about the Giffen Gaffe, SciClone’s stock drop, and Siemens $1 billion customer … it’s all here in the Friday roundup.

H-P Inquiry Escalates

According to a story in today’s Wall Street Journal by David Crawford, the DOJ “has asked Hewlett-Packard Co. to provide a trove of internal records as part of an international investigation into allegations that H-P executives paid bribes in Russia, according to people familiar with the investigations.”

According to the story, the DOJ request “came after German prosecutors complained H-P had refused to provide them with all of the records they requested” and after “H-P initially argued that the German request for bookkeeping records, some of which are five years old, imposed an ‘undue hardship’ on the company.”

The article indicates that the DOJ “asked H-P to comply voluntarily with the request and hasn’t subpoenaed the records” and that “H-P has yet to provide some records” but is “cooperating with the investigations.” According to H-P, the investigation
“involves people that have largely left the company and matters that happened as much as seven years ago.”

What Others Are Saying About Giffen

It’s been one week since the Giffen Gaffe (see here).

Here is what others are saying about the enforcement action that began with charges that James Giffen made “more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions”, yet ended with a misdemeanor tax violation against Giffen and an FCPA anti-bribery charge against a functionally defunct entity (The Mercator Corporation -in which Giffen was the principal shareholder, board chairman, and chief executive officer) focused merely on two snowmobiles.

Scott Horton, writing at Harper’s Magazine (see here) noted that “[t]he outcome is a huge embarrassment to federal prosecutors, who had invested a decade in resources in the effort to convict Giffen of FCPA and related violations.”

Horton, who has been following the case for years, highlighted how the “case has been the focus of political manipulation concerns for years” and closed with this paragraph:

“Kazakhs have long claimed that their government’s strategy of resolving the Giffen case by using the right levers with the American administration–a process that led them to hire former attorneys general and high-profile retired prosecutors, private investigators, and public-relations experts–would be successful. The outcome in the Giffen case appears to ratify that view. The notion of an independent, politically insulated criminal-justice administration in America has just taken another severe hit.”

Steve LeVine, author of The Oil and The Glory page at Foreign Policy, noted (here) that the Giffen resolution is “a considerable comedown for the federal government” and that Giffen’s lawyer “understood correctly that he could set up a collision between the Justice Department and the CIA in which the latter would probably prevail.”

The FCPA and Stock Price

What affect, if any, does an FCPA disclosure or resolution have on a company’s stock price?

It’s an issue I’ve explored before (see here) and best I can tell the evidence is inconclusive and the answer is – it depends.

In the case of a company that does business almost exclusively in China disclosing an FCPA inquiry focused on China, the answer is that disclosure of the FCPA inquiry matters – and quite a bit.

On Monday, SciClone Pharmaceuticals Inc., a Delaware company based in California, disclosed in a 10-Q filing (here) as follows:

“On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.”

SciClone’s business is focused primarily on China with 90+% of its revenue derived from China sales. Thus, it is not surprising that an FCPA inquiry focused on China had a material impact on the company’s stock price.

As noted in this Reuters story, news of the FCPA inquiry sent SciClone’s shares, at one point, down 41% to a 52 week low.

Siemens $1 Billion Customer

In December 2008, Siemens agreed to pay $800 million in combined U.S. fines and penalties to settle FCPA charges for a pattern of bribery the DOJ termed “unprecedented in scale and geographic scope.” According to the DOJ, for much of Siemens’ operations around the world, “bribery was nothing less than standard operating procedure.”

The Siemens enforcement action remains the largest FCPA settlement ever (even though Siemens itself was not charged with FCPA anti-bribery violations).

On the one year anniversary of the Siemens enforcement action, I ran a post – Siemens – The Year After (see here) which highlighted how the U.S. government continues to do substantial business with the company it charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”

This U.S. government business has helped Siemens outperform its competitors in a difficult recessionary environment and much of the company’s recent success is the direct result of government stimulus programs around the world.

Using Recovery.gov (a U.S. government website designed “to allow taxpayers to see precisely what entities receive Recovery money ..”), I highlighted how several Siemens’ business units have been awarded several dozen contracts funded by U.S. taxpayer stimulus dollars.

It is against this backdrop that Paul Glader’s recent piece in the Wall Street Journal “Siemens Seeks More U.S Orders” caught my eye.

According to the article, Siemens Corp. (the U.S. division of Siemens) currently brings in about $1 billion a year from the U.S. government, a figure the division hopes to double by 2015.

Eric Spiegel, chief executive of Siemens Corp., is quoted in the article as saying: “[o]ne of the beauties of the federal-government spending is it didn’t drop off during the recession.”

To that, I’ll add that one of the unfortunate beauties of engaging in bribery the U.S. government terms “unprecedented in scale and geographic scope” is no slow down in U.S. government contracts in the immediate aftermath of the enforcement action.

It’s one of the FCPA greatest headscratchers – FCPA violaters are and remain some of the U.S. government’s biggest suppliers and contracting partners.

As I’ve noted in numerous prior posts, efforts are underway to try to change this. See here, here and here.

*****

A good weekend to all.

