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Maxwell Technologies Becomes A Repeat Offender Of The FCPA’s Books And Records And Internal Controls Provisions


As highlighted in this previous post, in 2011 Maxwell Technologies (a California-based manufacturer of energy storage and power delivery products) resolved parallel DOJ and SEC Foreign Corrupt Practices Act enforcement actions concerning alleged business conduct in China by agreeing to pay approximately $14 million.

As noted in the previous post, the SEC’s charges included disclosure violations not often seen in FCPA enforcement actions, based on allegations that Maxwell’s bribe payments allowed the company to offset losses and fund product expansions that are now a source of revenue for the company. Specifically the SEC alleged: ““Maxwell greatly depended on the revenue from Maxwell SA’s high-voltage capacitor sales to China in order to help fund Maxwell’s expansion into new product lines that are now expected to become Maxwell’s future source of revenue. Maxwell engaged in the bribery scheme because it enabled the company to obtain material revenue needed to financially position itself to help fund the very products that today are sustaining Maxwell’s future growth.”

In connection with the 2011 action, then SEC FCPA Unit Chief Cheryl Scarboro stated: “Maxwell’s bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold. This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws.”

In resolving the 2011 enforcement action, Maxwell also agreed to a final judgment permanently enjoining the company from future violations of the FCPA’s anti-bribery and books and records and internal controls provisions (a so-called “obey the law” injunction).

So much for that obey the law injunction as yesterday Maxwell became a repeat offender at least as to the FCPA’s books and records and internal controls provisions.

This administrative order against the company and various individuals finds in summary fashion:

“From December 2011 through January 2013, Maxwell, a California-based company that develops, manufactures, and markets energy storage and power delivery products, engaged in an accounting fraud scheme that improperly recognized over $19 million in revenue from future quarters in violation of U.S. Generally Accepted Accounting Principles (“GAAP”). Maxwell, an SEC recidivist, issued materially false and misleading statements about its revenue, revenue growth, and gross margins, and inflated its reported financial results to better meet analysts’ expectations. Maxwell did not have sufficient internal accounting controls to identify and properly account for its revenue throughout the relevant period.”

The order finds that Maxwell violated the anti-fraud provisions of the Exchange Act (Sec. 10(b) and its associated Rule 10b-5), various reporting provisions of the Exchange Act, as well as the books and records and internal controls provisions of the FCPA.

In so finding, the order states:

“Maxwell is a recidivist. In January 2011, it paid approximately $14.3 million to settle Exchange Act Section 13(a) and Foreign Corrupt Practices Act-related charges with the SEC and the United States Department of Justice, and agreed to undertakings.”

Without admitting or denying the SEC’s findings, Maxwell agreed to pay a $2.8 civil penalty and once again agreed to an obey the law injunction.

In this release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:

“Maxwell recorded revenue before it was actually earned in order to make investors believe that the company’s most important business segment, ultracapacitors, was growing faster than it really was. This action demonstrates our commitment to holding issuers and their executives accountable when they deny investors the ability to make investment decisions based on accurate financial information.”

Maxwell’s recently filed annual report states

FCPA Matter

In January 2011, the Company reached settlements with the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other securities laws violations. The Company paid the monetary penalties under these settlements in installments such that all monetary penalties were paid in full by January 2013. With respect to the DOJ charges, a judgment of dismissal was issued in the U.S. District Court for the Southern District of California on March 28, 2014.

On October 15, 2013, the Company received an informal notice from the DOJ that an indictment against the former Senior Vice President and General Manager of its Swiss subsidiary had been filed in the United States District Court for the Southern District of California. The indictment is against the individual, a former officer, and not against the Company and the Company does not foresee that further penalties or fines could be assessed against it as a corporate entity for this matter. However, the Company may be required throughout the term of the action to advance the legal fees and costs incurred by the individual defendant and to incur other financial obligations. While the Company maintains directors’ and officers’ insurance policies which are intended to cover legal expenses related to its indemnification obligations in situations such as these, the Company cannot determine if and to what extent the insurance policy will cover the ongoing legal fees for this matter. Accordingly, the legal fees that may be incurred by the Company in defending this former officer could have a material impact on its financial condition and results of operation.

Swiss Bribery Matter

In August 2013, the Company’s Swiss subsidiary was served with a search warrant from the Swiss federal prosecutor’s office. At the end of the search, the Swiss federal prosecutor presented the Company with a listing of the materials gathered by the representatives and then removed the materials from its premises for keeping at the prosecutor’s office. Based upon the Company’s exposure to the case, the Company believes this action to be related to the same or similar facts and circumstances as the FCPA action previously settled with the SEC and the DOJ. During initial discussions, the Swiss prosecutor has acknowledged both the existence of the Company’s deferred prosecution agreement with the DOJ and its cooperation efforts thereunder, both of which should have a positive impact on discussions going forward. Additionally, other than the activities previously reviewed in conjunction with the SEC and DOJ matters under the FCPA, the Company has no reason to believe that additional facts or circumstances are under review by the Swiss authorities. To date, the Swiss prosecutor has not issued its formal decision as to whether the charges will be brought against individuals or the Company or whether the proceeding will be abandoned. At this time, the Company continues to cooperate with the Swiss prosecutor and while there continues to be no resolution of this matter, the incurrence of excessive fines in accordance with Swiss bribery laws could occur and have a material adverse impact on the Company’s financial condition and results of operation.”

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