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Two Scoops Of Opaqueness

As noted in this previous post, in 2010 Digi International had a quick and strange disappearing act.

In a July 22, 2010 SEC filing, the company disclosed as follows.

“As previously reported, after receiving allegations regarding possible violations of our gifts, travel and entertainment policy for activities in the Asia Pacific region by a few employees, we initiated an investigation of these policy and corresponding internal control issues, and any possible related violations of applicable law, including the Foreign Corrupt Practices Act (FCPA). We voluntarily disclosed the allegations to the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC). The investigation has been under the direction of the Audit Committee, comprised solely of independent directors, utilizing outside counsel, and focused on the APAC region. For completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made. We believe the investigation is substantially complete, pending the input from the DOJ and SEC. We have been providing the DOJ and SEC with updates and our proposed remediation plan. We will continue to cooperate fully with the SEC and DOJ process, which could include additional investigative procedures. This investigation found violations of company policy and internal controls that primarily involved three individuals in Hong Kong and our Chief Financial Officer. All four individuals have either been terminated or resigned from the company. The investigation also identified certain books and records and related internal controls issues under the FCPA. The ultimate impact and outcome of the DOJ and SEC process is unknown at this time. ” (emphasis added).

The prior post noted that SEC filings are carefully crafted, tightly worded documents created by in-house specialists and often vetted by outside professionals.  In short, words matter in SEC filings and given the above italicized words, it would seem reasonable to conclude that Digi (with the assistance and input from outside counsel) identified conduct that implicated the FCPA. Why else would the disclosure contain the clause “under the FCPA”?

However, as noted in the previous post, approximately ten days after its SEC filing, Digi (a leading supplier of multifunction communication devices to the U.S. Federal Government) issued a press release (here) stating that: “Digi has now received confirmation through discussions with representatives of the DOJ and the SEC that they will not be initiating any enforcement proceedings against Digi.”

It was quite the disappearing act and a quick one at that.  I highlighted in the previous post that FCPA enforcement (or lack of enforcement) is already largely an opaque process and Digi’s curious disappearing act served as another example for why transparency and accountability in FCPA enforcement is needed.

Digi’s 2010 disappearing act was merely the first scoop of opaqueness.

The second scoop was added last month when the SEC charged Digi’s former Chief Financial Officer Subramanian Krishnan.

The SEC’s complaint (here) alleges in summary form, among other things, that Krishnan “in his role as Chief Financial Officer […] engaged in certain actions and inactions, a result of which corporate funds were used to pay for unauthorized expenses” and that he “authorized such expenses for Digi employees, resulting in the filing of inaccurate expense reports, caused the Company to file inaccurate reports, failed to enforce Digi’s internal controls, demonstrated a lack of management integrity, failed to act to reveal inaccurate reports and wrongly certified the effectiveness of Digi’s internal controls and disclosed they were effective.”  As to certain of the expenses, the complaint alleges as follows.  “Krishnan approved corporate travel and entertainment expenses which appeared to have marginal, if any, business purpose.”  Based on these allegations, and others in the complaint, the SEC charged Krishnan with aiding and abetting violations of the FCPA’s books and records provisions and substantive FCPA internal controls violations.  As noted in this SEC release, without admitting or denying the SEC’s allegations, Krishnan consented to a final judgment permanently enjoining him from future securities law violations and to a bar from serving as an officer or director of any issuer.  As noted in the release, the duration of the bar, and the amount of disgorgement and the civil penalty will be determined at a later date.

The FCPA provisions at issue in the Krishnan enforcement action of course are generic and can be implicated as to conduct that does not involve payments to individuals deemed “foreign officials” by the enforcement agencies.  Yet it would seem unusual for a company to voluntarily disclose, as Digi did, violations of its gifts, travel and entertainment policy for activities in the Asia Pacific region that did not involve expenditures made to, or on behalf of, “foreign officials.”  Indeed, several FCPA enforcement actions have been based in whole or in part on excessive travel and entertainment expenses made to or on behalf of “foreign officials” in the Asia Pacific region.

What type of FCPA issues did Digi disclose in 2010?  Why did Digi’s FCPA scrutiny quickly and strangely disappear?  What sort of travel and entertainment expenses that had marginal business purpose did Digi’s CFO approve?

Because of the lack of transparency surrounding most things FCPA related, we are left to wonder.  All the public has to nibble on is two scoops of opaqueness and it leaves us hungry for more.

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