THE FCPA CONTINUES TO BE AN ENFORCMENT PRIORITY

The FCPA continues to be an enforcement priority for the SEC and DOJ. This year alone there are record-setting settlements and a record number of trials. Increasingly, the cases involve foreign regulators. With over 120 open investigations at DOJ, it is clear that these trends are going to continue.

SEC v AGCO Corporation, Civil Action No. 1:09-CV-01865 (D.D.C. Filed Sept. 30 2009) is one of twelve cases the SEC has brought based on the United Nations Oil for Food Program. This case involved the humanitarian side of that program.

AGCO is a manufacturer and supplier of agricultural equipment based in Duluth, Georgia. Prior to the initiation of the UN program, the company attempted to increase its market share in Iraq. The effort was not successful, although its U.K. subsidiary conducts business in the country.

Beginning in December 2000 AGCO learned through a Jordanian agent that the Iraqi Ministry of Agriculture required a 10% kickback based on the value of the contract as a condition of doing business. A manager in an AGCO sub agreed to the arrangement. Bank guarantees in favor of the agent were set up for the payments.

According to the Commission’s complaint, three types of fees were paid to the agent: 1) a flat commission; 2) a commission based on the value of the deal; and 3) an after sales commission. The latter permitted the agent to set up an infrastructure in Iraq to support the farm machinery of the company.

To conceal the commissions and additional payments demanded by the agent in 2001, the company recorded them as Ministry Accrual. This account was created by the marketing staff with virtually no assistance from the finance department. Employees from that department in the U.K., Denmark and France were instrumental to the scheme. From 2000 through 2003 approximately $5.9 million in kickbacks were paid.

In February 2002, the internal auditors raised questions about the sales process and the accruals. The company failed to take any action in response to the issues raised.

The Commission’s complaint alleged violations of the books and records and internal control provisions. To resolve the matter, the company consented to the entry of a permanent injunction prohibiting future violations of the books and records and internal control provisions. In addition, the company agreed to disgorge over $13.9 million plus prejudgment interest. AGCO was given credit for a $1.6 million penalty paid under a deferred prosecution agreement with DOJ. The company also agreed to a criminal disposition with the Danish State Prosecutor who will confiscate over $600,000. The settlement with the SEC reflected the cooperation of AGCO. See also Litig. Rel. 21229 (Sept. 30, 2009).

A BOILER ROOM FRAUD

Investment fraud cases with consumers losing their hard earned cash keep on surfacing. On Monday, the SEC brought two of these cases. On Tuesday, the Commission and the U.S. Attorney’s Office for the Southern District of Florida filed cases involving what the SEC labeled as “boiler room fraud” that began as early as 1998. Whether it is the turbulent economic times and the market crisis, the opening of the flood gates with the giant Ponzi schemes or that regulators have figured out how to find these cases, they just keep coming.

SEC v. 3001 AD, LLC, Case No. 09-Civ-81453 (S.D. Fla. Filed Sept. 29, 2009) names as defendants the company and Jimmy Barker, Robert Landrach, Marc Rifkin, Ronald Bowsky, Jack Maddock and Michael Weidgans. The parallel criminal case adds two individuals. Both cases center on the fraudulent sale of shares in 3001 AD and its related entities. The company, which ceased operations in 2008, purportedly developed and sold virtual reality products mainly for video game systems. From the late 1990s, the defendants raised about $20 million by selling interests in the company and its related entities. Those interests, sold for $5,000 each, were treated as interchangeable.

From a boiler room in Delray Beach, Florida, defendants marketed the interests primarily through telemarketer using a variety of misrepresentations to separate unsuspecting investors from their cash. These included:

• IPO: Investors were told that 3001 AD would soon be conducting an IPO. At one point, a press release titled to this effect was posed on their website. Preparations for the offering never went forward.

• Commissions: The documents given to investors said the commissions were 8%. Investors were never told that frequently from 10% to 40% of their investment went for commissions to the defendants.

• Business relationships: A press release told the public that Microsoft was negotiating a contract to license certain rights from the company. Another release claimed Apple had interest. Investors were also told that Disney was negotiating with the company. All of these claims were false

The criminal cases also allege that investors were promised $29,000 profit annually on each $5,000 investment.

The Commission’s complaint alleges violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b) and 15(a). See also Litig. Rel. 21227 (Sept. 29, 2009).

The criminal charges include securities fraud, wire and mail fraud, conspiracy and making a false statement to the SEC. See also http://www.usdoj.gov/usao/fls/PressReleases/090929-03.html. Both cases are in litigation.