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.
New SEC FCPA Unit Chief
Since the June departure of Cheryl Scarboro from the SEC (see here for the prior post), the SEC’s FCPA Unit has been without a Chief. No longer, as yesterday the SEC announced (here) that Kara Brockmeyer has been named the new Chief of the FCPA Unit. According to the release, the bulk of Brockmeyer’s FCPA experience has been in the Bonny Island Bribery cases – see here for previous posts.
Robert Khuzami, Director of the SEC’s Division of Enforcement stated as follows. “Enforcement of the FCPA remains a high priority for the Division, and adding Kara’s talent to the exceptional ability and dedication of the members of the Foreign Corrupt Practices Act Unit will further enhance our anti-corruption program.”
What does the SEC FCPA Unit Chief do? See here for the prior post and job description.
In The Words of Stanley Sporkin
Stanley Sporkin, as Director of the SEC’s Division of Enforcement in the mid-1970’s, played a key role in addressing the foreign corporate payments issues being investigated by Congress and in shaping what would become the FCPA’s books and records and internal control provisions. Calling Sporkin the “Father of the FCPA” (as many have) is, in all due respect, a bit of an overstatement as Sporkin’s SEC was not in favor of what would become the FCPA’s anti-bribery provisions and wanted no part in enforcing those provisions. Nevertheless, Sporkin was a key participant, and has remained a key player, on FCPA issues throughout his storied career.
Sporkin has been talking about FCPA reform for years – long before the U.S. Chamber released its FCPA reform proposals in October 2010.
Thanks to a reader, we can all read some of Sporkin’s early FCPA reform speeches.
In a 2004 speech (here), Sporkin spoke of the SEC stumbling upon the foreign payments issue in connection with its Watergate-related investigations. The FCPA was not a singular outgrowth of Watergate – Congress was already actively investigating allegations of overseas bribery and corruption separate and apart from the Watergate scandal – yet Watergate is nevertheless relevant to the FCPA’s origins. In his speech, Sporkin also talks about the relationship between the FCPA and Sarbanes-Oxley Section 404 (a hot-button issue in 2004 when Sporkin delivered the speech). As to “Next Steps,” Sporkin stated as follows. “[W]e need more than Congress passing new statute, and the SEC requiring strict compliance with existing legislation. We need a comprehensive assault on the problem. This means we need the assistance of our government and indeed all the countries of the world along with the world business community, to provide a climate which enables our corporations to compete honestly and fairly throughout the world. There is a way to fix this problem if there is a will to do so.” Among other things, Sporkin proposed – no doubt in recognition that most FCPA issues arise from use of foreign agents – the “establishment of a country-by-country list of agents that have been properly vetted and have agreed to be examined and audited by an independent international auditing group.”
In 2006, Sporkin returned to the podium (see here) as the FCPA neared its 30th year. He stated as follows. “What I envisioned when the law was enacted was a new corporate regime where bribery of foreign officials would be almost completely extinguished at least as it pertained to major U.S. corporations. As all of us here have observed, the wild-eyed-do-gooder predictions never occurred. Instead statistics indicate that bribery of foreign officials has maintained a steady pace over the years.” [Counterpoint – perhaps bribery of foreign officials, as envisioned by Congress and indeed Sporkin’s SEC, has largely been extinguished, but the issue (in 2006 and still today) is that the goalposts have been moved … and not by Congress].
In his 2006 speech, Sporkin did not advocate the FCPA’s repeal, but he did “think the Department of Justice and the SEC can do something forward-looking which would be win-win for both the government and the private sector.” He called it the “FCPA Immunization-Inoculation Program.” Sporkin stated that the “quasi-amnesty program” would consist of the following: (i) “agreement by participating firms to conduct a full and complete review [conducted jointly by a major accounting firm or specialized forensic accounting firm and a law firm] of the company’s compliance with the FCPA for the previous 3 years; (ii) the company would agree “to disclose the results of the legal-accounting audit to the SEC, its investors, and the public; (iii) “if any violations turned up in the process of the audit, the participating [company] would agree to take all steps to eliminate the problems and implement the appropriate controls to prevent further violations; (iv) participating companies “would agree to subject themselves to a similar audit on an annual basis for at least 5 years to ensure that compliance was being maintained; (v) participating companies “would be required to create the position of FCPA compliance officer, whose sole responsibility would be to ensure the company’s compliance with the FCPA” and make an annual certification; and (vi) “in exchange … the SEC and DOJ would give qualified assurances that no actions would be brought for violations exposed by the review.” As envisioned by Sporkin, the “limited amnesty would not apply if violations rose to flagrant or egregious level.”
