In the third corporate Foreign Corrupt Practices Act is less than 24 hours, the SEC announced this afternoon that Westport Fuel Systems (a Canadian company with shares traded on NASDAQ) agreed to pay approximately $4 million for “paying bribes to a foreign government official in China.”
In addition, in connection with the same core conduct, Nancy Gougarty (a U.S. citizen who previously served as Chief Operating Officer and from mid-2016 until early 2019 as the CEO and member of the board of directors) agreed to pay a $120,000 civil penalty.
This administrative order finds, in summary fashion:
“This matter concerns violations of the anti-bribery, books and records, and internal controls provisions of the FCPA by Westport Fuel Systems, Inc., a Canadian clean fuel technology company headquartered in Vancouver, Canada, and its former Chief Executive Officer, Nancy Gougarty.
Beginning no later than 2016, Westport, through Gougarty and others, engaged in a scheme to bribe a Chinese foreign government official (“Government Official”) to obtain business and a cash dividend payment from Westport’s Chinese joint venture (“JV” or “joint venture”). JV’s largest shareholder during the relevant period was a Chinese state-owned entity (“SOE-1”). The Government Official held a senior position at SOE-1. At the request of SOE-1, Westport, acting through Gougarty and others, agreed to, and did, transfer at a low valuation a portion of Westport’s shares in the joint venture to a Chinese private equity fund in which Gougarty and others had been informed that the Government Official held a financial interest. In exchange, Westport, through Gougarty and others, believed that the Government Official would use his influence to cause the JV to authorize an increased dividend payment of $3.5 million to Westport and to execute a framework supply agreement between the JV and Westport.
As a result of the bribery scheme, Westport violated the books and records provisions of the FCPA by maintaining false books and records that concealed the identity of the true counterparty to the share transfer. Westport also failed to devise and maintain a sufficient system of internal accounting controls, and Gougarty was a cause of this violation. Gougarty knowingly circumvented the internal accounting controls that Westport did maintain, by, for example, concealing the role of the private equity fund and by failing to require that due diligence be conducted on the fund. Lastly, Gougarty signed a certification regarding internal controls that was attached to Westport’s Form 40-F for the year ending December 31, 2016. Gougarty’s representations in that certification were false …”.”
Specifically, the order finds:
“In March of 2013, at the direction of the Government Official, SOE-1 proposed taking the JV public in China through an initial public offering (“IPO”). The JV’s manager, appointed by SOE-1, falsely represented to Westport that Chinese law required SOE-1 to have a majority interest in the joint venture to qualify for an IPO. Accordingly, the manager of the JV advised Westport that a preliminary step in the IPO process would involve restructuring the joint venture so that a portion of the shares held by Westport and a privately held Hong Kong conglomerate would have to be transferred to SOE-1 and a Chinese private equity fund (in which the Government Official held a financial interest). Although the shares were transferred to the private equity fund, the contemplated IPO never took place.
Once the proposed restructuring was complete, SOE-1 would own 51% of JV’s shares, Westport would own 23.33% through its Hong Kong subsidiary, the Hong Kong conglomerate would own 16.67%, and the Chinese private equity fund would own 9%. On February 11, 2014, the JV board of directors approved the proposed share transfer. Gougarty, Westport’s Chief Operating Officer at the time, led the Westport team in the negotiations with SOE-1.
In April 2014, Gougarty recruited and hired a Chinese national to head Westport’s Asia Pacific regional office. Gougarty had worked closely with the Asia Pacific general manager (“the Asia Pacific GM”) for four years in a different company before hiring him to join her at Westport. Based in Shanghai, the Asia Pacific GM played a central role in the negotiations with SOE-1 and the Chinese private equity fund due to his legal training, his native Mandarin language skills and his physical proximity to JV and SOE-1 in China.
The Asia Pacific GM then joined Gougarty in negotiating the terms of the share transfer with the JV’s manager and an SOE-1 executive, who acted on behalf of the Government Official. Based on information that he obtained in his conversations with the JV manager, an SOE-1 executive, and an executive at the Hong Kong conglomerate, the Asia Pacific GM provided frequent, detailed email updates to Gougarty and other Westport executives. Gougarty worked closely with and supervised the Asia Pacific GM during the negotiations from approximately June 2014 until his separation in April 2016.