Innospec Related News

By on August 10, 2010 in 2010 Enforcement Actions, David Turner, Individual Enforcement Action, Indonesia, Innospec, Iraq, Oil for Food Enforcement Action, Ousama Naaman, Private Right of Action, Related Civil Litigation, Reputational Damage, SEC Enforcement Action

In March, Innospec (a global chemical company) settled bribery enforcement actions on both sides of the Atlantic (see here).

This post discusses recent Innospec news – the SEC enforcement action against an Innospec agent (an individual who previously plead guilty to a DOJ enforcement action – see here) and a former Business Director at the company; a civil suit filed by an Innospec competitor in U.S. District Court in Richmond, Virginia; and how Innospec continues to grow its cash coffers despite receiving a pass on $50 million in fines and penalties in the March enforcement action based on inability to pay.

SEC Enforcement Action Against Turner and Naaman

Last week, the SEC added to Ousama Naaman’s legal woes charging him (see here) with civil FCPA anti-bribery violations, knowingly circumventing or knowingly falsifying books and records, and aiding and abetting Innospec’s FCPA books and records and internal control violations. According to the SEC release (see here) Naaman, Innospec’s agent in Iraq, agreed to disgorge $810,076 plus prejudgment interest of $67,030 and pay a penalty of $438,038 that will be deemed satisfied by his criminal fine. The disgorgement amount represents commissions Naaman received from Innospec “for his role in funneling bribe payments.” To my knowledge, the approximate $877,000 the SEC will recover from Naaman is the largest SEC recovery against an individual FCPA defendant.

In the same complaint, the SEC also charged David Turner, the Business Director of Innospec’s TEL Group, with the same substantive charges as Naaman. According to the complaint, Turner (a U.K. citizen who left Innospec in June 2009) “actively participated” in Innospec’s bribery and kickback schemes in Iraq and “actively participated” in Innospec’s bribery scheme in Indonesia.

According to the complaint:

“Turner was aware of the kickback scheme in connection with the Oil for Food Program. At some point in late 2002 or early 2003 Innospec’s internal auditors questioned Turner about the nature of the commission payments that were made to Naaman under the U.N. Oil for Food Program. Turner made false statements to the auditors and concealed the fact that the commission payments to Naaman included kickbacks to the Iraqi government in return for Oil for Food contracts. Turner also made false statements when he signed annual-certifications that were provided to auditors up until 2008 where Turner falsely stated that he had complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy prohibiting kickbacks and bribery, and that he was unaware of any violations of the Code of Ethics by anyone at Innospec.”

Even after the Oil for Food Program was terminated in late 2003, the complaint alleges that “Turner, along with senior officials at Innospec, directed and approved” additional bribe payments to Iraqi officials. In addition, the complaint alleges that “Turner and other Innospec officials directed and authorized payments, through Naaman, to fund lavish trips for Iraqi officials.”

As to Indonesia, the complaint alleges that “Turner, along with senior officials at Innospec, authorized and directed the payment of bribes to Indonesian government officials from at least 2000 through 2005, in order to win contracts for Innospec for the sale of TEL to state owned oil and gas companies in Indonesia.” According to the complaint, Turner and other Innospec officials and employees used various “euphemisms” in e-mail communications and in discussions to refer to the bribery scheme.

According to the complaint, Turner “obtained $40,000 in bonuses that were tied to the success of the TEL sales, which were procured through bribery.”

According to the SEC release, Turner, without admitting or denying the SEC’s allegations, consented to entry of a final judgment requiring him to disgorge $40,000. The release states that no civil penalty will be imposed on Turner “based on, among other things, Turner’s extensive and ongoing cooperation in the investigation.”

Competitor Sues Innospec

The FCPA does not have a private right of action (although as I explored in this post it would be interesting if a court were faced with this issue today).

However, a company that settles an FCPA enforcement action increasingly faces collateral litigation, most often shareholder derivative claims. If a plaintiff does craft a direct cause of action against the company, it is usually a RICO claim.

As noted in this Richmond Times-Dispatch story, NewMarket Corp.’s civil case against Innospec does not fit the above mold, rather it alleges that Innospec’s conduct, as set forth 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.

The article quotes NewMarket’s principal financial officer as saying that the company learned of Innospec’s actions after reading the documents released in connection with the March enforcement action. 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 claims that the competitor was a subsidiary company Ethyl Petroleum Additives Inc. which now goes by the name Afton Chemical Corp.

Innospec Continues to Be In the Money

In this prior post I highlighted how Innospec was ordered to pay $60,071,613 in disgorgement in the SEC’s enforcement action, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement was waived.

In other words, Innospec got a pass on approximately $50 million in March.

I then noted that Innospec’s first quarter financial results were positive and that
“as of March 31, 2010, Innospec had $67.5 million in cash and cash equivalents, $22.5million more than its total debt of $45.0 million.”

Innospec recently reported its second quarter financial results and it continues to be in the money. As noted in this company release:

“As of June 30, 2010, Innospec had $77.0 million in cash and cash equivalents, $30.0 million more than its total debt of $47.0 million.”

The company’s President and Chief Executive Officer stated that “Innospec’s second quarter operating results were very strong, with impressive double-digit increases in sales and operating income across all three business segments.”

The FCPA’s Long Tentacles

By on August 3, 2010 in Africa Sting, Allied Defense Group, Chemring Group, FCPA Investigative Costs, Merger Issues, PBSJ Corp., Raytheon, Reputational Damage, WS Atkins

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.

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