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A Further Reminder That The FCPA Has Always Been A Law Much Broader Than Its Name Suggests

gentex

This type of post has been published several times before (see here and here among other posts), and once again today, to highlight an important (yet often overlooked) aspect of the Foreign Corrupt Practices Act: the FCPA 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, let’s call these numerous enforcement actions non-FCPA, FCPA enforcement actions.

The latest example is this recent SEC enforcement action against Gentex (a Michigan based company that provides digital vision, connected car, dimmable glass, and fire protection products).

In summary fashion, this SEC order finds:

“This matter involves deficiencies in Gentex’s accounting for its executive and employee bonus compensation programs from the third quarter of 2015 through the second quarter of 2018 (the “Relevant Period”). These deficiencies were caused by an ineffective system of internal accounting controls, which made it possible for the company’s then-Chief Accounting Officer, [Kevin] Nash, and others in the accounting group, to make certain adjustments to the bonus compensation accruals without the required accounting analysis or without adequate supporting documentation.

[I]n certain quarters, Nash departed from Gentex’s procedure for estimating the bonus compensation accruals. Additionally, because the bonuses were calculated and paid based on pre-tax profits of the company, the adjustments were made late in Gentex’s quarterly financial statement closing process. He also failed to sufficiently document the basis for his accounting judgments related to certain accrual estimates.

Further, during Gentex’s quarterly closing process for the third quarter of 2015, after Gentex’s Chief Financial Officer (“CFO”) had instructed Nash to reserve funds for a potential executive bonus program, Nash directed a $300,000 accrual for the program. Nash subsequently determined that the accrual would cause Gentex to miss the consensus earnings per share (“EPS”) estimates for the quarter, and the next day, he directed a reduction to the accrual by $200,000. As a result, Gentex publicly reported EPS in line with consensus EPS estimates. If Nash had not reduced the accrual, Gentex would have missed consensus EPS estimates by one penny.

Nash directed the initial accrual for the executive bonus program and the subsequent reduction to the accrual without performing an analysis of the relevant criteria under generally accepted accounting principles in the U.S. (“GAAP”). As a result of his conduct, Nash violated Section 13(b)(5) of the Exchange Act, which prohibits knowingly circumventing or knowingly failing to implement a system of internal accounting controls. Nash further violated Rule 13b2-1 under the Exchange Act, which prohibits any person from directly or indirectly falsifying, or causing the falsification of, any book, record, or account required by the Exchange Act.

In addition, Gentex failed to devise and maintain a sufficient system of internal accounting controls related to its closing process, including its accounting for bonus compensation, and failed to maintain internal control over financial reporting.”

Based on the above, the SEC found that Gentex violated, among other things, the FCPA’s books and records and internal controls provisions. The SEC found that Nash, among other things, caused Gentex’s violations of the books and records and internal controls provisions.

Without admitting or denying the SEC’s findings, Gentex was ordered to pay a $4 million civil penalty and Nash was ordered to pay a $75,000 civil penalty.

As stated in the SEC release: “These actions arise from the Division of Enforcement’s Earnings Per Share (“EPS”) Initiative, which utilizes risk-based data analytics to uncover potential accounting and disclosure violations caused by, among other things, earnings management practices.”

 

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