This prior post highlighted the SEC’s recent $4 million Foreign Corrupt Practices Act enforcement action against Westport Fuel Systems and a former executive officer (Nancy Gougarty). This post continues the analysis by highlighting additional issues to consider.
Just the Third
Westport Fuel Systems is a Canadian company with shares listed on a U.S. exchange. The enforcement action is believed to be just the third enforcement action in the FCPA’s 40+ year history against a Canadian company. The first enforcement action against a Canadian company was Nordion (2016 – see here and here for prior posts). The second enforcement action against a Canadian company was Kinross Gold (2018 – see here and here for prior posts).
Why Can’t Canada Handle This?
Westport is a Canadian corporation with shares traded on the Toronto Stock Exchange (as well as NASDAQ).
Canada has an FCPA-like statute called the Corruption of Foreign Public Officials Act (CFPOA). In addition to anti-bribery provisions, the CFPOA has books and records provisions.
Thus, the question arises: why couldn’t Canadian law enforcement authorities handle this matter?
In 2017, Westport disclosed:
“On June 15, 2017, the Enforcement Division of the SEC issued a subpoena to Westport Fuel Systems for information concerning its Weichai Westport Inc. joint venture and compliance with the U.S. Foreign Corrupt Practices Act (“FCPA”) in connection with the Company’s operations in China. Westport Fuel Systems is cooperating with this request and cannot predict the duration, scope or outcome of the SEC’s investigation.”
According to other company disclosures, the SEC followed up with additional subpoenas on February 14, 2018, June 25, 2018, and August 2, 2018.
Thus, from start to finish, the company’s FCPA scrutiny lasted approximately 2.25 years. While this is much shorter than the typical 4.25 years that FCPA scrutiny tends to last in the modern era (see here), 2.25 years is still a long time for a company to be under FCPA scrutiny in connection with one business transaction. Particularly since the SEC stated that “Westport’s cooperation included making foreign witnesses available for testimony … and voluntarily produc[ed] additional requested documents.”
Unusual Fact Pattern
The Westport enforcement action had a rather unusual fact pattern not often seen in FCPA enforcement actions.
As found by the SEC:
- Westport held shares in a Chinese joint venture (JV), along with a privately held Hong Kong conglomerate, and the largest shareholder in the JV was a Chinese state-owned entity (SOE).
- At the direction of a Chinese government official, the SOE proposed taking the JV public in China through an IPO.
- The JV’s manager, appointed by the SOE, falsely represented to Westport that Chinese law required the SOE to have a majority interest in the JV to qualify for an IPO. In reality, the government official’s personal financial interest, not Chinese law, was motivating the transfer of shares to the private equity fund.
- The manager of the JV advised Westport that a preliminary step in the IPO process would involve restructuring the JV so that a portion of the shares held by Westport and the Hong Kong entity would have to be transferred to SOE and a Chinese private equity fund in which the government official held a financial interest.
- Although the shares were transferred to the private equity fund, the contemplated IPO never took place.
The SEC found that Westport violated the FCPA’s anti-bribery provisions as well as the books and records and internal controls provisions. As a foreign issuer, Westport can only violate the anti-bribery provisions to the extent the jurisdictional element (use of “the mails or any means or instrumentality of interstate commerce” as used in furtherance of the bribery scheme) has been satisfied.
The only jurisdictional finding in the action is that money flowed “through a correspondent bank in the United States.”
As relevant to Westport’s internal controls violations, the SEC found:
“While the Westport Code of Conduct prohibited the use of third parties to funnel bribes to government officials and it required that due diligence be conducted when retaining third parties to provide goods or services to Westport, both versions of the Code of Conduct were silent on the need to conduct due diligence when engaging in a business transaction with a third party in which a foreign government official may have a financial interest. Additionally, although Westport required anti-bribery clauses in contracts with vendors, there was no requirement that the company use such clauses when engaging in a business transaction such as a share transfer with entities that may be related to foreign government officials.”
Pre-Enforcement Action Professional Fees and Expenses
In August 2019, Westport disclosed: “As of June 30, 2019 we have recorded cumulative net expenses of $18.1 million in connection with these matters, including a provision of $4.5 million, net of insurance recovery, recorded in the second quarter of this year to reflect the Company’s estimate of costs to complete and resolve the SEC investigation.”
This suggests that the company spent approximately $14 million in pre-enforcement action professional fees and expenses in connection with its FCPA scrutiny. This would seem to be a significant amount of money in connection with a narrowly scoped SEC inquiry and if I were a Westport shareholder I would have some serious questions about what occurred in connection with the company’s FCPA scrutiny.
Regardless, it once again demonstrates that settlement amounts are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement. (See here for the article “FCPA Ripples”).
As highlighted here, in January 2019 Westport announced:
“Nancy S. Gougarty has decided to retire as Westport’s Chief Executive Officer and is stepping down from the Board of Directors. Ms. Gougarty will support Westport Fuel Systems’ leadership team through a transition period.
During Ms. Gougarty’s tenure as CEO she successfully led the integration of the merger of Westport Innovations Inc. and Fuel Systems Solutions, Inc. into the combined Westport Fuel Systems Inc., led the commercial launch of HPDI 2.0™, and improved the company’s operations.
“The Board of Directors would like to thank Nancy for her years of service and dedication to Westport Fuel Systems,” added [the Chair of the Board of Directors].
“I am proud of the work we have accomplished together at Westport and am grateful to have had the opportunity to lead such an innovative organization. The company is in capable hands and I am confident that it will continue to lead the sector as it goes from success to success,” said Ms. Gougarty.
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