WS Atkins Archives - FCPA Professor

The SEC Gets Creative In Bringing Its First FCPA Enforcement Action Of 2015

By Mike Koehler on January 26, 2015 in 2015 Enforcement Actions, Deferred Prosecution Agreements, Engineering Industry, Individual Enforcement Action, Morocco, PBSJ Corp., Qatar, SEC Enforcement Action, Walid Hatoum, WS Atkins

In its first Foreign Corrupt Practices Act enforcement action of 2015, the SEC got creative by agreeing to a deferred prosecution agreement with a legal entity that has not existed since April 2011 and bringing a related administrative action against an individual who agreed to resolve the action without admitting or denying the SEC’s findings. Never before has FCPA enforcement seen such a combination.

While the DOJ frequently uses NPA and DPAs to resolve corporate FCPA enforcement actions, last week’s enforcement action is only the third time the SEC has used an NPA or DPA to resolve an FCPA enforcement action. The other two instances are Tenaris (DPA in 2011) and Ralph Lauren (NPA in 2013).

The enforcement action was against PBSJ Corporation (PBSJ), an entity acquired in October 1, 2010 by WS Atkins plc (“Atkins”) as well as Walid Hatoum, a former executive of PBS&J International, Inc. (“PBS&J Int’l, a wholly-owned subsidiary of PBSJ) concerning a relationship with an alleged Qatari official in connection with projects in Qatar and Morocco.

As highlighted in this prior post, PBSJ voluntarily disclosed its FCPA scrutiny in December 2009.

Post-acquisition, PBSJ became an indirect wholly-owned subsidiary of Atkins and in April 2011, PBSJ changed its name to The Atkins North America Holdings Corporation.

In summary fashion, the two-year DPA “alleges” that:

“The PBSJ Corporation … on or about 2009, violated [the FCPA’s anti-bribery provisions, books and records and internal controls provisions] by making offers and promises of payment and other benefits to certain Qatari government officials in order to secure two multi-million dollar development contracts in Qatar and Morocco and by failing to keep accurate books and records relating to those transactions, and by failing to maintain internal accounting controls to ensure the transactions were recorded accurately and that financial statements were prepared in conformity with generally accepted accounting principles.”

According to the DPA:

“PBS&J International, Inc. (“PBS&J Int’l”) was a wholly-owned subsidiary of PBSJ headquartered and incorporated in Florida. PBS&J Int’l was a provider of engineering, architectural and planning services in international markets, including the Middle East. PBS&J Int’l currently is a subsidiary of Atkins.

The former President of PBS&J lnt’l, Walid Hatoum (“Hatoum”), is a United States citizen who initially worked for PBSJ as an engineer from 1986 until 1990. In February 2009, Hatoum was rehired to join PBS&J Int’l as its Director of lnternational Marketing, even though his prior employment file at PBSJ had been marked “Ineligible for Rehire .” Although Hatoum did not formally join PBS&J Int’l until April 2009, he assisted PBS&J lnt’l with identifying projects as early as November 2008. Hatoum was promoted to President ofPBS&J Int’l in mid-June 2009, and became an officer of PBSJ at the same time.

During 2009, PBS&J Int’l won two multi-million dollar development contracts. One contract was for work in Qatar and the other was for work in Morocco. Both were competitively solicited and approved by the Qatari Diar Real Estate Investment Company (“Qatari Diar”). Qatari Diar was established by the Qatari government to coordinate the country’s real estate development.

PBSJ and PBS&J Int’l, through Hatoum, offered bribes to the then-Director of International Projects at Qatari Diar (“Foreign Official”), to secure Qatari government contracts by planning to funnel funds to a local company the Foreign Official owned and, controlled (“Local Partner”). Foreign Official, a former business colleague of Hatoum’s at another U.S. engineering firm, worked for Qatari Diar throughout 2009, until his resignation from Qatari Diar on December 21, 2009. Prior to joining PBSJ, Hatoum and Foreign Official discussed directing business in the Middle East to Local Partner.

