Thus far this year, the SEC has brought three Foreign Corrupt Practices Act enforcement actions involving alleged foreign bribery.
In the last approximate two months, the SEC has brought at least three FCPA enforcement actions not involving foreign bribery.
Confused? Don’t be. The FCPA has always been a law much broader than its name suggests. Sure, the FCPA contains anti-bribery provisions which concern foreign bribery. Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, the name non-FCPA, FCPA enforcement actions has long been used on this site.
The latest example is this recent SEC enforcement action against Eagle Bancorp, Inc.
In summary fashion, this administrative order finds:
“These proceedings concern material misstatements and omissions that Eagle, a Bethesda, Maryland-based bank holding company, made about related party loans extended by Eagle’s principal subsidiary, EagleBank, to family trusts affiliated with Ronald D. Paul (“Paul”), Eagle’s former Chairman, CEO, and President, and to other related parties.
From March 2015 through April 2018, Eagle failed to include these undisclosed loans – which were hundreds of millions of dollars in the aggregate and over twice the amounts it had publicly disclosed – in the related party loan balances included in its annual reports and proxy statements filed with the Commission. Both Commission regulations and U.S. Generally Accepted Accounting Principles (“GAAP”) in effect during the relevant period required Eagle to disclose material related party transactions. Adequate disclosure of related party transactions is essential to enable investors to evaluate an issuer’s corporate governance.
In addition, following a report by a short seller in December 2017 that alleged, among other things, that Eagle had made significant undisclosed loans to Paul’s family trusts, Eagle and Paul falsely asserted that those loans were not related party loans and that Eagle was in compliance with all related party loan requirements. Specifically, Eagle immediately issued two separate press releases, one on the day of the short seller’s report and another two days later, essentially denying the allegations and asserting that all relevant loans were in compliance with the law.
After the release of the short seller report, numerous Eagle investors inquired of Eagle and Paul about the nature and amount of these loans to Paul’s family trusts, and whether they were or should be disclosed as related party loans. Despite being aware of these inquiries, and instead of undertaking a thorough and independent investigation of the short report’s allegations, Eagle relied on Paul’s false assertions about the facts necessary for an accurate analysis of whether the loans to Paul’s family trusts were related party transactions that should have been disclosed.
In response to these direct questions from investors and securities analysts, in meetings and on phone calls, Paul falsely asserted that, due to certain facts about his relationship with the trusts, the loans were not related party transactions and that Eagle’s related party loan disclosures were accurate. In January 2018, Paul learned from Eagle’s primary regulator that it considered his family trusts to be related interests under applicable banking regulations.
In its 2017 annual report filed with the Commission on March 1, 2018, Eagle again omitted the loans to Paul’s family trusts from its related party loan balances. While Eagle did disclose in that report the existence of loans to an unspecified trust “established by an executive officer and director,” it falsely stated that those loans were not related party loans. Eagle repeated these inaccurate disclosures in its proxy statement filed April 3, 2018.
In advance of filing its annual report for 2018, Eagle reassessed and enhanced its process for identifying and disclosing related party loans. In that annual report, filed with the Commission on March 1, 2019, Eagle finally disclosed the loans to Paul’s family trusts in its related party loan balances, and also reported previously-undisclosed related party loans to other Eagle directors and their families. As a result, Eagle revised and increased its related party loan balances to $238 million as of December 31, 2017, from a previously-reported balance of $61 million, and to $138 million as of December 31, 2016, from a previously-reported balance of $53 million.”
Based on the above, the SEC found that Eagle violated, among other things, the FCPA’s books and records and internal controls provisions.
Under the heading “Eagle’s False Books and Records and Inadequate Internal Controls,” the order finds:
“During the relevant period, Eagle’s books and records understated its related party loan balances for the reasons discussed above. Furthermore, during the relevant period, Eagle’s internal controls were insufficient to prevent these misstatements. Specifically, Eagle’s process for identifying related party loans relied on the wrong definition of “related party” – Regulation O instead of ASC 850 and Rule 9-03 – and heavily and unreasonably relied on Eagle’s officers and directors understanding and correctly reporting all related parties that met that technical definition.
In March 2019, shortly after the filing of its 2018 annual report, Paul retired from Eagle, citing health reasons. As part of the December 31, 2019 audit, Eagle’s independent auditor identified a material weakness in Eagle’s internal control over financial reporting “resulting from tone at the top issues that contributed to a control environment that was insufficiently tailored to the culture of deference afforded to” Paul. Subsequently, as part of the December 31, 2020 audit, Eagle’s independent auditor found that “[a]s of December 31, 2020, the enhanced controls are operating effectively and the deficiencies that contributed to the Material Weakness [identified in the 2019 audit] have been fully and effectively remediated.”
Without admitting or denying the SEC’s findings, Eagle agreed to pay approximately $13.4 million ($3.4 million in disgorgement and prejudgment interest and a $10 million civil penalty).