September 30th was the end of the SEC’s fiscal year – and like prior years – there was much enforcement activity in September. Just don’t call it “earnings management” – even though that is a term SEC Commissioner Hester Peirce has used to describe enforcement activity in September (see here).
Forty percentage of corporate SEC FCPA enforcement actions thus far in 2022 occurred during a 12-day period last month (see here and here) and this post highlights several other non-FCPA, FCPA enforcement actions (that is – enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions, yet have nothing to do with foreign bribery) from late September.
Barclays
As highlighted here, the SEC “charged Barclays PLC and Barclays Bank PLC (BBPLC) in connection with the unregistered offer and sale of an unprecedented amount of securities due to a failure to implement any internal control to track such transactions in real time. Both firms restated their year-end 2021 audited financial statements filed with the Commission as a result of the over-issuances and internal control failure. The firms agreed to pay a $200 million civil penalty and the SEC additionally ordered BBPLC to pay disgorgement and prejudgment interest of more than $161 million, which was deemed satisfied by an offer of rescission BBPLC made to investors in the unregistered offerings.”
Among the violations found by the SEC were violations of the FCPA’s books and records and internal controls provisions.
As highlighted here, in 2019 Barclays resolved a $6.3 million FCPA enforcement action focused on alleged improper internship and hiring practices. The SEC found violations of the FCPA’s books and records and internal controls provisions and stated:
“Barclays was required to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions and dispositions of assets. Barclays’s internal controls required that its employees submit accurate candidate questionnaires and attestation forms in order to screen proposed work experience program hires for compliance with Barclays policies and the FCPA. Contrary to that requirement, certain Barclays personnel submitted, reviewed, and approved inaccurate compliance questionnaires and attestation forms containing inaccurate information that failed to disclose the true source of candidates referred for hire and the intended purpose of making certain relationship hires.”
Tupperware Brands
As highlighted here, the SEC “charged consumer products company Tupperware Brands Corporation with failing to devise and maintain a sufficient system of internal accounting controls and with failing to maintain accurate books and records from at least 2016 through 2020. Tupperware has agreed to settle the charges and will pay a penalty of $900,000.”
In summary fashion, the SEC’s administrative order stated:
“These proceedings arise out of failures by Respondent to devise and maintain a sufficient system of internal accounting controls and to maintain accurate books and records from at least 2016 through 2020 (the “Relevant Period”).
Specifically, Tupperware’s failures relate to its House of Fuller Mexico reporting unit (“Fuller Mexico”), which Tupperware acquired as part of the Fuller Cosmetics beauty products business. Instead of fully integrating Fuller Mexico post-acquisition, and implementing appropriate policies and procedures, Tupperware retained certain legacy policies and practices, failing to recognize the risk that these policies and practices may not adequately address that unit’s direct sales model and, over time, lagging financial performance. As a result, Fuller Mexico’s management was able to override controls and inaccurately record financial results from at least 2016 through 2020 by: improperly increasing sales via the shipment of unordered products, without purchase orders (“Non-PO Sales”); and improperly reserving for various other expenses at Fuller Mexico.
During the Relevant Period, Fuller Mexico increasingly shipped Non-PO Sales to its independent sales representatives (known as “Fullerettes”). At certain points, Fuller Mexico sent more product via Non-PO Sales than the Fullerettes could reasonably sell, and a number of Fuller Mexico’s Non-PO Sales were made at the end of financial reporting periods.
As Non-PO Sales from Fuller Mexico increased over time, so did product returns. Tupperware failed to adequately reserve for the increased returns, as Fuller Mexico continued to apply a more lenient legacy practice for determining reserves arising from Fuller Mexico sales. Furthermore, Tupperware continued to rely on Fuller Mexico’s legacy information technology system and failed to respond to red flags indicating that Fuller Mexico was improperly using Non-PO Sales to attempt to meet its financial targets. Fuller Mexico’s management also overrode existing internal accounting controls by failing to book various required reserves in an attempt to show better results for the unit.
In August 2021, as a result of the activities at Fuller Mexico, Tupperware disclosed in its amended annual report on Form 10-K/A that, from 2016 through the first quarter of 2020, it had misstated its net sales, accounts receivable, inventories, and accrued liabilities in its annual and interim financial statements. Tupperware disclosed that approximately $5.2 million of reserves, including those related to Non-PO Sales, were erroneously recorded and should have been reflected in prior periods. Additionally, Tupperware also disclosed that approximately $2.4 million of other accruals were erroneously excluded from prior periods.”