In return, Foreign Official provided PBS&J Int’l with access to confidential sealed-bid information and pricing information on the two government contracts that helped PBS&J Int’l tender bids that had a greater likelihood of being awarded, including a government contract for which the Foreign Official was the project manager.”

Under the heading “Offers and Promises Made to Foreign Officials,” the DPA contains two subsections: “LRT Project in Qatar” and “Design Contract in Morocco.”

As to Qatar, the DPA states:

“In November and December 2008, Hatoum began discussing potential employment with PBSJ. Even before he received a formal employment contract, Hatoum met with PBS&J Int’l to discuss opportunities to grow PBS&J Int’l business in the Middle East. Hatoum discussed projects involving Qatari Diar, including a light rail transit project in Qatar (“the LRT Project”).

In January 2009, Hatoum arranged for Foreign Official’s brother, through Local Partner, to introduce PBS&J Int’l to Qatari Diar senior executives involved in the LRT Project. Soon after that meeting, PBS&J Int’l decided to bid on the LRT Project. PBS&J Int’l added Foreign Official’s company, Local Partner, on its proposal team as a subcontractor to handle local operations such as hiring local labor, as well as complying with bonding and insurance requirements. In return, Hatoum and PBS&J Int’l agreed to pay the Foreign Official, through Local Partner, 40% of the profits realized from any LRT Project contract as well as reimburse its direct costs. The remaining profits were to be split between PBS&J Int’l (40%) and another U.S.-based subcontractor (20%), which
would perform all of the planning and engineering services for the LRT project.

At that time, Hatoum was the only person at PBS&J Int’l who had any knowledge about Foreign Official’s ownership interest in Local Partner. Had PBSJ conducted meaningful due diligence at that time, it would have discovered Foreign Official’s dual role as both government official and third-party owner/operator of Local Partner.

During the bidding process, Foreign Official gave confidential sealed bid information to PBS&J Int’l to assist it in winning the LRT Project in return for promised payments. Foreign Official also made strategic and technical decisions on many aspects of the LRT Project that favored PBS&J Int’l with Hatoum’s knowledge.

Foreign Official used a Local Partner alias to communicate that information to Hatoum and other PBSJ and PBS&J Int’l employees while disguising his involvement on multiple conference calls and in dozens of emails to the United States. Hatoum was aware that Foreign Official was using the alias in communications with PBSJ employees, officers, and directors and with Qatari Diar. Hatoum flew to the Middle East to meet with Qatari Diar officials, including Foreign Official, to discuss PBS&J Int’l’ s qualifications for the LRT Project. At the meeting, neither Foreign Official nor Hatoum informed Qatari Diar that Foreign Official was working for Local Partner and providing confidential information and other assistance to help PBS&J Int’l win the contracts.

Following its initial submission, PBS&J Int’l revised its bid, based on information and guidance provided by the Foreign Official, to best position itself to win the LRT Project and to withstand possible challenges from competitors. On or about August 3, 2009, Qatari Diar awarded the LRT Project contract worth approximately $35.6 million to PBS&J Int’l.

After the award, PBS&J Int’l opened a joint account with Local Partner that was accessible to Foreign Official’s wife. PBS&J Int’l also authorized a four-year letter of credit relating to a bank guarantee in Qatar. The letter of credit was a precondition for receipt of the first contract payment by Qatari Diar to PBS&J Int’l, an up front, 10% (approximately $3.6 million) payment, which was deposited into the joint account.

Once the award was received, Hatoum offered Foreign Official an “agency fee” to Local Partner for 1.8% of the LRT Project contract amount (equivalent to approximately $640,000). Additionally, PBS&J Int’l agreed to pay half of the salary of Foreign Official’s wife, who worked for Local Partner.”

Under the sub-heading “Design Contract in Morocco” the DPA states:

“In addition to the LRT Project, Qatari Diar opened a Morocco hotel resort development (“Morocco Project”) for competitive bid. On August 7, 2009, PBS&J Int’l emailed its Statement of Qualifications for the design contract to Foreign Official, the Qatari Diar project manager for the Morocco Project.

