There are some topics in the Foreign Corrupt Practices Act space that are covered ad nauseam. Yearly enforcement statistics come to mind as well as the odd practice of “media” covering law firm client alerts as if they are news.
Then, there are other topics in the FCPA space that receive little coverage. In this later category are FCPA enforcement actions (that is those involving FCPA books and records and internal controls charges) that do not necessarily involve foreign bribery.
These pages have long focused on so-called non-FCPA FCPA enforcement actions because they often present a perplexing issue. That is, the same legal violation is generally enforced in different ways.
It’s as if speeding tickets in the same jurisdiction involving a blue car are handled differently than a speeding ticket involving a red car.
In the latest non-FCPA FCPA enforcement action, the SEC announced an administrative action against “Petroteq Energy, Inc., former executive chairman Aleksandr Blyumkin, and former Chief Financial Officer Mark Korb for their roles in making materially false and misleading disclosures in the company’s SEC filings about related party transactions, Petroteq’s assets, and Blyumkin’s receipt and use of Petroteq funds. Blyumkin also raised millions of dollars for Petroteq through a fraudulent, unregistered securities offering.”
In summary fashion, this administrative order finds:
“This matter involves violations by Petroteq, a public company based in Sherman Oaks, California, and its former executive chairman, Blyumkin. First, Petroteq raised $7.39 million in an unregistered securities offering from September 2017 to May 2019. Petroteq filed Form D notices with the Commission, signed by Blyumkin, falsely stating that the company paid no sales commissions in the offering. In reality, Petroteq paid commissions exceeding $2.89 million. Second, Blyumkin withdrew cash for himself from Petroteq’s bank accounts and directed company money to his companies, to his sister, and to companies owned by his brother-in-law and former domestic partner in transactions not disclosed in Petroteq’s Commission filings. As a result of these transactions, which totaled at least $3,065,595, Blyumkin received financial benefits from Petroteq exceeding his compensation described in Petroteq’s Commission filings. Third, in a transaction negotiated by Blyumkin, Petroteq reported paying $23.8 million in cash and stock to purchase certain mineral-lease operating rights, which accounted for 32.6% of the company’s total assets. Petroteq’s Commission filings failed to disclose that Petroteq purchased the assets from a related person, as defined in Exchange Act Regulation S-K, Item 404, and failed to disclose details concerning the lack of impairment analysis of the asset’s value.
In addition, from at least 2018 through 2020, Petroteq’s independent auditor identified material weaknesses in Petroteq’s internal control over financial reporting (“ICFR”), including that Blyumkin held single-signature authority over Petroteq’s bank accounts and that a material amount of Petroteq’s expenses were personal to Blyumkin. The auditor noted that these weaknesses increased the risk of misappropriation and financial misstatements. Despite these warnings, Blyumkin failed to implement internal accounting controls to address the material weaknesses that the auditor identified. The company failed to conduct an impairment analysis of Petroteq’s operating-rights assets, and the company’s financial statements failed to disclose certain other related-party transactions as required under generally accepted accounting principles (“GAAP”).”
Among the legal violations found in the SEC’s order were violations of the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, Petroteq agreed to pay a $1 million civil penalty.
In other words, an FCPA books and records and internal controls enforcement action involving high-level executive conduct and material weaknesses in internal controls over financial reporting was resolved for $1 million.
Yet other FCPA books and records and internal controls enforcement actions not involving high-level executive conduct and not involving material weaknesses in internal controls over financial reporting – but rather pedestrian issues such as corporate hospitality – are resolved for $25 million. (See here for the BHP Billiton enforcement action).
It makes no sense.