In November 2019, the DOJ announced that Yanliang Li (a citizen of China and former Managing Director of a Chinese division of Herbalife) and Hongwei Yang (a citizen of China and former head the External Affairs Department of a Chinese division of Herbalife) were criminally charged “for their roles in a scheme to violate the anti-bribery and the internal controls provisions of the FCPA.” Li was charged with one count of conspiring to violate the FCPA, one count of perjury and one count of destruction of records in a federal investigation. Yang was charged with conspiracy to violate the FCPA.
In addition, the SEC charged Li with violating the FCPA’s anti-bribery provisions and aiding and abetting books and records and internal controls violations.
Recently, Judge J. Paul Oetken (S.D.N.Y.) granted the SEC’s motion for a $550,092 default judgment against Li.
The order states in pertinent part (internal citations omitted):
“By not filing a responsive pleading, Defendant failed to defend, and the Clerk has certified his default.
The default establishes liability. Before entering default judgment, a district court is “required to determine whether the plaintiff’s allegations establish the defendant’s liability as a matter of law.” The “legal sufficiency of these claims is analyzed under the familiar plausibility standard.” In conducting that assessment, well-pleaded allegations are taken as true, as the default “is deemed to constitute a concession of all well-pleaded allegations of liability.”
The SEC has stated a claim under … the anti-bribery provision of the Foreign Corrupt Practices Act (“FCPA”) [which] makes it unlawful for any “officer, director, employee, or agent” of an issuer “to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to any foreign official for purposes of” influencing their official decision-making or “securing any improper advantage” in order to assist the issuer “in obtaining or retaining business.” The complaint alleges that Defendant, as an officer of an issuer, bribed Chinese government officials to obtain licenses, “stop government investigations,” “prevent or reduce fines,” and “prevent negative media coverage.” The complaint further alleges that in doing so, Defendant “communicated telephonically and via email with officers and employees . . . in the United States” to “obtain[] approvals for entertaining” Chinese media and government officials. Such allegations suffice to state a claim that Defendant used interstate mails to bribe foreign officials.
The SEC has also stated a claim that Defendant aided and abetted his company’s violations of [the FCPA’s books and records and internal controls provisions]. Section 20(e) of the Exchange Act provides that “any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of” the Exchange Act “shall be deemed to be in violation of such provision.” Accordingly, Defendant aided and abetted his company’s violations of [the books and records and internal controls provisions] if (i) the company violated [the books and records and internal controls provisions]; (ii) Defendant knew of or recklessly disregarded those violations; and (iii) Defendant substantially assisted in the achievement of those violations.
The complaint adequately alleges each element. First, the complaint adequately alleges that Defendant’s company violated [the books and records and internal controls provisions]. [The books and records provision] requires issuers to “make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuers.” [The internal controls provision] requires issuers to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary . . . to permit preparation of financial statements in conformity with generally accepted accounting principles . . . and to maintain accountability of assets;” and “(iii) access to assets is permitted only in accordance with management’s general or specific authorization.” The complaint alleges that the company mislabeled bribes as legitimate business expenses, coached an employee to undermine an audit, gave fake receipts, and incorporated these false expenses into its financial statements. Further, it alleges facts raising an inference that internal controls were insufficient to prevent the company from recording those false expenses as legitimate. Second, the complaint adequately alleges that Defendant knew of or recklessly disregarded these violations. It alleges, for example, that Defendant approved a false reimbursement knowing that the expense applications and attached invoices were false. Third, the complaint adequately alleges that Defendant substantially assisted these violations. It alleges, for example, that Defendant approved expenses for “red envelopes” and cash payments given to government officials. Such allegations suffice to raise an inference that Defendant aided and abetted accounting violations.”
As to damages, the order states in pertinent part (internal citations omitted):
“The SEC has also substantiated its request for civil damages. On a motion for a default judgment, “a defendant’s default does not constitute an admission as to the damages claimed in the complaint.” Instead, the “burden is on plaintiff to establish, by a reasonable certainty, his entitlement to the relief requested.” “To determine damages, the court may conduct an inquest . . . or it may rely on the affidavits and other documentary evidence provided by plaintiff, obviating the need for a hearing on damages.” There is no need for an inquest here.
The Exchange Act authorize a district court to impose civil monetary penalties for violations of the securities laws in three tiers. Tier II penalties are available for a “natural person . . . if the violation . . . involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.” “[T]he amount of the penalty for each such violation shall not exceed . . . [$80,000-$97,523] for a natural person . . . [or] the gross amount of pecuniary gain.” But a district court otherwise has “broad discretion to determine the appropriate amount of any penalty in light of the facts and circumstances surrounding each defendant’s role in the violations.” In determining the penalty, courts consider: “(1) the egregiousness of the violations; (2) a defendant’s scienter; (3) the repeated nature of the violations; (4) a defendant’s failure to admit wrongdoing; (5) whether a defendant’s conduct created substantial losses or the risk of substantial losses to others; (6) a defendant’s lack of cooperation with authorities; and (7) whether the penalty . . . should be reduced due a defendant’s demonstrated current and future financial condition.”
For the reasons explained above, these factors justify a Tier-II penalty. That penalty amounts to $550,092 in damages. The SEC has substantiated its allegations that Defendant submitted (i) false expense reports that purportedly reflected a reimbursement to a farm in Yantai and (ii) a false certification of its SEC filing in 2014. These violations each justify $80,000 in damages. The SEC has also substantiated its allegations that Defendant (i) endorsed a false audit report in April 2016, (ii) submitted a false certification of its SEC filing in 2015, (iii) submitted a false certification of its SEC filing in 2016, and (iv) gave false testimony to the SEC in 2016. These violations each justify an award of $97,523.”
As to the DOJ’s related enforcement action against Li and Yang, the docket does not show any substantive activity since the charges were announced in November 2019.