According to Sporkin, the “immunization-inoculation program would serve the dual purpose of: (1) creating suitable incentives to compliance-minded companies to adopt and maintain high ethical standards in the conduct of their business; and (2) reducing the case load and investigative burden of governmental agencies that enforce the FCPA while reassuring regulators that companies are taking active steps to limit corruption in their foreign contracting and other activities.” Sporkin conceded that “some adjustments may be necessary” but he believed that his proposal “would provide the right-thinking corporate community with the necessary assurances that it needs to develop a vibrant overseas business without having to defend itself against very costly and time consuming investigations.”
At the November 2010 Senate FCPA hearing, FCPA practitioner Michael Volkov (here) resurrected Sporkin’s proposal – see here for Volkov’s prepared statement. [By the way, for those of you looking for the complete transcript of that hearing, along with the prepared statements, and post-hearing Q&A’s – see here].
While Sporkin’s FCPA reform proposals are, in certain ways, different from many of the proposed FCPA amendments being discussed at the moment, the point of this post – other than to highlight Sporkin’s reform proposals, is to demonstrate that the screams of some – that FCPA reform is solely a Chamber issue or somehow akin to waving the white flag of surrender to corporate bribery – are off-base.
What various FCPA reform proposals through the years have in common is experienced and knowledgeable individuals (including many former DOJ and SEC enforcement attorneys who helped shape the FCPA and FCPA enforcement) sharing a belief that the current ad hoc, inconsistent, arbitrary, and largely opaque enforcement only climate is in need of reform.
“No-Charged Bribery Disgorgement”
The most recent issue of Debevoise & Plimpton’s always stellar FCPA Update contains an interesting article titled “Do FCPA Remedies Follow FCPA Wrongs? ‘Disgorgement’ in Internal Controls and Books and Records Case.” See here. The article chronicles the “growing trend” in which the SEC “has obtained hefty FCPA-related settlements including company obligations to ‘disgorge’ various amounts” even though the corporate defendant is not charged with an FCPA anti-bribery violation.
Indeed, it is a growing trend. In my 2010 SEC FCPA Enforcement Year in Review post (here), I calculated that 96% of SEC FCPA enforcement settlement amounts in 2010 consisted of disgorgement and prejudgment interest (including in cases where the SEC does not charge an FCPA anti-bribery violation).
The Debevoise author group (which includes Paul Berger (here) a former Associate Director of the SEC Division of Enforcement) concludes that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” The authors note that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”
In pointed language, the author groups concludes as follows. “Given the bedrock principle that a court’s equitable power to order such disgorgement goes only as far as the scope of the violation, it is difficult to determine how a court could lawfully allow disgorgement of profits for uncharged violations without the remedy crossing line into ‘punishment’ for the violations actually charged. Although settling companies that willingly accept disgorgement as a remedy in such cases may have important strategic interests at stake – e.g., avoiding primary anti-bribery charges – even these companies (as well as the SEC) must consider that the federal courts may at some point step in and forbid such settlements as beyond ‘the bounds of fairness, reasonableness, and adequacy.’ Similarly, although stipulated SEC civil cease and desist orders do not require judicial approval for their entry, the same result could occur if, and when, the agency seeks judicially to enforce the requirements of a jurisdictionally-flawed order in one of the ‘no charged bribery disgorgement’ cases. At some point, in any event, Congress may well determine that the practice of seeking ‘disgorgements’ in cases in which there is no jurisdictionally-cognizable bribery charged by the SEC is an inappropriate use of the agency’s authority. In light of these serious legal issues, the Commission itself may wish to re-examine its settlement practices in this arena.”
