In a globalizing economy, all companies and their directors and officers should carefully review their FCPA compliance procedures. On Monday, the Associated Press reported that Chiquita Brands International pleaded guilty to one count of doing business with a terrorist organization and now the Columbian government is seeking extradition of the executives. As part of the plea deal the company agreed to pay a $25 million fine. The plea agreement must be approved by Judge Royce C. Lamberth of the District of Columbia District Court or the company faces up to nearly $100 million in fines at its sentencing in June. As reported, the agreement ends a lengthy DOJ investigation into the company’s financial dealings rebels the U.S. government deems terrorist groups. In 2003 the company disclosed the payments to DOJ. According to prosecutors, the company agreed to pay about $1.7 million between 1997 and 2004 to the terrorist groups. According to the company, it was forced to make the payments and was acting only to ensure the safety of its workers. “Funding a terrorist organization can never be treated as a cost of doing business,” U.S. Attorney Jeffrey Taylor said.

In the past, Chiquita has also run afoul of laws as well, including the Foreign Corrupt Practices Act. In 2004, the WSJ reported that the company had disclosed to the DOJ and the SEC that its Greek unit made improper payments as part of a local tax audit settlement. Similarly, in 2001, the company consented to a cease and desist order for its violation of the FCPA regarding its Columbian indirect wholly-owned subsidiary paying Colombian customs officials to obtain license renewals. http://www.sec.gov/litigation/admin/34-44902.htm; see also SEC v. Chiquita Brands International, Inc., Civ. No. 1:01CV02079 (D.D.C.) (Oct. 3, 2001) (ordering $100,000 penalty by consent).

The FCPA imposes criminal penalties on American companies or their representatives that bribe officials of foreign governments. The FCPA has two parts: (1) the accounting provision and (2) the anti-bribery provisions. The accounting provisions which are enforced by the SEC require that public companies keep books, records, and accounts in reasonable detail, which adequately reflect the companies’ transactions and of the asset disposition and maintain adequate internal controls for such records, while the anti-bribery provisions, which essentially prohibit the payment of bribes to foreign officials, are enforced by DOJ. Within the last year, the DOJ and the SEC have increased their focus on these provisions. The SEC, for example, has increasingly been using the accounting provision in bringing civil cases under the FCPA as illustrated by the following cases:

In the Matter of Oil States International, Inc., (April 27, 2006) http://www.sec.gov/litigation/admin/2006/34-53732.pdf. Consented to C&D in an action that alleged violations of the FCPA by making and improperly recording payments to officials of Venezuela’s state-owned oil company. 

, (April 27, 2006) . Consented to C&D in an action that alleged violations of the FCPA by making and improperly recording payments to officials of Venezuela’s state-owned oil company. SEC v. John Samson, et al., (D.D.C. July 5, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19754.htm. Settled action that alleged that four employees of ABB participated in a scheme to bribe Nigerian government officials to obtain a contract to supply oil drilling equipment in Nigeria. Consents agreed statutory injunction, penalties for $40,000 and $50,000 and disgorgement of over $64,000.

, (D.D.C. July 5, 2006) . Settled action that alleged that four employees of ABB participated in a scheme to bribe Nigerian government officials to obtain a contract to supply oil drilling equipment in Nigeria. Consents agreed statutory injunction, penalties for $40,000 and $50,000 and disgorgement of over $64,000. In the matter of Schnitzer Steel Industries, Inc., (Oct. 16, 2006) http://www.sec.gov/litigation/admin/2006/34-54606.pdf. Consented to a C&D and to pay over $7.7 million in disgorgement and prejudgment interest and retain a consultant to review internal controls in an action alleging the payments of kickbacks or gifts to managers of steel mills in China to get business and improperly recorded the payments.

, (Oct. 16, 2006) . Consented to a C&D and to pay over $7.7 million in disgorgement and prejudgment interest and retain a consultant to review internal controls in an action alleging the payments of kickbacks or gifts to managers of steel mills in China to get business and improperly recorded the payments. In the matter of Statoil, ASA, (Oct. 13, 2006) http://www.sec.gov/litigation/admin/2006/34-54599.pdf. Consented to a C&D and to pay disgorgement of $10.5 million in an action alleging the payment of bribes to an Iranian official to assist in obtaining projects.

, (Oct. 13, 2006) . Consented to a C&D and to pay disgorgement of $10.5 million in an action alleging the payment of bribes to an Iranian official to assist in obtaining projects.In light of increased globalization and similar laws passed in other countries, the SEC and the DOJ are continuing to investigate and bring more FCPA cases. The increased focus on the FCPA in view of the rapidly expanding global economy suggests that any company that does business in of foreign company and its directors and officers should be mindful of the issues presented in complying with the FCPA.

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SEC Enforcement Trends – Financial Fraud

While financial fraud cases are a traditional staple of the SEC’s Enforcement Program, issuers, directors, officers and even outside vendors and consultants to public companies should take note of the increasing aggressive posture of the Enforcement division, which at times may be over reaching.  A review of the SEC’s cases in this area last year suggests that the agency is aggressively pursing these cases in an effort to expand the contours of potential liability and that it is imposing increasingly large penalties even those who cooperate with the investigation. 

