THE SEC’S FIRST DEFERRED COOPERATION AGREEMENT: A NEW APPROACH?

The SEC and Tenaris S.A resolved and FCPA case with a deferred prosecution agreement. It is the first deferred prosecution agreement under the initiative the Commission announced last year. The company also settled FCPA charges with the Department of Justice, entering into a non-prosecution agreement. The resolution of these actions reflects what DOJ terms the “extraordinary cooperation” of the company.

Tenaris is a Luxembourg based international seller of steel pipe products and related services to the oil and gas industry. In 2006 and 2007 Tenaris bid on contracts with OJSC O’ztashqineftgaz (“OAO”) to supply pipeline for the development and production of oil and natural gas in Uzbekistan. OAO was a subsidiary of Uzbekneftegaz, a state owned holding company of Uzbekistan’s oil and gas industry.

To facilitate the bidding process the company retained a local agent. Through the agent Tenaris was able to obtain confidential information regarding the bids of competitors. As a result, the company was successful in obtaining contracts during the time period which generated almost $5 million in profits. The agent was paid a commission, portions of which went to state officials as bribes.

Tenaris first learned of the bribes in March 2009 through a third party. The audit committee immediately retained counsel who launched an internal investigation. In a filing with the SEC on June 30, 2009 Tenaris disclosed the customer allegations that lead to the inquiry and the investigation, noting that it had self-reported to DOJ and the SEC. The next month counsel for the company briefed DOJ and SEC officials, promising to conduct a more detailed investigation and report again.

Subsequently, the company conducted a world-wide inquiry of its business operations and controls. It also provided DOJ and the SEC what the latter called “extensive, through, real-time cooperation . . .“ making full voluntary disclosure of the underlying conduct. The company also enhanced its compliance measures. The steps taken included the adoption of a strengthened Code of Conduct, Business Conduct Policy and Agent retention Procedure that addresses anticorruption and compliance with the FCPA.

Tenaris resolved the charges with DOJ by entering into a non-prosecution agreement. The company also agreed to pay a criminal fine of $3.5 million.

The deferred prosecution agreement executed with the SEC is modeled on those used by the Justice Department. Under its terms the company agreed to pay $5.4 million in disgorgement and prejudgment interest. Tenaris also accepted responsibility for its actions and agreed “not to contest or contradict the factual statements” regarding the underlying conduct detailed in the agreement. A footnote provides that the agreement is the result of settlement negotiations and thus the statements in it are not binding on the company in any other proceeding.

As part of the agreement Tenaris will continue to cooperate with the SEC. The company also agreed to: 1) provide the Commission with a written certification of compliance prior to the end of the agreement in 2013; 2) annually review and update its Code of Conduct; 3) require that each director, officer and management level employee certify compliance with the Code of Conduct on an annual basis; and 4) conduct FCPA training and supervision for all officers and managers, finance employees, other working in areas implicated by its anticorruption and compliance policies and future employees.

The fact that the SEC chose an FCPA case to enter into its first deferred prosecution agreement may indicate a shift in approach. DOJ has long used this type of agreement to resolve FCPA charges. In those agreements the Justice Department typically acknowledges the cooperation of the company. In many cases a description of the cooperation is provided and DOJ indicates the impact of it on the resolution of the matter.

In contrast the SEC frequently makes little reference to the cooperation of the company in its parallel FCPA settlements, an approach which seems at odds with the purpose of the initiative under which the agreement was crafted. This approach also makes it difficult at best to evaluate the impact of cooperation on the ultimate resolution of the case and offers little guidance to issuers. This is particularly true since SEC settlements in these cases all tend to be similar. In contrast, the agreement here details the cooperation steps of the company as well as its compliance undertakings. Perhaps the Tenaris agreement signals the beginning of a new effort to foster cooperation and focus on compliance and prevention.

CAN THE COMMISSION MOVE PAST THE SCANDALS?

SEC Enforcement completed its most comprehensive reorganization since the Division was created in the early 1970s. A new director, deputy director and other senior personnel have taken over. New specialty units have been created. The management structure has been streamlined. New initiatives such as cooperation agreements have been implemented. More cases are being brought and more money from disgorgement and penalties is being collected. All of this has been completed following Madoff and the other scandals.

The question however remains: Will SEC Enforcement ever move beyond the scandals of the recent past? Since at least the discovery of Bernard Madoff and his unprecedented fraud the Commission and its enforcement program have been mired in one scandal or difficulty after another. This repetition has made the letters “SEC” virtually a household word in middle America. Unfortunately Securities and Exchange Commission is now known for failure and error, not excellence.

In response to each recent scandal the agency has been the only thing that it can: Assert that lessons have been learned and that going forward there will be enhanced investor protections. The past is past.

This approach was on display last week as Commission officials testified before the House Committee on Financial Services, Subcommittee on Oversight and Investigations. During the hearing the Directors of the Division of Enforcement and of the Office of Compliance Inspections and Examinations provided the Committee with an update on the actions relating to the alleged Ponzi scheme of Robert Allen Stanford. Central to the testimony was a review of each recommendation made by the SEC Inspector General regarding the failure to take earlier action as to the alleged fraud. Each of the seven recommendations in the IG’s Report was examined. Each director detailed the steps taken in response.

If a central tenant of the Maddoff – Stanford debacle and other scandals was that the SEC failed in the past to detect, investigate and prosecute Ponzi schemes and other similar investment fund fraud action there should be no doubt the problem is solved. The SEC is now bringing quite literally a relentless stream of these cases. DOJ and the CFTC have also joined the effort.

The scandals appear equally relentless however. They continually surface in “wack-a-mole” fashion – knock one down and another appears. New iterations continue to surface. Madoff is over. Others have passed. Stanford has a new quite here trial date but the events about the discovery of the case have long been known. Yet there are pending and on-going questions about matters related to Madoff. There are pending and on-going investigations about Stanford.

The testimony last week was comprehensive. It answered every question. It was appropriately titled: “The Stanford Ponzi Scheme: Lessons for Protecting Investors from the Next Securities Fraud.” The question is how many times can the Commission say it has learned valuable lessons and moved on before it starts to sound like the child that cried ‘wolf” to many times?