For additional reading on this topic, see my article “The Facade of FCPA Enforcement” (here) – specifically the section titled “Disgorge What?” (pages 981-984).
How Fast Did You Drive Today?
Yesterday I traveled from Point A to Point B. The route included country roads, state highways, and an interstate. Each road had the speed limit displayed and along the route police cars were monitoring traffic and an few motorists were in fact pulled over. During the trip, I stayed below the speed limit, but nevertheless when I arrived home last night I logged my trip (route, speed limit, purpose of trip, etc.). In fact, I do this every day so that at the end of the year I can report my speed to a federal agency.
Sound a bit foolish to you?
If you answered yes, you should likewise conclude that Section 1504 of Dodd-Frank is foolish. As detailed in this prior post, Section 1504 was the “Miscellaneous Provisions” titled “Disclosure of Payments by Resource Extraction Issuers” tucked into Dodd-Frank at the last minute (even though the original bill languished in Congress).
Once the SEC issues final rules as to Section 1504, the rules are likely to substantially increase compliance costs and headaches for numerous companies that already have extensive FCPA compliance policies and procedures by further requiring disclosure of perfectly legal and legitimate payments to foreign governments. As noted in the prior post and in this submission I made to the SEC, Section 1504 is akin to “swatting a fly with a bazooka” and it attempts to legislate an issue that was sensibly put to rest in the mid-1970′s when Congress held extensive hearings on what would become the FCPA. In short, bribery and corruption are bad, but that does not mean that every attempt to curtail bribery and corruption is good.
I was reminded of Section 1504 last week when reading Joe Palazzolo’s article in the Wall Street Journal Corruption Currents page about how Royal Dutch Shell “is trying to curb” the reach of Section 1504’s disclosure requirements. The article links to an August 1st letter from Shell to the SEC (here) in which Shell “provide[d] greater clarity regarding [its] expected costs associated with the Commission’s proposed rules in its release titled Disclosure of Payments by Resource Extraction Issuers. (See here for the proposed rules). In the letter, Martin ten Brink (Executive Vice President Controller) focuses on material vs. immaterial projects and states as follows. “… [W]e wish to inform the Commission that if it were to adopt rules requiring disclosure for immaterial projects, disclosure that by definition is not important to reasonable investors, our marginal costs for this additional disclosure, with the required changes to our financial systems, needed to gather, assure and disclose the proposed information, would be in the tens of millions of dollars. However, by revising its proposed rules to limit disclosure to material projects, those projects that a reasonable investor considers important, we have estimated that the increase in our marginal costs would be reduced very significantly.”
As noted by Palazzolo, the Shell letter specifically references the recent decision by the U.S. Court of Appeals (D.C. Circuit) in Business Roundtable and Chamber of Commerce vs. SEC. In the opinion (here) a three-judge panel unanimously struck down the SEC’s so-called proxy access rule (Rule 14a-11) because “the Commission acted arbitrarily and capriciously for having failed once again […] adequately to assess the economic effects of a new rule.” As noted by Palazzolo, the SEC was supposed to have Section 1504’s rules finalized by April, but the agency pushed the deadline to the end of the year.
The SEC is not to blame for Section 1504. Congress put this issue on the SEC’s plate and said you write the rules. With the SEC struggling mightily to write the rules implementing Section 1504, the remedy should be for Congress to revisit Section 1504 and for it to reach the sensible conclusion (a conclusion a prior Congress reached in considering legislation to address the foreign payments issues in the mid-1970’s) that disclosure of perfectly legal and legitimate payments to foreign governments is not necessary.
Many NGO’s and civil society organizations support Section 1504 and have been known to say that companies who do not bribe should not be bothered by Section 1504’s disclosure requirements. That is like saying motorists who do not speed should not be bothered by the speed disclosures referenced at the beginning of this post.