The Commission Gives Definition To Cooperation

The Commission filed two settled civil injunctive actions stemming from the option backdating scandal at UnitedHealth Group, Inc. These two cases are the latest UnitedHeath cases and are similar to earlier backdating cases. Previously, the Commission settled with former UnitedHealth CEO DR. William W. McGuire, M.D. in $600 million settlement which was combined with private actions as discussed here. SEC v. McGuire, Civil Action No. 07-CV-4779 (D. Minn. Filed Dec. 6, 2007). At the same time, the UnitedHealth settlement is noteworthy for its discussion of cooperation and its impact on the Commission’s charging decision.

First, in SEC v. Lubben, the Commission filed a settled action against former UnitedHealth General Counsel David J. Lubben. According to the complaint, Mr. Lubben participated in the option backdating scheme at the company. The SEC alleges that between 1994 and 2005 the company backdated more than $1 billion in stock option compensatory grants given to senior executives and others. The options were “in-the-money” as a result of the backdating scheme.

Mr. Lubben resolved the case by consenting to the entry of a permanent injunction which prohibits future violations of the antifraud, reporting, record\-keeping, internal controls and proxy provisions of the federal securities laws. He also agreed to the entry of an order barring him from serving as an officer or director of a public company for five years and to the payment of disgorgement of over $1.4 million plus prejudgment interest and a civil penalty of $575,000. SEC v. Lubben, Case No. 08-CV-6454 (D. Minn. Filed Dec. 22, 2008).

Second, in SEC v. UnitedHealth Group, Inc., Case No. 08-CV-6455 (D. Minn. Filed Dec. 22, 2008), the Commission’s three count complaint charged violations of the periodic reporting requirements, a failure to maintain accurate books and records and a failure to maintain adequate internal controls. The factual allegations are similar to those in other UnitedHealth cases.

To settle the case, the company consented to the entry of a permanent injunction based only on the three claims in the complaint. The injunction did not contain a fraud provision. The Commission also did not seek a financial penalty.

In its Release, the Commission stated that it chose not to seek a fraud injunction against the company or a financial penalty based on the cooperation of UnitedHealth. In a departure from its typically cryptic description of that cooperation, the SEC outlined the actions taken by the company which it considered in reaching a prosecutorial decision. These steps, described as “extraordinary,” included:

• conducting an internal investigation;

• detailing in a Form 8-K the findings and conclusions of that inquiry; and

• sharing the facts uncovered with the government.

In addition, the company took extensive remedial measures in response to the investigation. These included:

• the implementation of new controls designed to prevent the recurrence of fraudulent conduct;

• removal of certain senior executives and board members; and

• the recoupment of nearly $1.8 billion in cash, options value and other benefits from several former and current officers through derivative litigation and voluntary re-pricing and cancellation of retroactive-pricing options.

Outlining the steps taken by the company which the Commission viewed as “extraordinary” and which influenced its charging decision is a practice which adds transparency to the charging process. This practice should also encourage cooperation in the future since it gives guidance to issuers considering the question.

A Continued Focus On FCPA Enforcement

The Department of Justice and the Securities and Exchange Commission continue to focus on FCPA prosecutions. Last week DOJ, along with the SEC and the Munich Public Prosecutors Office filed a record setting case, settled FCPA action against Siemens A.G. Now, another FCPA action has been brought, this one involving Fiat S.p.A. While not as spectacular as the Siemens case, it is the latest in a series of FCPA cases based on the U.N. Oil For Food Program.

The Department brought actions against Fiat, an Italian manufacturer, and three of its subsidiaries, Iveco S.p.A. (“Iveco”), CNH Italia S.p.A. (“CNH Italia”) and CNH France, S.P. (CNH France). Iveco and CNH Italia were each charged with conspiracy to commit wire fraud and to violate the books and records provisions of the FCPA. CNH France was charged with conspiracy to commit wire fraud. Specifically, the charges claim that from 2000 to 20002 Iveco, CNH Italia and CNH France paid about $4.4 million to the Iraqi government in connection with the humanitarian aid side of the U.N. program. As in other cases, the fees were paid by inflating the contract prices by 10% before the agreements were submitted to the United Nations for approval. The contracts were for industrial pumps, gears and other equipment.

Under the terms of the deferred prosecution agreement, Fiat agreed to pay a $7 million penalty. In entering into the agreement Fiat acknowledged responsibility for the actions of the subsidiaries and agreed to cooperate with the Department’s on-going Oil for Food Program.

The Department agreed to the deferred prosecution agreement in view of the cooperation of Fiat and its adoption of enhanced compliance procedures. If Fiat abides by the terms of the agreement, the charges will be dismissed after three years. U.S. v. Iveco S.p.A. and U.S. v. CNH Italia S.p.A. Both cases were filed in the District of Columbia on December 22, 2008.

The SEC filed a settled, related case. SEC v. Fiat S.p.A., Case No. 1:08-cv-02211 (D.D.C. Filed Dec. 22, 2008). The SEC complaint only names as defendants Fiat and CNH Global, N.V., a Dutch subsidiary which is a provider of agricultural and construction equipment. However, it involves Inveco, CNH France and NCH Italia. The SEC’s complaint alleges that the two defendants made about $4.3 million in kickback payments in connection with the sale of humanitarian goods to Iraq under the U.N. program. The action was settled with the entry by consent of a permanent injunction prohibiting future violations of the books and records provisions and an agreement to pay disgorgement of about $5.3 million plus prejudgment interest and a civil penalty of $3.6 million.