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“The Company Neglected To Comply With Basic Internal Control Requirements”


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 and these provisions are among the most generic legal provisions one can possibly find.

The latest example is this recent SEC enforcement action against African Gold (a publicly traded special purpose acquisition company incorporated in the Cayman Islands with its principal place of business in New York, New York).

In summary fashion, this administrative order finds:

“African Gold is a publicly traded special purpose acquisition company (“SPAC”). Since the closing of its initial public offering (“IPO”) of securities on March 2, 2021 until late 2022, African Gold failed properly to devise and maintain a sufficient system of internal accounting controls and also failed to maintain internal control over financial reporting (“ICFR”) and disclosure controls and procedures (“DCP”) as required. African Gold’s failure to implement sufficient internal controls enabled its former chief financial officer (“CFO”) to misappropriate nearly all of the money in African Gold’s operating bank account and to otherwise effectively use African Gold’s operating bank account as his own personal account for over one year. As a result, African Gold materially misstated the financial information in several required financial filings with the Commission. African Gold’s former CFO did not have access to African Gold’s trust account and did not misappropriate any funds from the trust account.

According to disclosures in its public filings, African Gold’s activities are limited to searching for a business combination target and its only liquid asset is the money held in its operating bank account, which is designated to fund that search. The money that African Gold raised in its IPO is secured in a trust account. As such, one of African Gold’s most significant risks of material misstatement in its financial statements was the risk of fraud relating to African Gold’s operating bank account and cash disbursements.

Notwithstanding this risk, African Gold failed to devise and maintain internal accounting controls sufficient to provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). For example, African Gold failed to implement basic segregation of duties or monitoring controls with respect to its operating bank account, cash disbursements and financial reporting more generally. Rather, African Gold gave its former CFO control over nearly all aspects of its financial reporting process with little to no oversight by or involvement of other African Gold personnel.

African Gold’s failure to have sufficient internal accounting controls resulted in African Gold’s failure to timely prevent and detect the misappropriation of its only liquid asset— the money held in its operating bank account, which it needed to fund its search for a business combination target. This resulted in African Gold filing material misstatements in its Form 10-K filed with the Commission for the fiscal year ended December 31, 2021 and Forms 10-Q for the periods ended June 30, 2021, September 30, 2021 and March 31, 2022 (the “Financial Filings”). African Gold has since disclosed that the Financial Filings must be restated and should not be relied upon, but has not yet filed any restatements.”

Based on the above, the SEC found that African Gold violated, among other things, the FCPA’s books and records and internal controls provisions.

Without admitting or denying the SEC’s findings, African Gold agreed to pay a $103,591 civil penalty.

In the SEC release John Dugan (Associate Director for Enforcement in the SEC’s Boston Regional Office) stated:

“This settled order with African Gold demonstrates that SPACs must comply with basic Exchange Act requirements, just like any other publicly traded company. The fact that African Gold did not discover the misappropriation of its funds for more than a year, when certain vendors refused to provide further services due to unpaid invoices, clearly indicates that the company neglected to comply with basic internal control requirements.”

As noted in the SEC’s order:

“On January 3, 2023, the Commission charged Cooper J. Morgenthau, African Gold’s former CFO, with violating several provisions of the federal securities laws related to misappropriating money from African Gold’s operating bank account and for lying to African Gold’s accountants and auditor, circumventing and/or knowingly failing to implement internal accounting controls, falsifying African Gold’s books and records, and filing false certifications with the Commission. On January 6, 2023, the Court entered a consent judgment, which enjoined Morgenthau from violating the relevant securities laws and rules and granted other relief sought by the Commission. Relatedly, on January 3, 2023, Morgenthau pleaded guilty to one count of wire fraud, in violation of 18 U.S.C. § 1343, based on the same conduct alleged in the Commission’s complaint.”

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