The Siemens FCPA Case: A Record Settlement And A Warning To All

SSiemens AG resolved FCPA charges with the Department of Justice, the Munich Public Prosecutor’s Office and the SEC with multiple guilty pleas and the payment of $1.6 billion in fines, penalties and disgorgement of profits, including $800 million to U.S. authorities. This is the largest monetary sanction ever imposed in an FCPA case, according to DOJ. In announcing the settlement, the Department again cautioned companies that it will continue to crack down along with other regulators around the globe on FCPA violations. U.S. v. Siemens Aktiengesellschaft, Case No. 08-367 (D.D.C. Filed Dec. 15, 2008); see also SEC v. Siemens Aktiengesellschaft, Case No. 1:08-cv-02167 (D.D.C. Filed Dec. 15, 2008).

Under the terms of the plea agreement:

1) Siemens AG pled guilty to one count of failure to maintain internal controls and one count of books and records violations;

2) Siemens S.A. Argentina pled guilty to one count of conspiracy to violate the books and records provisions of the FCPA;

3) Siemens Bangladesh Limited pled guilty to a one count information charging conspiracy to violate the anti-bribery and books and records provisions; and

4) Siemens S.A. Venezuela pled guilty to a one count information charging conspiracy to violate the anti-bribery and books and records provisions.

Under the agreements, Siemens will pay a fine of $450 million, the largest criminal FCPA fine since the Act was passed in 1977. The company also agreed to retain an independent monitor for four years.

The charges are based on violations in Latin America and the middle east. From 2000 to 2002 four Siemens subsidiaries – Siemens Turkey, Siemens France, Osram Middle East and Gas Turbine – were awarded 42 contracts valued at more than $80 million with the Ministries of Electricity and Oil of Iraq under the United Nations Oil for Food Program. These contracts were secured by paying over $1.7 million in kickbacks to the Iraq government. The company netted over $38 million in profits. As with other OFP cases, the contract price was inflated prior to the submission of the contract to the U.N. for approval. The payments were improperly recorded on the books and records of the company.

Siemens’ subsidiaries in Latin America also violated the FCPA. Beginning in September 1998 and continuing through 2007 Siemens Argentina made over $31 million in corrupt payments to various Argentine officials. These payments were improperly recorded in the books and records as “consulting fees,” “legal fees” and other types of legitimate payments. These payments were made to obtain favorable business treatment in connection with a $1 billion national identity card project.

Siemens Venezuela also made corrupt payments beginning in October 2001. The subsidiary made over $18 million in corrupt payments to various Venezuelan officials to obtain favorable treatment in connection with two major metropolitan mass transit projects. Again, the payments were not properly recorded.

Finally, Siemens Bangladesh admitted that from May 2001 to August 2006 it made corrupt payment of over $5.3 million. The payments were made to obtain favorable treatment during the bidding process on a mobile telephone project.

At a press conference held to announce the resolution of these cases, Acting Assistant Attorney General Friedrich stated that “Today’s filings make clear that for its business operations overseas, bribery was nothing less than standard operating procedure for Siemens.” Mr. Friedrich went on to note that Siemens executives had off-the books slush funds, employed shell corporations to funnel payments and at times used “suit cases filled with cash” to facilitate the payments.

The company also settled charges with the Munich Public Prosecutor’s Office and the SEC. With the former, Siemens AG agreed to pay about $569 million which includes a fine and disgorgement. To settle with the SEC, the company consented to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records provision. In addition, the company agreed to disgorge $350 million in profits which does not include those in the payment under the Munich settlement.

These actions are based on the cooperation of Siemens. The extensive cooperation of the company, praised by DOJ, included conducting a full investigation of the matter, making the results of that investigation available to the Department, taking appropriate personnel action regarding those involved, instituting remedial actions and accepting responsibility for its actions.

In announcing the settlement the Department and the FBI again emphasized that the FCPA is a key area of emphasis. To root out violations U.S. authorities will continue to team with enforcement authorities around the globe, as they did here.

Questions About The SEC And A Warning For Investors

The Bernard Madoff $50 billion scheme is, according to the SEC, unprecedented in size and duration. Perhaps what makes it all the more unbelievable is that it Mr. Madoff has for decades been a key Wall Street player, well known and trusted. All this raises many questions, not the least of which was: where was the SEC? It also raises a cautionary note for investors.

This scheme was not discovered by the SEC or federal prosecutors. By all accounts, it was virtually self-reported when Mr. Madoff confessed to associates and his sons. They apparently reported the alleged fraud to authorities. Now, the SEC has issued a press release and filed a law suit. Prosecutors have filed criminal charges as discussed here. Unfortunately, this all was too little, too late for the markets and the investors.

Why did the SEC just discover this massive fraud if it has been going on for years? This is not a scheme that the SEC had to look far to find. It was right in its own backyard. This scheme, according to court papers, was run out of the broker dealer that Mr. Madoff founded in New York City. Broker dealers are among the most heavily regulated businesses in the world, with an overlay of federal regulation by the SEC and oversight by self-regulatory organizations. All this regulation did not find the fraud.

By all accounts, Mr. Madoff ran what was in effect a multi-billion dollar fund like a secret hedge fund. According to the court papers, he managed it from a secret set of books he kept outside the normal broker dealer records. Those records were kept under lock and key. While it is not totally clear, it appears only he had access. While the contents of the records were secret, the fact that they existed was not. Secret records of billions of dollars in securities trades should have raised at least a red flag for the SEC and SRO officials even if the fund was unregulated. Apparently it did not.

There is more, however. For years, Mr. Madoff has had a secret investment strategy. Some called it a “black box.” For years, Mr. Madoff obtained returns with the “black box” that nobody could match for their consistency. Year in and year out, market up and market down, he reported steady profits. Rumors swirled about a trading method nobody quite understood and returns that no one could duplicate. Some raised questions about the trading technique and the authenticity of the results. No one investigated.
There is more, however. As early as 1992 Mr. Madoff and his secret, ultra-successful fund, came to the attention of the SEC. Then, his fund became entangled in an enforcement investigation. Everything was accounted for. No one investigated.

The red flags went unheeded. The rumors continued. The SEC and SROs were nowhere to be seen. Investors poured in the cash.

To be fair, Mr. Madoff had an impeccable reputation. His investors were happy. They got account statements every month and got paid when they asked. Still, secret books, billions of dollars, a black box trading scheme and results that could not be duplicated seem worth at least a look. Unfortunately nobody did – until way too late.

Now, investors in Mr. Madoff’s fund are now scurrying about to see what can be salvaged. Undoubtedly there will be lawsuits against many. What investors will recover is anyone’s guess at this point.

For all investors, no doubt their already shaken confidence from the current market crisis will only be further shaken by this incident. The failure of the regulators here clearly leaves questions about the billions of dollars invested in unregulated hedge funds. At the same time going forward investors should remember regardless of what the regulators do or don’t do, there is no substitute for skepticism: if the trading system cannot be understood there is a reason; if the returns are too good to be true, they probably are.