by T. GormanPosted on Posted in SECActions

The Manhattan U.S. Attorney’s Office achieved another significant win with the announcement of an agreement by the SAC Capital Companies to plead guilty to the indictment against them and to resolve the parallel civil forfeiture case. U.S. v. S.A.C. Capital Advisors, LP, Case No. 13 cr 541 (S.D.N.Y.); U.S. v. SAC Capital Advisors, LP, Civil Action No. 13 Civ. 5182 (S.D.N.Y.). For the U.S. Attorney’s Office the plea arrangement is the culmination of an unprecedented, unbroken string of insider trading guilty pleas and convictions. For the defendants, the result is harsh, effectively ending the business of a Wall Street titan.

The five count indictment named as defendants the key SAC entities: S.A.C Capital Advisors, LP, S.A.C. Capital Advisors LLC, CR Intrinsic Investors, LLC and Sigma Capital Management, LLC. It contains one count of wire fraud and four counts of securities fraud.

The indictment is built on two essential components. First, it rolls up prior insider trading convictions and charges brought against former and current employees and affiliates of the firms. The list includes former employee Wes Wang who furnished inside information about a variety of companies including Cisco Systems, Broadcom Corporation and others; Richard Choo-Beng Lee who provided illegal tips on Intel, AMD and others; Jon Horvath who is alleged to have illegally tipped Michael Steinberg, currently awaiting trial, about inside information regarding NVIDIA and Dell; Noah Freeman who provided inside information about Avnet, Inc., Fairchild Semiconductor, Atheros Communications, Inc., and others; Donald Longueuil who passed-on material non-public information about Fairchild, Broadcom, Dell and others; Mathew Martoma who, like Mr. Steinberg, is awaiting trial on insider trading charges only related to Elan Corporation and Wyeth; and Richard Lee who pleaded guilty to providing illegal tips about Yahoo! Inc. and 3Com Corporation.

The Second component is the culture, reflected in the relentless pursuit of “edge” or inside information, hiring practices that fostered contacts with companies and the lack of effective compliance systems. The firm encouraged the hiring of those who had deep connections to public companies which could yield “edge” or inside information. This was exemplified by the hiring Richard Lee who had a questionable history but was reputed to have access to inside information. The lack of effective compliance procedures aided this culture where suspicious practices were not referred to compliance or glossed over, according to the indictment.

Under the terms of the deal the SAC Companies will pled guilty to all of the counts in the indictment. In addition, the companies will pay a financial penalty of $1.8 billion. That sum represents a $900 million judgment in the forfeiture action and a $900 million criminal fine. The defendants will be given credit for the $616 million paid earlier to resolve an SEC civil insider trading case. The companies will also terminate their registration with the SEC as an investment advisor. Finally, the defendants will be on probation for five years. During that period they will implement insider trading compliance procedures which will be supervised by a monitor.

The guilty plea only resolves charges for the defendants. It does not resolve liability for any individual. Accordingly, the failure to supervise action brought by the SEC against Mr. Cohen still must be resolved. Likewise, the civil and criminal insider trading inquiries will continue. The date for the defendants to appear and enter the guilty pleas and be sentenced has not been announced.

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by T. GormanPosted on Posted in SECActions

FCPA enforcement continues to be a priority for the DOJ and the SEC. This can make doing business in high risk parts of the world such as China hazardous. While compliance systems are not a defense, they may be sufficient in some circumstances to warrant a declination or at least to aid in minimizing liability.

A new report by the U.S. China Business Council, titled Best Practices for Managing Compliance in China, (here) provides insight into practices which can assist companies doing business in the high risk environment of the PRC. The Report is based on a survey of, and conversations with, 30 companies doing business in China in a wide variety of areas.

The Report begins by recognizing the difficulty of conducting business in China while maintaining an effective compliance program: “Foreign companies doing business in China encounter local perspectives and assumptions that make adherence to corporate compliance programs an ever evolving and challenging effort. Practices normally considered unacceptable in the U.S. may not only be allowed in China, but may even be strongly encouraged by local cultural conventions. Developing internal practices that take these norms into consideration – while protecting a company’s legal obligations and international reputation – is a difficult process that requires balancing strongly competing interests.”

Companies doing business in China must manage not just FCPA compliance but also a variety of local laws while competing with enterprises that are not focused on anti-corruption compliance. China does not have any overriding statute such as the FCPA, according to the Report. There are, however, local laws which companies must consider including: PRC criminal law; interpretations of select courts; anti-unfair competition law; and SAIC interim provisions on prohibition of commercial bribery activities.

While contending with these laws and maintaining FCPA compliance, companies must compete with those who are not following the U.S. statute. About 60% of companies reported in the survey that they are “more concerned with competition from firms not following FCPA strictures than with managing compliance program enforcement in China.” Thus 35% of the companies surveyed by the Business Council in a separate membership survey indicated a loss of business due to FCPA compliance. Nevertheless, none of the companies surveyed questioned the benefits of compliance included protection from possible violations, company branding in the market place, lower costs and a better ability to manage local government expectations. Indeed, one company reported an increase of 17% in profit margins after winnowing its distributor relationships after conducting rigorous FCPA due diligence.

The Business Council survey also provides insight into compliance practices currently being utilized by companies doing business in China. These include:

Structure: About 40% of the companies reported employing full time compliance officers at the local level either covering China or Asia-Pacific. A variety of reporting structures were used including: 1) direct report to Asia-Pacific leadership with a dotted line to China and U.S. compliance heads; 2) Direct report to U.S. compliance with a dotted line to China leadership; and 3) China compliance committee direct report to China leadership with a dotted line reporting to the U.S. compliance head.

Local adoption: Over 90% of the companies surveyed reported that compliance policies are developed by their global teams and then implemented in specific regions. Nearly 60% have China specific rules built on global compliance principles.

Entertainment: One of the key risks faced by companies stems from commercial and government entertainment. 94% of the firms responding in the survey reported using mandatory monetary thresholds or limits on the amount that can be spent on entertainment and gift giving. 44% of those companies use global company wide limits in U.S. dollars while 56% keep the thresholds in local currency. The average threshold for entertainment expenses in China is about $72 per event.

Gifts: Another key issue is gift giving, which is customary in China. Most companies reported that they discourage gifts. When they are unavoidable, typically firms favor giving gifts of minimal monetary value with corporate logos such as flash drives, calendars, notebooks and small toys directly related to the business of the company. Most companies also maintain a threshold for gifts. The average amount for those in the survey was $57.

Approval process: About 51% of those surveyed reported setting pre-approval expense thresholds that are tailored to various employee functions and levels. Only 16% of the responding companies reported having no pre-approval process.

Social responsibility activities: Most companies reported that they do not participate in corporate social responsibility initiatives. Companies that do participate prefer to work with organizations that have an international track record or a global agreement with the company.

Training: Those responding in the survey stressed frequent and continuous training. Some companies tie training to yearly reviews.

Auditing: The most common method for monitoring compliance is auditing. Approximately 44% of those responding reported utilizing an external firm while 36% use internal auditors and external firms.

Whistleblowers: Nearly all of the companies in the survey offer hotlines for staff to anonymously report compliance concerns. The most successful are those with multi-lingual support and local call-in numbers.

Joint ventures: These present some of the most challenging issues, according to those who responded. Companies in the survey stated that the most effective approach comes from continual reinforcement over a long period. In view of the cultural nuances of conducting business in China those responding in the survey stated “it may be most effective to work behind the scenes with key company leaders to win their support for more stringent compliance observance.”

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