Penalties for financial fraud continue to be large.  For example:  SEC v. McAfee, Inc., (D.D. Cal. Jan 4, 2006) www.sec.gov/litigation/litreleases/lr19520.htm involved an alleged scheme to overstate revenue from 1998 to 200 by about $622 million according to the complaint.  The case settled with the defendant consenting to the entry of a statutory injunction and an order directing the payment of a $50 million penalty. 

SEC v. Tyco International Ltd., (S.D.N.Y. Apr. 17, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19657.htm  was based, according to the complaint, on a financial fraud centered on a scheme to overstate results by at least $1 billion.  The case settled with the entry of a consent decree which included a statutory injunction and an order requiring the payment of a $50 million penalty.  

Even in cases where the SEC acknowledged the company’s cooperation the Commission assessed large fines.  For example: 

SEC v. Federal National Mortgage, (D.D.C. May 22, 2006) http://sec.gov/litigation/litreleases/2006/lr19710.htm was based on a complaint that alleged multiple violations of GAAP to smooth earnings over a period of years.  The case settled with the entry by consent of a statutory injunction and an order directing the payment of a $400 million penalty.  The SEC’s release acknowledged the cooperation of the company. 

SEC v. AIG, (S.D.N.Y. Feb. 9. 2006) http://www.sec.gov/litigation/litreleases/lr19560.htm  involved an alleged financial fraud in which the company overstated its loss reserves by $500 million to improve its balance sheet.  The actions settled with the entry of a consent degree under which the company agreed to the entry of a statutory injunction and the payment of a penalty of $100 million. Again, the SEC’s Release acknowledged the extensive cooperation of the company.  

In addition to imposing large penalties in financial fraud cases, the SEC was also aggressive in its case selection.  Consider the following examples: 

In the Matter of City of San Diego, (Nov. 14, 2006), www.sec.gov/litigation/admin/2006/33-8751.pdf is a settled administrative proceeding brought against the City of San Diego based on allegations of financial fraud involving bond offerings by the City.  The case alleged that the City failed to disclose difficulties with pension and retiree health care obligations in the bond offering.  The action was resolved with the entry of a cease and desist order by consent and the entry of an order, which required the retention of a consultant to review internal controls. 

SEC v. Todd, et al., Case No. 03CV2230 BEN (WMc) http://sec.gov/news/press/2007/2007-35.htm involved a claimed financial fraud to inflate the revenues of Gateway, Inc. by former CEO Jeffrey Weitzen, former CFO John J. Todd, and former controller Robert D. Manza.  Following a trial on the merits Todd and Manza were found liable for securities fraud on March 7, 2007.  The evidence established that both men engaged in a scheme to inflate earnings by approving credit for persons who had previously been rejected as bad credit risks and then booking sales to those individuals.  In this pre-SOX (i.e. a CEO certification was not required) case the evidence demonstrated that CEO Weitzen had not signed the filings involved and that, although Weitzen had knowledge of the accounting issues the SEC claimed were fraudulent, the SEC failed to show Weitzen acted with scienter or as a control person.  The SEC, however, sought to hold him liable as the CEO.  The court granted summary judgment in favor of Mr. Weitzen on May 30, 2006.   Both of these cases suggest the aggressive posture of the Enforcement Program.  While the City of San Diego is not the first case involving a municipal government, such cases are not an ordinary occurrence.  The case involving Mr. Weitzen suggests a very aggressive – perhaps overly aggressive – approach of trying to hold those at the top responsible. 

Finally, the SEC is pursing not only those at the company who engage in financial fraud, but others outside the company who aided and abetted the fraud – even to the point of criminal liability.  Consider for example: 

SEC v. Scientific-Atlanta, (S.D.N.Y. June 22, 2006), www.sec.gov/litigtion/litreleases/2006/lr19735.htm which is a settled enforcement action alleging that the defendant company aided and abetted Adelphia in inflating its earnings by $43 million.  The action settled with a consent to the entry of a statutory injunction and an order directing the payment of $20 million in disgorgement. 

SEC v. Ronald Ferguson, (S.D.N.Y. Feb. 2006), http://sec.gov/litigation/litreleases/lr19552.htm where the complaint charged four former senior executives of Gen Re and one senior executive of AIG with aiding and abetting AIG in improperly overstating its loss reserves by almost $500 million.  A parallel criminal case was also filed.  Both cases are pending.  

SEC v. Gary Bell, (D.D.C. Jan. 18, 2007) http://sec.gov/litigation/litreleases/2007/lr19975.htm is an action against 13 additional employees and agents of vendors claimed to have aided and abetted a massive fraud at U.S. Food Service, Inc. by executing false audit confirmations.  Several agreed to settle for consent decrees and penalties, while others are litigating with the SEC. 

Collectively these cases suggest aggressive, and at times overly aggressive, efforts in the financial fraud area with potentially expanding contours of liability and very large penalties even when the company is fully cooperative with the SEC’s investigation.  Pushing the edge of liability, as in the action against Mr. Weitzen and others discussed earlier in this series, suggests an approach that may at times be based more on an overly aggressive posture than sound legal theory and the evidence.  All of this suggests that issuers, their directors and executives should carefully review their compliance programs to avoid becoming entangled in one of these actions. 

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