For years these pages have highlighted the SEC’s inconsistent approach to enforcing the books and records and internal controls provisions of the Foreign Corrupt Practices Act. (See here, here, here, here, here, here and here for prior posts).
Unlike the FCPA’s anti-bribery provisions, the FCPA’s accounting provisions are generic and generally require that issuers shall: (i) maintain books and records which, in reasonable detail, accurately and fairly reflect issuer transactions and disposition of assets (the books and records provisions); and (ii) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for (the internal controls provisions).
The SEC frequently advances an enforcement theory akin to strict liability that goes something like this: if problematic conduct occurs within a subsidiary, the conduct becomes an issuer violation of the books and records because the subsidiary’s books and records are consolidated with the issuers for purpose of financial reporting as well as an internal controls violation because the subsidiary is subject to the issuer’s internal controls.
Last week, the DOJ announced that Commonwealth Edison Company (ComEd – a majority owned subsidiary of Exelon Corporation (“Exelon” – a company with shares on Nasdaq and thus an issuer) “agreed to pay $200 million to resolve a federal criminal investigation into a years-long bribery scheme.” The conduct did not involve a “foreign official” and thus was not captured by the FCPA’s anti-bribery provisions, but rather a domestic official (described as Public Official A “the Speaker of the Illinois House of Representatives and the longest serving member of the House of Representatives”)(an obvious reference to Michael Madigan).
According to the DOJ release:
“ComEd admitted it arranged jobs, vendor subcontracts, and monetary payments associated with those jobs and subcontracts, for various associates of a high-level elected official for the state of Illinois, to influence and reward the official’s efforts to assist ComEd with respect to legislation concerning ComEd and its business.”
[…]
“ComEd admitted that its efforts to influence and reward the high-level elected official – identified in the Statement of Facts as “Public Official A” – began in or around 2011 and continued through in or around 2019. During that time, the Illinois General Assembly considered bills and passed legislation that had a substantial impact on ComEd’s operations and profitability, including legislation that affected the regulatory process used to determine the electricity rates ComEd charged its customers. Public Official A controlled what measures were called for a vote in the Illinois House of Representatives and exerted substantial influence over fellow lawmakers concerning legislation affecting ComEd. The company admitted that it arranged for jobs and vendor subcontracts for Public Official A’s political allies and workers even in instances where those people performed little or no work that they were purportedly hired by ComEd to perform.
In addition to the jobs and contracts, ComEd further admitted that it undertook other efforts to influence and reward Public Official A, including by appointing an individual to ComEd’s Board of Directors at the request of Public Official A; retaining a particular law firm at the request of Public Official A; and accepting into the company’s internship program a certain amount of students who resided in the Chicago ward where Public Official A was associated.”
Based on this conduct, the DOJ charged ComEd under 18 USC 666(a)(2) (Theft or bribery concerning programs receiving Federal funds) which prohibits: corruptly giving, offering or agreeing to give anything of value to any person, with intent to influence or reward an agent of an organization or of a State, local, or Indian tribal government … in connection with any business, transactions or series of transactions of such organization, government or agency involving anything of value of $5,000 or more.
Insert a “foreign official” for Michael Madigan and the conduct at issue certainly falls into the same general space of many FCPA anti-bribery enforcement actions including several recent enforcement actions concerning jobs or internships provided to individuals associated with a “foreign official.” In every one of these enforcement actions, even though the conduct at issue largely focused on a foreign subsidiary, the SEC still found the issuer parent company liable for books and records and/or internal controls violations – often pursuant to the strict liability enforcement theory described above.
Given this background and context, the lack of books and records and/or internal controls charges against Exelon is interesting to say the least and once again highlights the SEC’s inconsistent approach to enforcing these provisions.
The lack of charges against Exelon is all the more surprising given the following DOJ allegations concerning Exelon itself.
“CEO-1 was the chief executive officer of ComEd between in and around March 2012 and May 2018. From June 1, 2018 to October 15, 2019, CEO-1 served as a senior executive at Exelon Utilities, and had oversight authority over ComEd’s operations.”
“ComEd employees and agents, including third-party consultants and lobbyists, were subject to Exelon’s Code of Conduct. Exelon’s Code of Conduct, applicable beginning in 2015, required employees and agents to: (a) “[k]eep accurate and complete records so all payments are honestly detailed and company funds are not used for unlawful purposes”; (b) “[c]onduct due diligence on all potential agents, consultants or other business partners”; and (c) “[n]ever use a third party to make payments or offers that could be improper.” Exelon’s Code of Conduct also prohibited bribery and listed as an example of a prohibited bribe: “Providing something of value for the benefit of a public official in a position to make a decision that could benefit the company.”
“Although ComEd and Exelon conducted due diligence on Board Member 1 and ultimately determined he was qualified for a Board position, no one at ComEd or Exelon recruited Board Member 1 to serve as a director, and ComEd did not interview or vet other outside candidates for the vacant board seat. ComEd appointed Board Member 1, in part, with the intent to influence and reward Public Official A in connection with Public Official A’s official duties.”
Several FCPA enforcement actions involving alleged foreign bribery (not domestic bribery as in the ComEd matter) have involved similar, or in many cases fewer, allegations against a parent company issuer compared to the allegations against Exelon in the ComEd matter.
Thus, it is curious (based on the information in the ComEd matter) why the SEC did not bring an enforcement action against Exelon.