In October 2009, Hatoum offered payment to Foreign Official in the form of an agency fee to Local Partner to secure the Morocco Project. The Morocco Project was worth approximately $25 million to PBS&J Int’l, of which the Foreign Official was offered an agency fee of 3% of the contract amount, which equates to approximately $750,000. Hatoum instructed a PBS&J Int’l employee to hide the agency fee within the company’s bid proposal by inflating other components of the offer for the Morocco Project.

Foreign Official attended meetings with PBS&J Int’l employees to discuss the project but neither Foreign Official nor Hatoum told the employees that he was working for Local Partner. At the same time, Foreign Official, using his Local Partner alias, reviewed and made changes to PBS&J Int’l’ s original bid offer via email and phone. He also made key technical and strategic proposal decisions throughout the bidding process and instructed PBS&J Int’ l to lower its offer to a specific dollar amount. By doing so, he ensured PBS&J Int’l’s final bid had a greater likelihood of being approved by Qatari Diar. On or around October 19, 2009, Qatari Diar informed PBS&J Int’l that it was awarded the Morocco Project.”

Under the heading “Red Flags,” the DPA states:

“PBSJ and PBS&J Int’l officers and employees ignored multiple red flags that should have led them to uncover the payment scheme. For example, PBS&J Int’l and PBSJ employees knew that Local Partner was providing them with confidential sealed bid information. Hatoum also informed the employees that he was obtaining information from someone that Hatoum described as a “good friend” and “top executive” at Qatari Diar. Before PBS&J Int’l submitted its bid for the Morocco Project, a PBS&J Int’l officer learned that the husband of one of the Local Partner employees was a government official working on the Morocco Project. The PBSJ Int’l officer learned of Foreign Official’s role while attending dinner with Hatoum, Foreign Official and the Foreign Official’s wife. In addition, a PBSJ employee knew that “agency fees” to Local Partner were disguised as legitimate costs within the Morocco Project bid.”

Under the heading “Discovery of the Payment Scheme,” the DPA states:

“Shortly after PBSJ Int’l was awarded the Morocco Project contract, PBSJ’ s former Chief Operating Officer commented to PBSJ’s then-general counsel that PBS&J Int’l was successful in winning two contracts in the Middle East within a fairly short period of time. PBSJ’s then-general counsel asked Hatoum how he was able to win the LRT and Morocco Project contracts over companies with far more international experience. Hatoum told PBSJ’s then-general counsel PBSJ offered “agency fees” in order to win the projects and, when asked, admitted there “would be a problem” if the agency fees were not paid. PBSJ’ s then-general counsel immediately launched an investigation of this issue.

Three weeks later, in November 2009, a Qatari government official informed Hatoum and the then-President of PBSJ that Qatari Diar had discovered Foreign Official’s involvement in Local Partner and was rescinding PBS&J Int’l’s contract for the Morocco Project. Hatoum then secretly made an offer of employment to a second Qatari foreign official in return for influencing Qatari Diar to reinstate the contract. However, Qatari Diar refused to reinstate the contract and did not provide PBS&J Int’l any proceeds for the project. PBSJ suspended Hatoum in December 2009. Hatoum also began deleting emails and other records.

PBS&J Int’l and Qatari Diar negotiated a termination of the LRT Project contract effective December 31,2009. In January 2010, Qatari Diar entered into a bridge contract with PBS&J Int’l to continue work on the LRT Project (the “Bridge Contract”) until a replacement company could be found. Ultimately, the period of performance on the Bridge Contract was 16 months . PBS&J Int’l earned $2,892,504 in profits on the Bridge Contract.