Early in the negotiations, the Asia Pacific GM reported that he was told that the Government Official had a significant but undisclosed financial interest in the Chinese private equity fund that was to receive the JV shares from Westport and the Hong Kong conglomerate. He also reported that it was the Government Official’s personal financial interest, not Chinese law, which was motivating the transfer of shares to the private equity fund. In an email dated June 20, 2014, the Asia Pacific GM reported to Gougarty that the Government Official “has [a] personal interest in the fund that [SOE-1] tries to bring in.” In an email dated June 26, 2014, addressed to Gougarty and others, the Asia Pacific GM explained that the IPO was for the Government Official’s “benefit, all he wants is a discount to the fund where he has interest.”
The Government Official’s personal interest became a central part of Westport’s negotiation strategy. Gougarty recommended alternatives that included seeking a supply agreement in exchange for a transfer of shares to the private equity fund. No later than March 2015, Westport explicitly conditioned the share transfer on obtaining a long-term sales agreement. Having acknowledged Westport’s position of “no component sales contract, no share transfer,” Gougarty instructed Westport employees working for her on the transaction in March 2016 that the component supply agreement was a necessary element to complete the deal.
The negotiations progressed slowly as the Government Official and Westport disagreed on the share transfer price, a figure derived from the valuation of the joint venture. In March 2015, after meeting with executives at the private equity fund, the Asia Pacific GM reported that he was told that the Government Official was seeking a low valuation in order to “make quick and big money” outside the scrutiny of Chinese regulators. At the same time, Westport was seeking to maximize its value in order to alleviate its worsening finances and severe need for cash. However, as oil prices plummeted in 2014 and 2015, increasing the market for gasoline-powered car engines and reducing the market for Westport’s alternative fuel products, Westport became more willing to accept a lower valuation in order to close the deal and obtain the much-needed, albeit smaller, infusion of cash.
On June 29, 2015, Westport’s Board of Directors authorized Westport’s management to complete the negotiations and execute the share transfer. Gougarty did not disclose to the Board what the Asia Pacific GM had told her about the Government Official’s personal financial interest in the private equity fund or that the Government Official had requested a discount in the share transfer price. In fact, approximately nine months before obtaining the Board’s approval, Gougarty withheld this information from the Board, deleting a sentence in a September 2014 draft letter to the Board prepared by the Asia Pacific GM that described the proposed transfer. If Gougarty had not redacted the sentence, it would have reported to the Board that the Government Official had a financial interest in the Chinese private equity fund.
By early December 2015, Westport and the Government Official, negotiating through SOE-1 and the private equity fund, struck a deal. They agreed on a valuation of $70 million for the JV, and Westport agreed to transfer shares to SOE-1 and the private equity fund in exchange for a long-term framework supply agreement and a cash dividend of 30% of undistributed profits–20% more than what was provided for under the joint venture agreement and more than Westport had received in the past. Westport also agreed, as Gougarty explained earlier in November 2015, that the public announcement of the deal would be limited to “talk[ing] about the transfer of share[s] to [SOE-1] and [an] unidentified Chinese company.”
In June 2016, Westport issued a revised Code of Conduct, which, like the earlier version that had been in effect since 2010, prohibited the payment of bribes to government officials, including transfers made indirectly through third parties. Gougarty reviewed the 2010 Code of Conduct when she began working at Westport, and she reviewed the new version in June 2016. She had also received training regarding the FCPA while working at another company prior to joining Westport.
While the Westport Code of Conduct prohibited the use of third parties to funnel bribes to government officials and it required that due diligence be conducted when retaining third parties to provide goods or services to Westport, both versions of the Code of Conduct were silent on the need to conduct due diligence when engaging in a business transaction with a third party in which a foreign government official may have a financial interest. Additionally, although Westport required anti-bribery clauses in contracts with vendors, there was no requirement that the company use such clauses when engaging in a business transaction such as a share transfer with entities that may be related to foreign government officials.
On August 20, 2016, Gougarty, by then Westport’s CEO, executed the share transfer agreements with the Chinese private equity fund and with SOE-1. That same day, the JV and Westport entered into a framework supply agreement pursuant to which the JV eventually would purchase approximately $500,000 of engine components from Westport. By separate resolution, executed on the same day, the JV authorized the distribution of a 30% dividend to all of the shareholders.
