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 Synchronoss Technologies, Inc. (SNCR) and seven senior employees, including the former CFO, in connection with their roles related to long-running accounting improprieties.
In summary fashion, this administrative order finds:
“In July 2018, SNCR announced a restatement of its audited financial statements for the fiscal years ended December 31, 2016 and 2015 and restated selected financial data for the fiscal years ended 2014 and 2013 totaling approximately $190 million in cumulative revenues. As part of this announcement, SNCR restated revenues related to certain transactions for which SNCR had recognized revenue improperly and in a manner inconsistent with generally accepted accounting principles (“GAAP”). The restatement primarily related to three categories of transactions, for which SNCR improperly recognized revenue: (1) transactions for which there was not persuasive evidence of an arrangement; (2) acquisitions/divestitures in which SNCR recognized revenue on license agreement(s) instead of combining those purported amounts with the purchase or sales prices; and (3) license/hosting transactions, in which SNCR converted prior multi-term software-as-a-service (“SaaS”) agreements into perpetual license agreements, and improperly recognized the revenue upfront, instead of recognizing it ratably over the term of the arrangements. In its restatement, SNCR also acknowledged “pervasive material weaknesses” in its internal control over financial reporting for the restatement period.
Certain instances of SNCR’s improper accounting were the result of misconduct by certain of SNCR’s senior executives and other employees. As a result of this misconduct, SNCR filed with the Commission materially misstated financial statements in its annual, quarterly and current reports during the restatement period.”
Based on the above, the SEC found that SNCR violated, among other things, the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, SNCR agreed to pay a $12.5 million civil monetary penalty.
In the SEC release, Gurbir Grewal (Director of the SEC’s Division of Enforcement) stated:
“Investors are entitled to rely on financial statements that are free of accounting improprieties, and when an issuer and its executives and employees engage in accounting gimmicks, we will use every available tool, including significant corporate penalties and individual accountability, to address such misconduct.”
The SNCR enforcement action also demonstrates another issue discussed on these pages for years – the SEC’s seeming inconsistent approach to enforcing the FCPA’s books and records and internal controls provisions (see here).
Consistency is a basic rule of law principle. In other words, the same legal violation ought to be sanctioned in the same way. When the same legal violation is sanctioned in materially different ways, trust and confidence in law enforcement is diminished.
The SNCR enforcement action resulted from the misconduct of certain of SNCR’s senior executives and resulted in materially misstated financial statements.
While a $12.5 million civil penalty is nothing to sneeze at, consider that the BHP Billiton FCPA enforcement action (also finding violations of the books and records and internal controls provisions) resulted in a $25 million civil penalty for the “failure to devise and maintain sufficient internal controls over a global hospitality program that the company hosted in connection with its sponsorship of the 2008 Beijing Summer Olympic Games.” There were no findings of senior executive misconduct in the BHP Billiton action nor did the alleged improper conduct result in materially misstated financial statements.