As a result of the above, the SEC found that Tupperware violated the FCPA’s books and records and internal controls provisions.
Compass Minerals
As highlighted here, the SEC “announced settled charges against Compass Minerals International Inc. for misleading investors about a technology upgrade that the company claimed would reduce costs at its most significant mine, but in reality, had increased costs, and for failing to properly assess whether to disclose the financial risks created by the company’s excessive discharge of mercury in Brazil. Compass is ordered to pay $12 million to settle the charges.”
In summary fashion, the SEC’s administrative order stated:
“This case involves various disclosure violations by Compass Minerals. From 2017 to 2018, Compass made repeated misrepresentations about its plans to reduce costs and about the production levels at its Goderich salt mine. These misrepresentations were the consequence of a deficient disclosure process at the company in which statements to investors were not reviewed by personnel who were sufficiently knowledgeable about both Compass’s operations and its disclosure obligations. The failures in Compass’s disclosure controls and procedures resulted not only in material misstatements about the mine, but in the company’s senior management not having sufficient information about environmental issues caused by a facility it owned in Brazil to make appropriate determinations about disclosures.
Compass calls its Goderich salt mine in Canada the “crown jewel” of its asset portfolio. Goderich is the biggest underground salt mine in the world and the largest single contributor to Compass’s financial results, accounting for about one-third of the company’s earnings. Between 2015 and 2019, Compass upgraded its mining system at Goderich from drilling-and-blasting to continuous mining and continuous haulage (“CMCH”) primarily in an effort to reduce costs.
In 2017, Compass told investors this upgrade was “progressing on plan” and that it would generate $30 million in annual savings for the company beginning in 2018—equivalent to about a 17% increase in the company’s operating income. These statements were materially misleading. Goderich’s new mining system was unable to produce enough salt during this period to save the company money. To the contrary, the production shortfalls caused by the upgrade required the company to incur additional expenses that substantially increased costs for Compass, and the company’s experience implementing the upgrade showed this would continue. Compass did not disclose these facts, which substantially undermined Compass’s statements about the upgrade.
In early 2018, Compass told investors the upgrade had already saved the company $5 million in 2017. This was not true. While the upgrade had reduced certain expenses by about $1 million, overall in 2017, the upgrade had instead increased costs that year.
During this period, Compass also misrepresented the amount of salt it was mining and that it was able to produce at Goderich using the installed CMCH equipment, and failed to disclose as required how the known and ongoing production shortfalls it was experiencing were reasonably expected to reduce its future operating income. After Compass disclosed in October 2018 that continuing production shortfalls at the Goderich mine were significantly impacting its financial results, the company’s share price declined significantly.
In addition to these violations involving Goderich, from the fourth quarter of 2017 to the first quarter of 2022, Compass failed to adequately assess the financial consequences of a recently-acquired subsidiary’s failures to comply with environmental regulations in Brazil. A chemical plant owned by the subsidiary discharged mercury above permitted levels on certain occasions, some of which reached near the Botafogo River. This resulted in potential financial risks for Compass. For example, the Brazilian government may have imposed regulatory penalties or suspended the facility’s operating permit. In addition, Compass’s Brazilian subsidiary may have been subject to liability from third parties impacted by any contamination. Because of its deficient disclosures controls and procedures, however, Compass did not adequately analyze whether these uncertainties were required to be disclosed.
In addition to these disclosure violations, Compass filed materially misstated financials due to its use of a salt interim inventory accounting methodology that did not comply with Generally Accepted Accounting Principles (GAAP).”
Based on the above, the SEC found, among other things, that Compass violated the FCPA’s books and records and internal controls provisions.
Deloitte-China
As highlighted here, the SEC “charged Deloitte Touche Tohmatsu Certified Public Accountants LLP (Deloitte-China), the Chinese affiliate of the Deloitte global network of accounting firms, with failing to comply with fundamental U.S. auditing requirements in its component audits of U.S. issuers and its audits of foreign companies listed on U.S. exchanges. Deloitte-China agreed to settle the charges by paying a $20 million penalty and agreeing to extensive remedial measures.”
Although neither an FCPA enforcement action nor a non-FCPA, FCPA enforcement action, it is interesting to note that in the administrative order the SEC found, among other Deloitte-China audit deficiencies, the following:
“The failures of Deloitte-China audit personnel on impacted audits to comply with PCAOB standards involved multiple audit areas, and involved the testing of various accounts on clients’ balance sheets and income statements, as well as clients’ ICFR, including their control for ensuring compliance with the Foreign Corrupt Practices Act.”
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