PBSJ and Qatari Diar caught Hatoum’s scheme before any of the offered and authorized amounts were paid.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the DPA states:

“PBSJ failed to devise and maintain an adequate system of internal accounting controls. The violations involved conduct orchestrated by a high level manager at PBS&J Int’l and numerous red flags were overlooked by PBSJ and PBS&J Int’l managers and employees. Employees were aware that they were receiving confidential information in a sealed-bid process from a foreign official and that their bids were inflated to conceal payments to Local Partner. Over a million dollars in payments were offered and authorized to Foreign Official through Local Partner without a system of internal accounting controls to identify and detect the improper transactions. PBS&J Int’l agreed to pay Local Partner 40% of the LRT Project profits without subjecting Local Partner or its employees to any meaningful due diligence. PBS&J Int’l did not request a due diligence questionnaire from Local Partner before it initiated its investigation into the matter, and asked no questions about Local Partner’s purported financial statements, work experience, ability to perform the work it was supposed to do under the contract, external auditors, or owners, despite knowing that a Local Partner employee was married to a government official at Qatari Diar. In fact, during the period, PBSJ considered but declined adopting due diligence controls over its contractors and joint venture partners.

As a result, PBS&J Int’l, through Hatoum, offered and authorized bribes to Foreign Official through Local Partner totaling approximately $1,390,000 to secure the LRT and Morocco Projects, plus a portion of any profits Local Partner realized from the LRT Project and partial salary to Foreign Official ‘s wife.

Although PBSJ offered FCPA training at PBSJ and PBS&J Int’l, the company did not ensure that its employees take the training prior to working on international matters. As a result, key PBS&J Int’l personnel on the LRT and Morocco Projects received little, if any, FCPA training during the relevant period. Hatoum received annual FCPA training from his previous employer. Hatoum was offered FCPA training by PBSJ on his first day of official employment in April 2009, but did not take it. Hatoum did not receive training from PBSJ until after Qatari Diar cancelled the Morocco Project in November 2009.”

Under the heading “Failure to Maintain Books and Records,” the DPA states:

“PBSJ, directly and through PBS&J Int’l, failed to make and keep books, records, and accounts which accurately and fairly reflected PBS&J Int’l’s transactions with Local Partner intended for Foreign Official. Some of the payments offered and authorized to Foreign Official were concealed within other, legitimate categories of costs within bids, while others were improperly described in the books and records as legitimate transaction costs. PBSJ failed to accurately disclose in its books and records that the joint account entered into with Local Partner would benefit Foreign Official.”

Under the heading “Self-Report, Remediation, and Cooperation,” the DPA states:

“PBSJ conducted an internal investigation. PBSJ self-reported its preliminary findings of the conduct to staff of the Division of Enforcement (“Division”) and the Department of Justice (“DOJ”).

PBSJ also took immediate steps to end the misconduct. PBSJ suspended Hatoum in December 2009 and later reprimanded four other employees that missed red flags that should have alerted them to the illegal activity. PBSJ also withdrew all proposals in the Middle East initiated during Hatoum’s tenure with PBS&J Int’l. PBSJ reviewed its preexisting compliance program and revised and enhanced its compliance program, including, in part, adoption of: (1) a detailed due diligence questionnaire for contractors, sponsors, and agents; (2) an enhanced FCP A compliance program with mandatory annual training for employees and third-party agents; (3) an international compliance oversight committee at the corporate level; and (4) an annual FCPA compliance audit.

PBSJ ultimately provided substantial cooperation to the staff of the Division, including: voluntarily producing documents and disclosing information to the staff; voluntarily making witnesses available for interviews; and allowing its then-general counsel to interview with staff; and providing factual chronologies, timelines, internal interview summaries, and full forensic images of data.”

The DPA contains a so-called muzzle clause in which PBSJ and Atkins is prohibited from “denying, directly or indirectly, any aspect of [DPA] or creating the impression that the statements [in the DPA] are without factual basis.

In this release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Hatoum offered and authorized nearly $1.4 million in bribes disguised as ‘agency fees’ intended for a foreign official who used an alias to communicate confidential information that assisted PBSJ. PBSJ ignored multiple red flags that should have enabled other officers and employees to uncover the bribery scheme at an earlier stage. But once discovered, the company self-reported the potential FCPA violations and cooperated substantially.”

