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Wow – The SEC Acknowledges That Section 13(b)(6) Exists

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In 1988, the FCPA’s books and records and internal controls provisions were amended to include a de facto “good faith” compliance defense in certain situations involving issuers. (See 15 USC 78m(b)(6) – so-called Section 13(b)(6) of the ’34 Act). Since then, Section 13(b)(6) has seemed to be relevant to several Foreign Corrupt Practices Act enforcement actions, however the enforcement actions were silent on this important statutory provision.

The recent Eni enforcement action (see here and here for prior posts) is believed to be the first FCPA enforcement to meaningfully address Section 13(b)(6). In this regard, wow – the SEC actually acknowledged that Section 13(b)(6) exists after completely ignoring this relevant statutory provision in several prior relevant enforcement actions. But did the SEC get it right?

Section 13(b)(6) states:

“Where an issuer … holds 50% or less of the voting power with respect to a domestic or foreign firm, the [books and records and internal controls provisions] require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls consistent with [the internal controls provisions]. Such circumstances include the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied with the requirements of [the books and records and internal controls provisions].

Relevant legislative history states:

“The amendment recognizes that it is unrealistic to expect a minority owner to exert a disproportionate degree of influence over the accounting practices of a subsidiary. The amount of influence which an issuer may exercise necessarily varies from case to case. While the relative degree of ownership is obviously one factor, other factors may also be important in determining whether an issuer has demonstrated good-faith efforts to use its influence.”

However, as discussed in the “Facade of FCPA Enforcement,” the enforcement agencies seemingly ignore this FCPA statutory provision in bringing certain FCPA enforcement actions against parent companies based on the conduct of indirect, multiple-tier subsidiaries or affiliates in the absence of any allegations that the parent had knowledge of or participated in the improper conduct and in the absence of any bad faith allegations. These FCPA enforcement actions would seem to be in direct conflict with the FCPA’s statutory provisions and contribute to the facade of FCPA enforcement

For instance, in 2007 the SEC filed a settled civil complaint against The Dow Chemical Company (“Dow” – a large manufacturer and seller of chemicals, plastic materials, and agricultural and other specialized products and services) charging it with violations of the FCPA’s books and records and internal control provisions. The conduct at issue involved Dow’s “fifth-tier subsidiary” and payments it allegedly made to “Indian government officials to register several agro-chemical products slated for marketing in time for India’s growing season.” Without making a single allegation as to the absence of Dow’s good faith, and without alleging in any way that Dow participated in or had knowledge of the conduct at issue, the SEC charged Dow with violating the FCPA’s books and records and internal control provisions.

Likewise, in 2009 the SEC filed a settled civil complaint against Avery Dennison (“Avery” – a California-based manufacturer of self-adhesive materials and products (“Avery”), charging it with violations of the FCPA’s books and records and internal control provisions. The conduct at issue involved its “indirect subsidiary” Avery (China) Co. Ltd. (“Avery China”). Avery China allegedly provided things of value to Chinese “foreign officials” in seeking business opportunities with Chinese state-owned entities. According to the SEC, the things of value were improperly recorded in Avery China’s books and records. The SEC alleged that Avery China was wholly-owned by Avery Dennison Hong Kong BV, which in turn is wholly-owned by Avery Dennison Group Danmark ApS, which in turn is wholly-owned by Avery. Despite these legally significant facts, without making a single allegation as to the absence of Avery’s good faith, and without alleging in any way that Avery participated in or had knowledge of the conduct at issue, the SEC charged Avery with violating the FCPA’s books and records and internal control provisions

The Dow and Avery enforcement actions (and several others) charging parent companies for the books and records and internal control violations of indirect subsidiaries or affiliates, in the absence of any allegation that the parent company lacked good faith or participated in or had knowledge of the conduct at issue, seem to be in direct conflict with the FCPA’s specific statutory provision.

The Eni enforcement action was based exclusively on the conduct of Saipem S.p.A. (an entity in which Eni held a 43% interest) and it entering into “four sham contracts with an intermediary to assist in obtaining contracts awarded by Algeria’s state-owned oil company.” The culpable actor was Executive A (widely reported to be Alessandro Bernini) who served as Saipem’s CFO from 1996 to 2008 and Eni’s CFO from 2008 to 2012 when he was separated from the comapny.

According to the SEC, Eni “required Saipem to maintain its own internal controls policies, including adopting Eni’s directives of transparency, traceability, and anti-bribery compliance.” In the words of Section 13(b)(6), Eni would thus seemed to have proceeded “in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls consistent with [the internal controls provisions].”

However, according to the SEC:

Executive A “along with other senior officers, bypassed contracting and procurement controls to enter into contracts with the intermediary including falsifying and backdating documents concerning the intermediary contracts in Board notes and approvals. Saipem also made payments to the intermediary on at least one occasion without the approval from the appropriate senior officer until nearly a year after the payment had been made.”

As stated by the SEC, “these actions demonstrate that Saipem’s internal accounting controls were inadequate and insufficient.” Even so, how does that negate Eni’s good faith efforts?

Executive A became Eni’s CFO in August 2008 and according to the SEC “remained involved in Saipem’s intermediary contracts by communicating with the intermediary and its owner and associates, sending e-mails concerning the intermediary, and facilitating Saipem’s ongoing payments to the intermediary.” Once again, according to the SEC, Executive A “continued to conceal Saipem’s sham intermediary contracts from, among others, his colleagues at Eni.” As stated by the SEC:

“Executive A continued to override and undermine Saipem’s internal accounting controls by exerting his influence over Saipem and requesting that it prepay an invoice from the intermediary that was not due yet. Executive A also circumvented Saipem’s anti-bribery internal controls by emailing the intermediary’s ‘strawman’ owner and also meeting with the intermediary’s true owner.”

Once again, how do these findings negate Eni’s good faith efforts?

Relevant to Eni’s good faith efforts, the SEC next acknowledged:

“In late 2012, Eni became aware that Saipem has entered into four agreements with the intermediary without conducting adequate due diligence. Eni also learned that Executive A had continued to involve himself in Saipem’s payments to the intermediary. Immediately upon discovering those facts, Eni separated Executive A from the company.”

Nevertheless, the SEC stated in conclusory fashion:

“Here, however, because Saipem’s accounting for intermediary fees was inaccurate, and because Executive A participated in the approval of and payments to the intermediary while at Saipem and continued to take certain actions to facilitate payments to the intermediary while CFO of Eni, Eni failed to proceed in good faith to cause Saipem to devise and maintain sufficient internal accounting controls. As the principal finance officer of Eni, Executive A could not have been proceeding in good faith to cause Saipem to devise and maintain sufficient internal accounting controls while simultaneously being aware of, and participating in, conduct at Saipem that undermined those controls. Because its CFO was not acting in good faith, Eni cannot rely on the provisions of Section 13(b)(6) of the Exchange Act.”

Kudos to the SEC for acknowledging that Section 13(b)(6) exists, but was this the right answer based on the information in the administrative order?

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