by T. GormanPosted on Posted in SECActions

The SEC concluded an FCPA investigation with Diageo, plc, in a settled administrative proceeding. In the Mater of Diageo plc, Adm. Proc. File No. 3-14490 (July 27, 2011).

Diago is a leading producer and distributor of premium branded spirits, beer and wine including Johnnie Walker, Simiroff, Guinnes and others. Its ADRs are registered with the Commission and traded on the New York Stock Exchange.

The company is the product of a 1997 merger in which it acquired a subsidiary in India, Diageo India Pvt. Ltd. or DI. At the time Diago also acquired an indirect majority economic interest in and operational control over a joint venture which operated in Thailand, Diageo Moet Hennessy Thailand or DI. The company recognized that its “new subsidiaries had weak compliance policies, procedures, and controls” according to the Order. Both are involved in the action along with Diageo Korea Co. Ltd. or DK.

The proceeding centers on hundreds of small payments made by the three subsidiaries over a period of years to government liquor store operators to secure good product placement, to secure label registrations for its products, as lobbying fees to secure certain tax rulings, to military officials to promote its products and for travel and entertainment. Specifically, in India the following payments were made from 2003 to 2009:

  • Liquor store operators: DI made $792,310 in “improper” cash through third party distributors to 900 or more employees of government liquor stores for favorable product placement. Another $186,299 in “cash service fees” was paid to distributors as compensation for advancing the funds. The payments were not properly recorded.
  • Canteen stores: DI reimbursed about $530,955 in “improper” cash payments made by third party sales promoters to government employees of Indian Military’s Canteen Stores Department. The payments were made to secure: the release of seized shipments of product; obtain initial listings and annual label registrations for product; secure price revision approvals and favorable factory inspection reports; and to promote the products and good will. The payments were not properly booked.
  • Label registrations: DI reimbursed $98,310 in cash payments made by third party promoters and distributors to government officials to secure label registration for products. The payments were not properly booked.
  • Import permits: DI paid $78,622 in extra commissions to distributors to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals for product.

In Thailand the following payments were made:

  • Lobbying: From April 2004 through July 2008 Diageo, through DT, retained the services of a Thai government and foreign political party official. The purpose was to lobby the government primarily regarding transfer pricing tax issues. During the period the company was involved in active disputes with the government relating to these issues. Senior Diageo officials attended meetings with the Thai lobbyist who was also the brother of a DT executive. As a result of these efforts the Thai government accepted important aspects of the proposed transfer pricing methodology. DT paid about $12,000 per month for 49 months for these services for a total of $599,322 to a political consulting firm. “Most, if not all . .” of that sum was paid to the Thai lobbyist. The payments were not properly accounted for. About $15,169 was for the reimbursement of entertainment expenses “including those incurred on behalf of government officials.” Typically the payments were recorded under “generic” labels.

In South Korea the following payments were made:

  • Tax issues: In April 2003 DK, “under Diageo’s direction,” requested a more advantageous transfer tax pricing formula. As part of the negotiations the company sought a large tax rebate. Following intense negotiations in 2004 the government paid a $50 million refund. Subsequently, DK paid a Korean Customs Service official who had been instrumental in the negotiations about $86,339, apparently as a reward. The sum was channeled out of the company using false invoices and was booked by Diageo, through DK, improperly.
  • Entertainment costs: During the transfer pricing negotiations about $109,253 in travel and entertainment costs for Korean customs and other government officials was expended. In part these were for a trip to Scotland with DK employees to visit Diageo’s Windsor Scotch production facilities. “During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side- trip to Prague and Budapest.” The costs were not properly recorded.
  • Gifts: From 2002 through 2006 Diageo, through DK, routinely made hundreds of small payments to South Korean military officers who were responsible for procuring liquor. During the time period about 400 such payments were made totaling $64,184. In addition, another $165,287 was spent for non-traditional and non-seasonal gifts and entertainment for the military. These payments were not properly recorded.

The proceeding was resolved with the company consenting to the entry of a cease and desist order based on Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Diageo also agreed to pay disgorgement of $11,306,081 along with prejudgment interest and a $3 million civil penalty. The Commission acknowledged the cooperation of the company which included certain remedial efforts, employee termination and significant enhancements to its FCPA compliance program.

Two upcoming programs on the FCPA:
Program: Is FCPA Enforcement To Aggressive? August 5, 2011, ABA Annual Meeting Toronto.
Is FCPA Enforcement Overly Aggressive? The program links are here and here.

Program: Current Trends in FCPA Enforcement, August 17, 2011, Live in Menlo Park, CA, and webcast nationally. The program link is here.

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by T. GormanPosted on Posted in SECActions

The number federal securities class action suits filed in the first half of 2011 decreased compared to the second half of 2010. At the same time however the number of cases filed increased compared to the first half of 2010, according to a new report by Cornerstone Research (here). For the first half of 2011 there were 94 suits filed. That is below the 104 suits filed in the second half of 2010 but more than the 72 suits filed in the first half of 2010.

Securities class action filings in the first half of 2011 were driven by suits arising from M&A activity and those associated with Chinese issuers who conducted a reverse merger. In the first six months of the year 24 class actions were filed involving reverse merger cases. During the period 21 were associated with M&A activity. In contrast only two suits related to the credit crisis were brought.

If class action securities suits continue to be filed at the present pace, the report projects there will be a total of 190 cases brought in 2011. This is on par with the average number of filings from 1997 to 2010. However, if the number involving Chinese reverse mergers is excluded from the projection since there are only a finite number of these companies, only 165 filings would be made in 2011. That would be the second lowest number of suits brought during the period 1997 to 2010.

A decline in filings would be consistent with patterns in market volatility which tends to serve as a barometer for securities class action filings. For example, during periods of high volatility such as the fourth quarter of 2008, filings tend to increase. Over the last four quarters, in contrast, the downward trend in market volatility is mirrored by the decline (absent the Chinese issuer cases) in class action securities suit filings.

During the first half of 2011 there was also a decline in the number of suits filed involving companies in the S&P 500. In that period only 8.5 % of the cases involved a company on the index compared to 15.5% during the second half of 2010. This is partially explained by the number of cases involving Chinese issuers and M&A transaction related cases which tended to involve smaller issuers.

While M&A transactions cases continue to be a “notable phenomenon,” according to the report, the number of these actions declined in the first half of 2011 to 21 filings compared to the last half of 2010 in which there were 27 cases brought. At the same time however there was an increase in M&A activity. While the M&A related cases typically are filed in state court, at the end of 2010 a trend of filing a parallel federal court action took off and has continued into 2011. This trend may continue the report notes because the litigation creates an obstacle and financial risk to the completion of the transaction which tends to favor settlement.

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