THE FCPA: A CONTINUOUS SERIES OF PAYMENTS AND PROMISES

The FCPA continues to be a key area of focus for the SEC with the filing of a settled administrative proceeding, In the Matter of Avery Dennison Corporation, File No. 3-13564 (Filed July 29, 2009); see also SEC v. Avery Dennison Corp., Civil Action No. CV 09-5493 (C.D. Cal. Filed July 29, 2009). This proceeding, based on a series of alleged FCPA violations, concerns Avery (China) Co. Ltd., an indirect subsidiary of California multinational, Avery Dennison Corporation. As with many FCPA cases, Avery discovered the violations, conducted an internal investigation, and self-reported to the Commission.

The Order for Proceedings is based on a series of payments and promises of payments by Avery China’s Reflective Division. That division sold materials typically used in printing, road signs and emergency vehicle marking. In China, the Ministry of Public Security requires that all such products meet the requirements of an authorized government entity such as the Traffic Management Research Institute, known as the Wuxi Institute. The Reflective Division of Avery China sought to obtain business from this Institute. The series of payments and promises involving the Institute and others are:

• In January 2004, an Avery China sales manager went to a meeting with officials from the Institute and bought each a pair of shoes with a combined value of $500.

• In May 2004, the subsidiary hired a former Wuxi Institute official as a sales manager because his wife was still employed at the Institute and was in charge of two projects the company wanted to pursue.

• In August 2004, Avery China obtained two contracts to install new graphics on police cars through the Institute. The Reflectives China Sales Manager agreed that the total sales price of the contracts would be inflated so the additional charges could be paid back to the Institute as a “consulting fee.” Total sales under these contracts were about $677,000, with profits of about $363,000. The kickback payments, which would have been about $41,000, were discovered by another division and halted prior to payment.

• In December 2002, a Reflectives Division salesman hosted a sightseeing trip for five government officials. Two reimbursement requests were used to conceal the expenses for the trip.

• In August 2004, the Reflectives China National Manager approved a kickback to another state owned enterprise to secure a sales contract. Total sales under the contract were about $106,000, with profits of about $61,000. The $2,415 kickback was not paid after it was discovered by company officials.

• In late 2005, during a sales conference hosted by Avery China at a famous tourist destination, the Reflectives China National Sales Manager paid for sightseeing trips for at least four government officials.

• In August 2005, after self-reporting to the SEC, the company discovered two additional instances of possible improper payments by acquired companies.

To resolve the matter, the company agreed to cease and desist order from committing or causing any violations and future violations of Sections 13(b)(2)(A) and (B) of the Exchange Act. The company also agreed to pay disgorgement of about $273,000 and prejudgment interest. In the related civil action the company agreed to a penalty of $200,000. See also Lit. Rel. 21156 (Jul. 29, 2009).

INSIDER TRADING AND PONZI SCHEME CASES — THE KEY FOCUS

The SEC continued to focus on two key areas this week — insider trading and Ponzi schemes. First, the Commission brought an insider trading action against Khaled Al Hashemi, a citizen and resident of Abu Dhabi, UAE. SEC v. Hashemi, Civil Action No. 09-CV-6650 (S.D.N.Y. Filed July 27, 2009). The complaint is based on trading in advance of a merger announcement. Specifically, the Commission claims that the defendant traded in the shares of Nova Chemicals prior to the February 23, 2009 announcement that the company would merge with International Petroleum Investment Company.

Defendant Hashemi purchased 120,000 shares of Nova common stock through an online brokerage account shortly prior to the merger announcement, according to the SEC. Over half of those purchases were made the day before the announcement. To fund these transactions, the defendant liquidated most of his stock portfolio and wired an additional $100,000 to his account. When the merger was announced, the share price spiked 289%, yield profits of $458,000. The Commission obtained a freeze order over the accounts. The case, which alleges violations of Section 10(b) and Rule 10(b)-5, is in litigation. See also Lit. Rel. 21154. This case follows ruling in two high profile insider trading cases last week, where the SEC lost a motion to dismiss in Cuban, but prevailed in the Second Circuit in Dorozhko, both of which are discussed here.

Second, the SEC continued its string of Ponzi scheme cases, filing SEC v. Clark, Case No. C09-03423 (N.D.Ca. Filed July 27, 2009). Clark is a follow-up action to an action brought initially in July 2007. SEC v. AOB Commerce, Inc., Case No. CV 07-4507 (C.D. Cal. July 16, 2007). There, the SEC filed an emergency action against AOB Commerce, its two principals and related entities, claiming that since at least mid-2004 the defendants had raised more than $45 million from hundreds of investors from the sale of unregistered promissory notes that claimed to pay a guaranteed return of up to 5.5%. The fund was supposed to make loans in Asia and China. Although some loans were made, most of the offering proceeds were used to pay interest on the notes. In the initial action. the SEC obtained a temporary freeze order. See also Lit. Rel. 20196. Subsequently the SEC obtained a preliminary injunction and the appointment of a receiver. See Lit. Rel. 20241.

The action this week is against a sales agent at AOB Commerce. The complaint claims that Mr. Clark failed to conduct adequate due diligence as to the fund, assisted with the creation of a misleading investor brochure and failed to register or become associated with a registered broker-dealer at the time that he participated in the sale of notes. The complaint alleges violations of Section 5 of the Securities Act and Section 10(b) of the Exchange Act. The case is in litigation. See also Lit. Rel. 21153. While there was a time when Ponzi schemes were believed to be difficult to detect, as the market crisis has continued, the Commission has brought a steady stream of these cases.