The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.
Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.
Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.
The latest examples are recent SEC enforcement actions against Malvern Bancorp. and Ault Alliance, Inc.
Malvern Bancorp, Inc. was a bank holding company and its principal business was making commercial real estate loans, residential real estate loans, construction and development loans, commercial business loans, home equity loans and lines of credit, and other consumer loans.
In summary fashion, this administrative order states:
“Between December 2017 and February 2021 (“Relevant Period”), Malvern repeatedly failed to timely recognize and appropriately account for issues related to several large commercial real estate loans resulting in material misstatements of Malvern’s financial statements for several quarters. Gangemi was Malvern’s Chief Financial Officer and principal accounting officer and reviewed and approved Malvern’s accounting that was improper. During the Relevant Period, Malvern failed to properly account for troubled debt restructurings, loan impairments and charge-offs, and impairment of other real estate owned. This led to Malvern’s restatement of its financial statements in its amended Form 10-Q for the quarter-ended December 31, 2019 and in its amended Form 10-K for the fiscal year-ended September 30, 2020. Throughout the Relevant Period, Malvern’s books and records with respect to these loans were inaccurate and its related internal accounting controls were ineffective.”
Based on the above, the administrative order finds, among other things, violations of the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, Malvern agreed to pay a civil penalty of $350,000.
Ault Alliance, Inc. is a Delaware corporation whose principal place of business is in Las Vegas, Nevada. AAI is a diversified holding company which, since 2016, has engaged in operating businesses that include, among others, power products and systems, digital asset mining of Bitcoin, the manufacture and sale of textile technology machinery, and commercial lending.
In summary fashion, this administrative order states:
“This matter involves material misstatements regarding certain businesses of AAI, the failure to disclose interests in related person transactions, improper recording of purported consulting services, erroneous accounting of investments, and the failure to maintain accounting and disclosure controls.
In 2018 and 2019, AAI, a holding company based in Las Vegas, Nevada, and its Executive Chairman and then-Chief Executive Officer (“CEO”), Ault, made materially false and misleading statements and omissions concerning the performance of a $50 million purchase order that AAI received from a related party, as well as the performance of AAI’s new crypto asset mining business. AAI and Ault made these misstatements, which operated as a fraud on investors, in registration statements, various periodic and other reports filed with the Commission, in investor presentations, and in tweets by Ault.
In its Forms 10-K and proxy statements for fiscal years 2016 to 2021, AAI failed to disclose material interests that Ault and then-Chief Financial Officer (“CFO”) Horne had in loans that AAI made to a related person, as required by Item 404 of Regulation S-K. Separately, in 2019, through Ault and Horne, AAI improperly recorded $75,000 paid to an individual as being for consulting services which, in fact, were not provided to AAI and benefitted Ault in extinguishing a personal debt owed to the individual.
In addition, from 2017 through the present, AAI has had reporting, books and records, and internal accounting control failures, and has failed to maintain Disclosure Controls and Procedures (“DCP”) and Internal Control over Financial Reporting (“ICFR”) due to repeated material weaknesses that AAI has repeatedly disclosed. AAI failed to maintain DCP and ICFR for 22 consecutive reporting periods from the period ended June 30, 2017, through the period ended September 30, 2022. These deficiencies continue through today and have not been remedied. AAI announced one restatement in 2017 resulting from its material weaknesses. And during its fiscal years ended December 31, 2018 through 2021, AAI improperly accounted for its investments in warrants of a related party. On April 14, 2023, AAI filed amended periodic reports to restate for this improper warrant accounting.”
Based on the above, the administrative order finds, among other things, violations of the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, AAI agreed to pay a $700,000 penalty and to hire an Independent Consultant to review its internal control over financial reporting and disclosure controls and procedures.
