Former SEC Chairman Roderick Hills And The FCPA

Roderick Hills, who passed away at the end of last month, served as Chairman of the SEC through one if its most turbulent periods – the birth of the Foreign Corrupt Practices Act. When Mr. Hills became Chairman in 1975 the SEC had already initiated the first of what would become a series of illicit payment cases, having settled with American Ship Building and its then CEO.

In his first year of service, and throughout his term, the agency resolved a series of foreign payments cases with some of the largest corporations in the U.S. and their senior executives. Those settlements included Phillips Petroleum (1975), Northrop (1975), Gulf Oil (1975), Lockheed Aircraft (1976) and General Tire (1976). Each of the settlements reflected the fundamental values of the securities laws – accountability to the shareholders whose money was being used to make the illicit payments. Thus each settlement focused on improving corporate governance, accountability and transparency.

While the Commission’s foreign payments actions were successful many were highly critical of the investigations and cases. Some thought the cases should not have been brought. Others claimed that the sums involved were not material. Still others argued that since many of the transactions took place in foreign countries the issue was one of local law in the particular country. Even within the government there was debate with the State Department expressing concern regarding the implications of corporate payments on foreign policy while the Department of Defense, which assisted manufactures selling weapons systems, was actually involved in some of the conduct. Chairman Hills recounted some of the criticisms faced by the SEC in a speech delivered at Yale Law School in 1976:

· One commentator stated that the questionable payments cases were just another experiment doomed to fail, comparing the cases to prohibition: “’America’s unlamented noble experiment with prohibition in the 1920’s made more sense than this new crackdown. Back then, the do-good arguments for banning booze worked out as a bonanza for crime, corruption, and conspiracy. Now the SEC’s new experiment in righteousness is about to backfire too. It will register more laughter abroad than sales. Washington’s cleanup code for corporations under pressure to pay off abroad is reducing America to a role of ‘a pitiful, helpless giant’ . . .’”

· Another comment from a distinguished Washington lawyer and former SEC staff member noted: “‘What function remains for the SEC here? I submit; none. The Commission is plainly out of its ballpark . . . ‘”

· A state court judge wrote: “‘I read your bureaucratic blurb in the Wall Street Journal today (about foreign payment cases). You are out of your mind. Stockholders don’t give a good damn.’”

During the on-going Congressional hearings a series of proposals were debated that could impact the future of the agency. Those included one to give the SEC criminal authority and others focused on adding criminal bribery provisions but not the books and records and internal control provisions favored by the SEC.

Throughout the pubic criticism and Congressional debates the SEC continued with its investigations. The culminated was the Volunteer Program during which 450 companies self-reported, conducted extensive internal investigations, disclosed wrongful conduct and settled actions with the Commission, agreeing to significant remedies. The program did not offer issuers or those involved immunity from prosecution, or even promise “cooperation credit.” It did not require the company to consult with the SEC staff. Rather, it was an effort to spur corporate self-governance since the illicit or questionable payment cases graphically illuminated serious corporate self-governance issues. As Chairman Hills stated:

“It is apparent that our system of corporate self-regulation policed by independent auditors, directors and counsel and ultimately enforced by the SEC has broken down. Hundreds of millions of dollars have been siphoned out of corporate cash flow and spent out of slush funds with the knowledge of some members of top corporate management but without the knowledge of the outside directors, outside auditors and stockholders. No matter that it is only a score or so out of thousands, some are among the biggest and the most audited corporations in the world. If they can do it, who can’t?’ ”

The Volunteer Program, as well as the other foreign payments cases brought by the agency during the period, was a step toward repairing and strengthening corporate self-governance under the supervision not of the government but of the board of directors and its independent directors and outside auditors and counsel. It was that focus which sparked the initial inquiries. It was that continued focus through the tenure of Chairman Hills that made the cases a success and ultimately helped craft the FCPA by the end of his term in 1977.