As noted in the release:

“Under the DPA, PBSJ agreed to pay disgorgement and interest of $3,032,875 and a penalty of $375,000. PBSJ took quick steps to end the misconduct after self-reporting to the SEC, and the company voluntarily made witnesses available for interviews and provided factual chronologies, timelines, internal summaries, and full forensic images to cooperate with the SEC’s investigation.”

Based on the same core conduct “alleged” in the DPA, the SEC also brought an administrative action against Hatoum.

In summary, the Administrative Order states under the heading “Hatoum Caused PBSJ’s Inaccurate Books and Records” as follows.

“Hatoum authorized illicit payments to Foreign Official that were not accurately and fairly reflected on PBSJ’s books and records. Hatoum directed subordinates to conceal some of the payments he offered and authorized to Foreign Official within bids. Other offers and promises to pay authorized by Hatoum to Foreign Official were improperly described in the books and records as legitimate transaction costs with his knowledge.”

Under the heading “Hatoum Caused PBSJ’s Internal Accounting Control Failure,” the order states:

“On April 22, 2009, Hatoum signed a “Business Conduct Standards” agreement for PBSJ employees in which he agreed that “I will neither accept nor give bribes or kickbacks of any value for services or favorable treatment for contracts.” As a high level manager at PBS&J Int’l and later as an officer of PBSJ, Hatoum was responsible for maintaining and ensuring compliance with PBSJ’s internal accounting controls at PBS&J Int’l. Hatoum, however, repeatedly exploited the company’s internal accounting control deficiencies to offer and authorize payments to Foreign Official through Local Partner totaling approximately $1,390,000 to secure the LRT and Morocco Projects, plus 40% of any profits realized from the LRT Project and partial salary to Foreign Official’s wife. Hatoum instructed subordinates to inflate PBS&J Int’l bids by concealing payments to Local Partner intended for Foreign Official. Hatoum took advantage of PBSJ’s accounting controls system by introducing Local Partner as a “legitimate” potential partner for the LRT Project and authorized a subordinate to execute an agreement to pay Local Partner 40% of the LRT Project profits without subjecting Local Partner or its employees to any meaningful due diligence. Hatoum also knowingly executed – and caused a PBS&J Int’l employee to send a questionnaire requesting advocacy assistance from the United States Department of Commerce that included false representations about Local Partner and PBS&J Int’l. Although Hatoum did not participate in PBSJ’s FCPA training until after the scheme was uncovered, Hatoum was aware of the prohibitions of the FCPA from annual FCPA training that he received from his former employer.”

As noted in the SEC’s release:

“The SEC’s order against Hatoum finds that he violated the anti-bribery, internal accounting controls, books and records, and false records provisions of the Securities Exchange Act of 1934. Without admitting or denying the findings, Hatoum agreed to pay a penalty of $50,000.”

PBSJ and Atkins were represented by Mark Schnapp (Greenberg Traurig). Hatoum was represented by Michael Lamont of Wiand Guerra King.

Friday Leftovers

By Mike Koehler on November 28, 2014 in Deferred Prosecution Agreements, Double Standard, India, Merger Issues, Non-Prosecution Agreement, Opinion Procedure Release, Orthofix International, PBSJ Corp., Related Civil Litigation, Richard Bistrong, SciClone Pharmaceuticals, WS Atkins

Scrutiny update, a double standard, ripples, that’s interesting, and for the reading stack. It’s all here in a leftovers edition of the Friday roundup.

Scrutiny Update

One of the longest-lasting instances of FCPA scrutiny concerns PBSJ Corporation (a global engineering and architectural firm) that first disclosed FCPA scrutiny in December 2009. PBSJ was subsequently acquired by WS Atkins (a U.K. company) and WS Atkins disclosed in a recently regulatory filing as follows.