On September 29, 2016, as reflected in bank records maintained as source documents in Westport’s files, the private equity fund wired a payment of approximately $3 million to Westport’s bank in Vancouver, Canada, from its bank in China through a correspondent bank in the United States. However, even though Westport’s Key Accounting Control 3.1.1 required the comparison of source documents with journal entries, Westport’s books and records accounting for the transaction falsely reflected the identity of the counterparty in the transaction as SOE-2, an entity related to SOE-1, rather than the true counterparty, the private equity fund.
In October 2016, Westport received approximately $3.5 million, representing the increased dividend approved by the JV Board on August 20, 2016, the same day that Westport executed the share transfer agreements to the private equity fund and SOE-1. The $3.5 million dividend was credited to Westport’s bank account in Vancouver, Canada, having been sent from a bank in China through a correspondent bank in the United States.
On November 9, 2016, Westport furnished its Form 6-K with the Commission which, like Westport’s books and records, falsely described the identity of the counterparty in the share transfer as SOE-2 instead of the Chinese private equity fund. Even though Westport’s internal accounting Key Controls 6.2.1 and 6.2.2 purported to establish a process to reconcile public filings with source documents to provide reasonable assurance with respect to the accuracy and consistency of its filings, it failed to follow this process. As evidenced by her own misconduct, Gougarty as CEO failed to discharge her duty on behalf of Westport to devise and maintain a sufficient system of internal accounting controls.
On March 31, 2017, Westport filed a Form 40-F, its annual report, for the year ending December 31, 2016. The Management Discussion & Analysis (“MD&A”) and financial statements attached to the Form 40-F falsely reported the identity of the counterparty in the share transfer as SOE-2 instead of the Chinese private equity fund. In connection with the filing of the Form 40-F, Gougarty executed a certification falsely attesting that Westport had disclosed all significant deficiencies and material weaknesses in the design and operation of its internal controls to the outside auditors. However, as Gougarty knew, she had failed to disclose to the outside auditors the deficiencies and weaknesses in the internal controls that she had exploited in carrying out an unlawful bribery scheme in circumvention of Westport’s anti-bribery policies and its key accounting controls.”
Based on the above findings, the SEC found that Westport violated the FCPA’s anti-bribery provisions, books and records provisions and internal controls provisions. The SEC also found that Gougarty caused the company’s books and records violations and internal controls violations and that Gougarty knowingly circumvented or knowingly failed to implement a system of internal controls.
Without admitting or denying the SEC’s findings, Westport agreed to pay approximately $4 million (disgorgement of $2.35 million, prejudgment interest of $196,000 and a $1.5 million civil penalty). Gougarty agreed to pay a $120,000 civil penalty.
Under the heading Westport’s Remedial Efforts, the order states:
“In determining to accept Westport’s Offer, the Commission considered remedial acts undertaken by Westport concerning its anti-corruption and financial reporting compliance programs, and its cooperation afforded the Commission staff.
During the course of the staff’s investigation, Westport enhanced its anticorruption and compliance policies and training programs, and its disclosure policies and controls. Westport enhanced its antibribery and anticorruption controls by adopting revised policies that, among other things, establish specific controls for transactions involving foreign government officials and entities, mandate due diligence for such transactions, and specifically require Westport’s business partners to agree to abide by antibribery laws, including the FCPA.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“A company’s commitment to compliance is only as strong as the effort put in by senior management. Here, the chief executive exploited weaknesses in the company’s controls to engage in bribery, undermining shareholder interests.”
As a condition of settlement, Westport agreed to report to the SEC “periodically during a two-year term, the status of its remediation and implementation of compliance measures, particularly as to the areas of due diligence of third-party entities and persons, FCPA training and the testing of relevant controls including the collection and analysis of compliance data.”
In this release, David Johnson (CEO of the company) stated:
“With the investigation resolved and a steadfast commitment to maintaining a culture of integrity, we are able to return our full focus to providing our customers around the world with our clean transportation technologies and products to address the urgent challenges of climate change and urban air quality.”
Shortly after the enforcement action was announced, Westport’s shares closed up approximately 9.2%.
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