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.  

by T. GormanPosted on Posted in SECActions

The key question about the stock option backdating scandal is not if more cases will be brought, but rather what standard prosecutors will use when exercising their broad discretion to charge.   To date there are at least 200 companies which have announced internal investigations into their option issuance practices.  About 140 of those are under investigation by the SEC and some are the subject of criminal inquiries by various U.S. Attorney’s offices.  The conduct engaged in by persons at these companies probably ranges from the bumbling to actual fraud.  In-between there are varying shades of gray.  Those companies, along with their directors and officers are holding their collective breath, wondering where in those shades of gray the line will fall between those charged and those not charged.

Today, the SEC gave some indication of where that line might fall.  It brought a long awaited action based on its investigation into the backdating practices at Apple.  Named as defendants in an enforcement action were Apple’s former GC of nine years, Nancy Heinen, and its former CFO and director, Fred Anderson.  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   These are the two persons identified by internal investigators as having engaged in possible misconduct.

The SEC’s complaint follows what is becoming a familiar formula.  It alleges instances of backdating and preparation of false documents and targets those persons who specifically participated in granting the options.  The complaint focuses on two option grants, the first in January 2001 of 4.8 million options to Apple’s Executive Team and the second in October 2001 of 7.5 million options to Apple’s CEO Steve Jobs.  According to the complaint, in both instances Ms. Heinen caused Apple to backdate the options and directed her staff to prepare documents to reflect the new date.  For the October options, the SEC alleges that Ms. Heinen signed fictitious board minutes for a special meeting that did not occur.  The complaint alleges that Mr. Anderson should have realized the implications of Ms. Heinen’s actions, failed to disclose key information to Apple’s auditors and neglected to ensure that the financial statements were accurate.  While Ms. Heinen has vowed to fight, Mr. Anderson settled with the SEC without admitting or denying the allegations and will pay over $3 million in disgorgement, prejudgment interest, and fines.  Anderson avoided an officer and director bar and disqualification from practicing before the Commission. Citing the company’s full cooperation, the SEC is not pursuing an action against the company.  The SEC release does not state that its investigation is continuing as is typical, perhaps suggesting that its inquiry is at an end.  The San Jose Mercury News reported earlier this week that Apple CEO and high tech rock star Steve Jobs who many think is Apple would not be charged criminally. 

Putting this case together with the handful of earlier SEC actions in this area suggests the parameters of liability being used by the agency.  In Apple, as in earlier cases, there are allegations of false documents and a cover-up – the kind of acts that support scienter.  In Apple, as in earlier cases, the named defendants are alleged to have been directly involved in the issuance of the backdated options.  In Apple, as in earlier cases, the company was not named nor were those outside the options issuance process. 

Perhaps the only deviation from earlier cases is the negligence based allegations against Mr. Anderson claiming that he “should have known” the implications of what was going on.  Not an unreasonable charge against a CFO but it is interesting that the SEC chose not to allege fraud.  Equally interesting is the fact that the SEC did not seek an officer/director bar against Mr. Anderson as has become its customary practice, although he has retired.  A press release issued by Mr. Anderson suggests that the SEC will also forgo its usual Rule 102(e) action to bar him from practicing before the agency which, given the consent decree he executed, is virtually automatic.  Nevertheless, Mr. Anderson was the CFO of the company at the time, was involved in the transactions according to the complaint, and was identified by internal investors as possibly a culpable person.  Thus, this case seems to fit within the pattern of earlier cases suggesting that in the future the SEC will focus on those directly involved in bringing options backdating cases where it finds clear evidence of scienter such as falsified documents and cover ups.