Are The Hedge Funds Coming In? Blackstone’s IPO Filing

First the SEC tried to make them register. Suit was brought and they won, the SEC lost. The U.S. Court of Appeals for the District of Columbia struck down the efforts of the SEC to directly regulate hedge funds last summer. Goldstein v. SEC, 451 F. 3d 873 (D.C.Cir. 2006). Then SEC Chairman Cox vowed before congress that “hedge funds are not, should not be, and will not be unregulated.” www.sec.gov/news/testimony/2006/ts07250cc.htm Subsequently, the SEC proposed rules focused on hedge funds. Proposed Rule 206(4)-8 would prohibit investment advisors from making false statements to investors. Proposed Rules 509 and 216 would require accredited investors to have at least $2.5 million in investments — that is, it limits the class of persons who can purchase shares in the private placements used by the funds which are exempt from the registration requirements of the federal securities laws. www.sec.gov/rules/proposed/2006/33-33-8766.pdf The SEC also continues to bring enforcement actions against hedge funds using primarily the antifraud provisions of the federal securities laws. See, e.g., SEC v. Langley Partners, L.LC. et al., (D.D.C. March 14, 2006), www.sec.gov/litigation/litreleases/lr19607.htm (settled enforcement action which alleged insider trading and sale of unregistered securities regarding 23 PIPE offerings); SEC v. Deephaven Capital Management, LLC., et al., (D.D.C. May 2, 2006), www.sec.gov/litigation/litreleases/2006/lr19683.htm (settled enforcement action which alleged insider trading in connection with 19 PIPE offerings). This could be viewed as regulation by consent decree. Now however we have role reversal. Yesterday huge private equity firm Blackstone made landmark IPO filing with the SEC. Blackstone, founded by Pete Peterson in 1985, reportedly has about $78.7 billion in assets under management of which $31.1 billion are from its private equity business, $17.7 billion are in its real estate division and another $29.9 billion in its alternative assets unit. Blackstone reportedly posted $1.1 billion in revenue in 2006 with net income of $2.3 billion. The IPO would seek to raise as much as much as $4 billion through a public offering.

Increasing Enforcement Emphasis: Chiquita Pleads Guilty; Extradition of Executives Sought

In a globalizing economy, all companies and their directors and officers should carefully review their FCPA compliance procedures. On Monday, the Associated Press reported that Chiquita Brands International pleaded guilty to one count of doing business with a terrorist organization and now the Columbian government is seeking extradition of the executives. As part of the plea deal the company agreed to pay a $25 million fine. The plea agreement must be approved by Judge Royce C. Lamberth of the District of Columbia District Court or the company faces up to nearly $100 million in fines at its sentencing in June. As reported, the agreement ends a lengthy DOJ investigation into the company’s financial dealings rebels the U.S. government deems terrorist groups. In 2003 the company disclosed the payments to DOJ. According to prosecutors, the company agreed to pay about $1.7 million between 1997 and 2004 to the terrorist groups. According to the company, it was forced to make the payments and was acting only to ensure the safety of its workers. “Funding a terrorist organization can never be treated as a cost of doing business,” U.S. Attorney Jeffrey Taylor said.

In the past, Chiquita has also run afoul of laws as well, including the Foreign Corrupt Practices Act. In 2004, the WSJ reported that the company had disclosed to the DOJ and the SEC that its Greek unit made improper payments as part of a local tax audit settlement. Similarly, in 2001, the company consented to a cease and desist order for its violation of the FCPA regarding its Columbian indirect wholly-owned subsidiary paying Colombian customs officials to obtain license renewals. http://www.sec.gov/litigation/admin/34-44902.htm; see also SEC v. Chiquita Brands International, Inc., Civ. No. 1:01CV02079 (D.D.C.) (Oct. 3, 2001) (ordering $100,000 penalty by consent).

The FCPA imposes criminal penalties on American companies or their representatives that bribe officials of foreign governments. The FCPA has two parts: (1) the accounting provision and (2) the anti-bribery provisions. The accounting provisions which are enforced by the SEC require that public companies keep books, records, and accounts in reasonable detail, which adequately reflect the companies’ transactions and of the asset disposition and maintain adequate internal controls for such records, while the anti-bribery provisions, which essentially prohibit the payment of bribes to foreign officials, are enforced by DOJ. Within the last year, the DOJ and the SEC have increased their focus on these provisions. The SEC, for example, has increasingly been using the accounting provision in bringing civil cases under the FCPA as illustrated by the following cases:

In the Matter of Oil States International, Inc., (April 27, 2006) http://www.sec.gov/litigation/admin/2006/34-53732.pdf. Consented to C&D in an action that alleged violations of the FCPA by making and improperly recording payments to officials of Venezuela’s state-owned oil company. 

, (April 27, 2006) . Consented to C&D in an action that alleged violations of the FCPA by making and improperly recording payments to officials of Venezuela’s state-owned oil company. SEC v. John Samson, et al., (D.D.C. July 5, 2006) http://www.sec.gov/litigation/litreleases/2006/lr19754.htm. Settled action that alleged that four employees of ABB participated in a scheme to bribe Nigerian government officials to obtain a contract to supply oil drilling equipment in Nigeria. Consents agreed statutory injunction, penalties for $40,000 and $50,000 and disgorgement of over $64,000.

, (D.D.C. July 5, 2006) . Settled action that alleged that four employees of ABB participated in a scheme to bribe Nigerian government officials to obtain a contract to supply oil drilling equipment in Nigeria. Consents agreed statutory injunction, penalties for $40,000 and $50,000 and disgorgement of over $64,000. In the matter of Schnitzer Steel Industries, Inc., (Oct. 16, 2006) http://www.sec.gov/litigation/admin/2006/34-54606.pdf. Consented to a C&D and to pay over $7.7 million in disgorgement and prejudgment interest and retain a consultant to review internal controls in an action alleging the payments of kickbacks or gifts to managers of steel mills in China to get business and improperly recorded the payments.

, (Oct. 16, 2006) . Consented to a C&D and to pay over $7.7 million in disgorgement and prejudgment interest and retain a consultant to review internal controls in an action alleging the payments of kickbacks or gifts to managers of steel mills in China to get business and improperly recorded the payments. In the matter of Statoil, ASA, (Oct. 13, 2006) http://www.sec.gov/litigation/admin/2006/34-54599.pdf. Consented to a C&D and to pay disgorgement of $10.5 million in an action alleging the payment of bribes to an Iranian official to assist in obtaining projects.

, (Oct. 13, 2006) . Consented to a C&D and to pay disgorgement of $10.5 million in an action alleging the payment of bribes to an Iranian official to assist in obtaining projects.In light of increased globalization and similar laws passed in other countries, the SEC and the DOJ are continuing to investigate and bring more FCPA cases. The increased focus on the FCPA in view of the rapidly expanding global economy suggests that any company that does business in of foreign company and its directors and officers should be mindful of the issues presented in complying with the FCPA.