“There are ongoing discussions regarding the longstanding and previously reported Department of Justice and Securities and Exchange Commission enquiries relating to potential Foreign Corrupt Practices Act violations by the PBSJ Corporation prior to its acquisition by the Group. We anticipate resolution of this matter before the end of the current financial year.”

Double Standard?

Several FCPA enforcement actions or instances of FCPA scrutiny have been based on providing things of value such as meals, entertainment and consulting fees to foreign physicians.

Against this backdrop, the Wall Street Journal reports:

“As it fights to buy Botox maker Allergan Inc., Valeant Pharmaceuticals International Inc. is investing cash and time wooing the doctors it would need on its side after a takeover. A centerpiece of the effort: Valeant said it met with a total of 45 influential cosmetic surgeons and dermatologists in September at events in Aspen, Colo., and Palm Beach, Fla. Valeant paid for the physicians’ airfares, two-night stays at luxury hotels and meals. The company also agreed to provide consulting fees that could amount to as much as $30,000, according to doctors who attended the meetings. Valeant, a smaller player than Allergan in cosmetic medicine, must win over doctors if it wrests control of the Botox maker, since it will rely on the physicians for business. Valeant said the pursuit seems to be paying off. Several doctors who attended the sessions, of what Valeant called its special advisory committee, said they were won over by the company’s plans for Allergan—including attracting patients to physicians’ offices and introducing new products.”

Ripples

My recent article “Foreign Corrupt Practices Act Ripples” highlights that settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.

One such ripple is offensive use of the FCPA to further advance a litigating position and that is just what Instituto Mexicano Del Seguro Social (“IMSS”) has done in this recent civil complaint against Orthofix International.

You may recall that in July 2012 Orthofix resolved a $7.4 million FCPA enforcement action based on allegations that its Mexican subsidiary paid bribes totaling approximately $317,000 to Mexican officials in order to obtain and retain sales contracts from IMSS. (See here for the prior post).

In the recent civil complaint, IMSS uses the core conduct at issue in the FCPA enforcement action and alleges various RICO claims, fraud claims, and other claims under Mexican law.

That’s Interesting

As has been widely reported (see here for instance), “President Obama called on the Federal Communications Commission … to declare broadband Internet service a public utility, saying that it was essential to the economy …”.

That’s interesting because – as informed readers know – in the 11th Circuit’s “foreign official” decision the court concluded that an otherwise commercial enterprise can be a “instrumentality” of a government if the “entity controlled by the government … performs a function the controlling government treats as its own.” Among the factors the court articulated for whether an entity performs a “function the controlling government treats as its own” was “whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

Reading Stack

Several law firm client alerts regarding the DOJ’s recent FCPA Opinion Procedure release concerning successor liability (see here, here, here). In this alert, former DOJ FCPA Unit Chief Charles Duross leads with the headline “Is DOJ Evolving Away from the Halliburton Opinion Standard?” (a reference to this 2008 Opinion Procedure release).

From Foley & Larder and MZM Legal (India) – “Anti-Bribery and Foreign Corrupt Practices Act Compliance Guide for U.S. Companies Doing Business in India.”

Recent interviews (here and here) with Richard Bistrong, a real-world FCPA violator and undercover cooperator. See here for my previous Q&A with Bistrong. As noted here, Bistrong recently spoke to my FCPA class at Southern Illinois University School of Law. Having the ability to hear from an individual who violated the law my students were studying, and being able to hear first-hand of real-world business conditions, was of tremendous value to the students and added an important dimension to the class.

Should the government reconsider its use of deferred prosecution agreements? That is the question posed in this New York Times roundtable (in the context of recent bank prosecutions).

Finally for your viewing pleasure, an FCPA-related interview here of SciClone’s CEO (a company that has been under FCPA scrutiny since approximately August, 2010).

*****

A good weekend to all.

Inside A Merger

By Mike Koehler on September 1, 2010 in Merger Issues, PBSJ Corp., WS Atkins

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.”

The FCPA’s Long Tentacles

By Mike Koehler 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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