by T. GormanPosted on Posted in SECActions

Last week the SEC brought a long awaited action based on its investigation into the backdating practices at Apple.  SEC v. Nancy R. Heinen and Fred D. Anderson, Case No. 07-2214-HRL (Lloyd) (N.D. Cal. filed April 24, 2007) http://sec.gov/litigation/litreleases/2007/lr20086.htm  (see blog post of 4/25/07).  As discussed earlier here, the case added some definition to what standard prosecutors may use when exercising their broad discretion to charge.  Those cases suggest that future cases will focus on allegations of false documents and a cover-up – the kind of acts that support scienter – and situations where defendants have been directly involved in the issuance of the backdated options.  The company and those outside the options issuance process do not appear to be the focus of the inquiries.   

Yet, while most struggle to grasp where the SEC is headed with its options investigations, yesterday the Financial Times reported a new wrinkle that raises concerns for companies and their executives caught up in the on-going options saga.  Guerrera, Masters and Pimlott, “Threat to US Backdating Scandal Companies,” FT (Apr. 30, 2007).  The article reports that during a time when “cash-rich hedge funds and private equity groups are scouring the market for takeover targets” more than 40 companies are exposed to takeover bids because they have not filed financials with the SEC nor had a shareholder meeting for 13 months.  Under certain state laws, including Delaware, if a company does not hold a shareholder meeting for 13 months, investors can ask a court to call one.  Companies however are prohibited from issuing proxy documents if they have not produced up-to-date financial statements.  This inability to communicate with shareholders paves the way for activist investors to make proposals, such as removing directors, and the company would be unable fully to respond.  The article noted that Comverse asked the SEC to waive the ban on shareholder communications if the circling hedge fund succeeds in calling a meeting.  The SEC declined to comment.  Again, the question is where will the SEC take the option scandal on this issue.   

Curiously, this is not the first time that the media has reported new studies which may have contributed to the contour of the option scandal.  The current SEC and DOJ investigations into the backdating of stock options began with news articles, primarily those in the Wall Street Journal, which recently won awards for its coverage.  This year news articles have continued and more studies have been completed regarding the breadth of the option issue, including a study suggesting  that interlocking boards contributed to the backdating practice.  See Bizjak , John M., Lemmon, Michael L. and Whitby, Ryan J., “Option Backdating and Board Interlocks” (November 2006). Available at SSRN: http://ssrn.com/abstract=946787.  A discussion of the report is contained in the New York Times, January 21, 2007 at BU-5 (see post of 1/22/07).  Sometimes its difficult to determine if the regulators or the investigating media are driving this scandal.  (see post of 10/10/06). 

Now however the final chapter may be about to unfold taking another turn as it does so.  Last week Reuters reported that SEC Chairman Christopher Cox expects to wrap up many of its stock options dating cases within weeks. “We are working on procedures to move many of the cases very quickly,” Cox said, adding their resolution would be within “weeks.”  Rueters reported that Mr. Cox gave no indication of whether the options cases would be resolved through settlements, lawsuits or a combination of both.  Mr. Cox added that the SEC would like to put the option backdating scandal behind them, noting that such conduct will not likely continue in today’s environment.   Mr. Cox did not elaborate on what process the SEC is likely to use. 

The statements of Chairman Cox in the context of over 140 on-going investigations and the handful of cases that have been brought are curious at best.  While the scandal seems to ebb and turn in various directions, this newest wrinkle is perhaps the most intriguing.  On the one hand the Chairman’s remarks, read in the context of the cases brought to date could suggest that only a relative few of the 140 open investigations contain the kind of scienter laden allegations the SEC is looking for as the predicate for an enforcement action.  That would clearly be good news for many companies, their directors and executives.  On the other hand, the FT story may not be good news for the forty or so companies caught in that dilemma.  Yet, it is hard to imagine an enforcement agency like the SEC, which has been proceeding at an ever-increasingly slow pace, resolving 140 investigations in a matter of weeks.  Absent a new turn in the scandal, however, the Chairman’s comments do offer a view of the light at the end of the tunnel for many companies.

by T. GormanPosted on Posted in SECActions

Yesterday the SEC brought another FCPA case, its third this year.  Earlier the SEC filed In re The Dow Chemical Company, (Feb. 13, 2007) http://www.sec.gov/litigation/admin/2007/34-55281.pdf); and SEC v. Martin, 1:07CV0434 (D.D.C. Mar. 6, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20029.htm).  The increasing focus on the FCPA suggest that this is again becoming an enforcement priority.  The SEC, ofcourse, has brought cases in this area since the 1970’s when it brought the so-called foreign payments cases that lead up to the passage of the FCPA.  Those cases were clearly the headline grabbers of their day.  While the FCPA is not about to push option backdating off the front page yet, it clearly is area in which more cases are being brought.  This may be the result of increased globalization.  

The latest FCPA case was filed against Baker Hughes Inc., a Texas-based global provider of oil field products and services, for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA.  SEC v. Baker Hughes Incorporated and Roy Fearnley, Civil Action No. H-07-1408, (S.D.TX, filed April 26, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20094.htm.  Without admitting or denying the allegations in the complaint, the company agreed to pay more than $23 million in disgorgement and prejudgment interest and to pay a civil penalty of $10 million.  The SEC also charged Roy Fearnley, a former business development manager for Baker Hughes, with violating and aiding and abetting violations of the FCPA.  Mr. Fearnley has not reached any settlement with the Commission regarding these charges. 

The Complaint alleges that Baker Hughes paid approximately $5.2 million to two agents, knowing that some or all of the money was intended to bribe officials of State-owned companies in Kazakhstan.  According to the complaint, Baker Hughes retained two separate agents in 1998 and 2000, respectively, to facilitate business in Kazakhstan.  The first was retained in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan.  As alleged, the second agent was hired after Mr. Fearnley told his bosses that an agent for Kazakhstan’s national oil company told him that unless the second agent was retained, Baker Hughes could “say goodbye to this and future business.”  Additionally, the SEC alleges that between 1998 and 2005, Baker Hughes made payments in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan that suggested a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes’ books and records.  The SEC’s complaint also alleges violations of the books and records and internal controls provisions of the FCPA in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan.  In the settlement, Baker Hughes will retain an independent consultant to review the company’s FCPA compliance and procedures. 

In a related criminal proceeding, the DOJ filed criminal FCPA charges against the company and its wholly-owned subsidiary Baker Hughes Services International, Inc.  BHSI pleaded guilty to one count of violating the anti-bribery provisions of the FCPA, one count of aiding and abetting the falsification of the books and records of Baker Hughes, and one count of conspiracy to violate the FCPA, and to pay a criminal fine of $11 million.  The DOJ entered into a two-year deferred prosecution agreement with Baker Hughes concerning charges of violating the anti-bribery and books and records provisions of the FCPA.  Under the agreement, the company must  retain a monitor for three years to review and assess the company’s compliance program and monitor its implementation of and compliance with new internal policies and procedures.

Regardless of the reasons, its clear that the number of FCPA cases being brought by the SEC and the DOJ is on the rise.  This suggest that prudent companies that do business abroad and their directors and officers carefully review their compliance systems in this area now to avoid difficulties than later at the insistence of the SEC or the DOJ.