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SEC Finally Announces Its FCPA Enforcement Action Against Legg Mason


Prior posts here and here highlighted the DOJ’s June FCPA enforcement action against Legg Mason regarding business conduct in Libya. It was noted in the prior post that FCPA enforcement actions against issuers that involve a DOJ and SEC component are almost always announced on the same day. Yet for some reason, back in June the i’s were not dotted or the t’s crossed at the SEC and the DOJ’s June enforcement action clearly had a placeholder for the forthcoming SEC prong.

That happened earlier today as the SEC finally announced its enforcement action.

The SEC’s administrative order is based on the same core conduct alleged in the DOJ’s June enforcement action and is not repeated in this post other to highlight the introduction of the SEC’s administrative order which states:

“This matter concerns violations of the internal controls provision of the FCPA by Legg Mason, Inc. Between 2004 and 2010, Legg Mason, through Permal Group Ltd., one of its former asset management subsidiaries (“Permal”), partnered with Société Générale S.A., a global financial services company based in Paris, France (“Société Générale”) to solicit business from state-owned financial institutions in Libya (“Libyan Financial Institutions”). In connection with this effort, bribes were paid through a Libyan middle-man (the “Libyan Intermediary”) to obtain investments from Libyan Financial Institutions.

From approximately 2005 to 2008, Société Générale paid the Libyan Intermediary approximately $26.25 million for supposed “introductory” services. Nevertheless, by at least 2006, two Permal employees were aware that the intermediary was paying bribes to Libyan government officials in order to secure investments. These two now former Permal employees agreed to continue to use the Libyan Intermediary notwithstanding that knowledge.

Société Générale sold the Libyan Financial Institutions seven structured notes, or debt securities, linked to funds managed in whole, or in part, by Permal. The total value of these notes was approximately $950 million. For each of the seven transactions, Société Générale, on behalf of itself and Permal, paid to an entity incorporated under the laws of Panama and controlled by the Libyan Intermediary (the “Panamanian Company”) a commission of between one and a half and three percent of the nominal amount of the investments made by the Libyan Financial Institutions. Permal earned net revenues of approximately $31.6 million from these transactions.

Legg Mason lacked appropriate internal accounting controls with respect to the use of introducing brokers and other intermediaries in emerging markets, including Libya. Accordingly, Legg Mason violated the internal controls provision of the [FCPA].”

Under the heading “Legg Mason Lacked Adequate Internal Accounting Controls,” the order finds:

“Legg Mason failed in a timely manner to devise and maintain an adequate system of internal accounting controls with respect to the Company’s widespread use of introducing brokers and other intermediaries in emerging markets, including Libya. The controls in place during the relevant period were minimal and deficient.

The internal accounting controls were not reasonably sufficient with respect to the Company’s use of, and payments to, intermediaries. Legg Mason did not timely institute appropriate risk-based due diligence and compliance requirements pertaining to the retention and oversight of such agents and business partners.

Legg Mason did not take adequate steps to identify or mitigate the risks of bribery and corruption in making use of middlemen such as the Libyan Intermediary.”

Legg Mason agreed to pay $34.5 million in disgorgement and prejudgment interest. Thus, the overall Legg Mason FCPA enforcement action is approximately $67.1 million (DOJ – $32.6 million / SEC $34.5 million).

Under the heading “Cooperation and Remedial Action,” the order states:

“In determining to accept the Offer, the Commission considered the significant cooperation Legg Mason provided to the Commission staff throughout the investigation. Legg Mason’s cooperation included summarizing the findings of its internal investigation, making foreign-based employees available to the Commission staff including providing for their travel to the United States for interviews, and providing timely factual summaries of witness interviews and other information developed in the course of its internal investigation. Legg Mason’s cooperation assisted the Commission in collecting information that might not have been otherwise available to the staff. The Commission also considered the remedial efforts undertaken by Respondent. Legg Mason’s remedial action included replacing the employees involved in the violation, increasing the number of professionals focused on the company’s compliance efforts including establishing a new anti-corruption officer position, and enhancing its internal accounting controls to prevent and detect the type of misconduct described herein.”

Under the heading “Non-Imposition of a Civil Penalty,” the order states:

“Legg Mason acknowledges that the Commission is not imposing a civil penalty based upon the imposition of a $32,625,000 criminal fine as part of Legg Mason’s resolution with the United States Department of Justice on June 4, 2018.”

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

“Companies must take adequate steps to identify and mitigate the risks of bribery and corruption present in their global business. Those risks are particularly acute when, as here, agents and middlemen are used as part of a company’s efforts to obtain business with government clients.”

The following additional issues are worthy of highlighting.

The Legg Mason enforcement action represents yet another no-charged bribery disgorgement action.  As highlighted in this previous post (and numerous prior posts thereafter), so-called no-charged bribery disgorgement is troubling. Among others, Paul Berger (here) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Moreover, the conduct at issue in the Legg Mason enforcement action took place between 2004 and 2010 and beyond any conceivable statute of limitations period. Thus, the disgorgement amount conflicts with the Supreme Court’s unanimous holding in Kokesh. But then again, statue of limitations do not matter when issuers roll over and play dead when faced with FCPA scrutiny by agreeing to toll or waive statute of limitation defenses.

On the day of the enforcement action, Legg Mason’s stock stock closed up 1.1%.

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