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 example concerns an SEC enforcement action against Latch, Inc. (a Missouri based company that develops and manufactures smart access hardware and software products for multi-family residential properties).
In summary fashion, this administrative order finds:
“These proceedings arise out of revenue recognition errors by [Latch] … that spanned from at least January 2019 through March 2022 (the “Relevant Period”). [Latch] became a public company through a June 2021 business combination (the “De-SPAC Transaction”) with a special purpose acquisition company (the “SPAC”) that resulted in [Latch] obtaining approximately $450 million in cash proceeds from investors. [Latch] materially misrepresented its 2019 and 2020 revenue in financial statements that were included in registration statements and proxy filings filed with the Commission and provided to investors in connection with the De-SPAC Transaction. After [Latch] became publicly traded, it continued to misstate its revenue, including in its 2021 Form 10-K and interim period reports and associated Forms 8-K.
[Latch] grew rapidly following its first commercial sale in 2016, but its internal accounting control environment did not keep pace. [Latch] had an aggressive sales culture that prioritized meeting internal targets by shipping hardware—often in advance of organic customer demand and through the use of side agreements meaning agreements not contained in the purchase order or sales order. Notwithstanding the use of side agreements and its aggressive sales culture that resulted in sales being pulled forward, [Latch] failed to devise and maintain a sufficient system of internal accounting controls to detect the agreements or make sure that key details regarding these sales were available to permit preparation of its financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). [Latch] also failed to devise and maintain a sufficient system of internal accounting controls to: (1) assess the collectability of its contracts with distributors, resulting in [Latch] recognizing revenue for sales through distributors who did not have the ability to pay; and (2) ensure timely collection of sell-through pricing data to incorporate into its revenue recognition transaction price determination certain discounts it provided. As a result, investors and market participants lacked accurate information to make informed investment decisions.
Following an internal investigation into these and other issues, [Latch] filed an annual report in December 2024 for the year ended December 31, 2022 (the “Restated 10-K”), which disclosed that [Latch] had overstated its revenue for the Relevant Period, including by approximately 107% for the year ended December 31, 2019; 39% for the year ended December 31, 2020; and 50% for the year ended December 31, 2021 (as well as in interim periods).”
Based on the above, the order finds that Latch violated, among other things, the FCPA’s books and records and internal controls provisions.
Under the heading “Cooperation and Remedial Efforts,” the order states:
“In determining to accept the Offer, the Commission considered [Latch’s]
cooperation with the staff’s investigation and its remedial efforts after discovering the violations at issue.After learning of potential misconduct, [Latch] retained outside counsel to conduct an internal investigation under the direction and oversight of its Audit Committee. [Latch] reported on the findings of the investigation to Commission staff and provided selected documents to illustrate certain findings. Upon request, [Latch] also provided staff with additional documents and with explanations and summaries of specific factual issues. [Latch], including its leadership, also met with the staff to discuss its restatement and related issues.
[Latch] also undertook remedial measures relating to the conduct described in the Offer of Settlement, including (i) making changes to management, the finance, sales, and accounting teams; (ii) developing training for [Latch] personnel; and (iii) implementing new controls relating to [Latch’s] accounting, monitoring, risk assessment, and financial reporting functions, including revising its Sarbanes-Oxley compliance program.”
