by T. GormanPosted on Posted in SECActions

The FCPA has long been a focus for the Commission. Indeed, since the earliest days of the Division of Enforcement, when then Director Stanley Sporkin began focusing on foreign payments while watching the Watergate hearings, the agency has focused on the books, records and internal control issues related to foreign payments. The Commission’s latest case in this area is no different. While alleging millions of dollars in payments, the Order in the settled administrative proceedings centers on books, records and controls. In the Matter of Stericycle, Inc., Adm. Proc. File No. 3-20826 (April 20, 2022).

This is a proceeding charging the company with violations of the FCPA books, records and internal control and bribery provisions. Stericycle is an Illinois based firm specializing in medical waste services and others. The firm’s shares are traded on the Nasdaq National Market LLC.

The firm began operations in Latin America in 1997. During the period 2012 through 2016 the firm operated through wholly-owned subsidiaries in Brazil, Mexico, and Argentina. The firm established a Latin America division based in Miami in 2013 that had responsibility for and management of the operations, financial reporting and books and records of Stericycle Brazil, Stericycle Mexico and Stericycle Argentina. During that period the firm paid millions of dollars in the form of hundreds of bribe payments to obtain and maintain business from government customers in Brazil, Mexico and Argentina and to obtain priority release of payments owed under government contracts. As a result the books and records of the company were not properly maintained. Overall Stericycle benefited by about $22.2 million during the period.

The Order alleges violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B). In resolving the matter the company agreed to implement certain undertakings which included engaging an Independence Compliance Monitor and reporting to the Commission staff personally. The reports will remain non-public with certain exceptions.

Stericycle consented to the entry of a cease-and-desist order based on the Exchange Act Sections cited above. The company agreed to pay disgorgement in the amount of $22,184,981 and prejudgment of $5,999,258.80. The company will receive a disgorgement offset of up to $4,196,719 (about 1/3 of its net profits from its violations related to Brazil) based on the U.S. dollar value of any disgorgement paid to the Brazilian authorities reflected by evidence acceptable to the Commission staff. No penalty was imposed based on the settlement with the Department of Justice. There the company entered into a three year deferred prosecution agreement under which Stericycle acknowledged responsibility for criminal conduct relating to certain findings in the Order.

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by T. GormanPosted on Posted in SECActions

Earnings management has long been a key concern for the Commission and its Enforcement Division. While the agency has in recent years made various efforts to focus on the issue, few cases have resulted. Indeed, many of the accounting cases developed have followed a restatement of the firm’s financial statements.

This week, however, the agency filed a settled proceeding which centered on claims of earnings management tied to a poor control environment. The company and its CFO are named as respondents. In the Matter of Rollins, Inc., Adm. Proc. File No. 3-20824 (April 18, 2022).

Respondents are Rollins and its CFO, Paul Northen. The Atlanta based firm provides termite and other pest control services to residential and commercial companies through brands such as Orkin. Its shares are traded on the NYSE. Mr. Northen served as CFO for seven years beginning in 2015.

Rollins had developed a culture focused in part on earnings consistency. In the first quarter of 2016 the quarterly report filed with the Commission announced that the firm was posting its “40th consecutive quarter of improved revenues and earnings. . .” The earnings release for the second quarter of 2017 announced the “45th consecutive quarter of improved earnings and revenue.”

Each quarter the company made a determination as to the appropriate amount to reserve or accrue for several categories of lability accounts. Those included reserves for items such as a termite reserve which is an estimate of actual or potential damage claims by customers. The firm also had certain corporate-level reserve accounts. Those were determined after the reporting units results were available. The CFO had the final determinative authority over the amount of the corporate-level reserves.

In the second quarter of 2017 CFO Northen directed a reduction to certain corporate-level accounting reserves. The purpose was to enable the company to publicly report earnings per share in line with research analysts’ consensus estimates. Mr. Northen was aware at the time that the company earnings were close to but not at consensus estimates when directing that the adjustments be made. Without the adjustments for the first quarter of 2016 and the second quarter of 2017 the company would have been below the consensus by one cent.

At the time of the reserve adjustments Rollins’ accounting personnel had significant discretion. The firm also had an environment of inadequate internal controls. As a result, the company failed to devise and maintain sufficient internal accounting controls. The Order alleges violations of Securities Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and 13(b)(5). The Commission considered the cooperation and remedial acts taken by Rollins.

To resolve the proceedings the company consented to the entry of a cease-and-desist order based on each of the Sections cited in the Order except Exchange Act Section 13(b)(5). The firm will also pay a civil penalty of $8 million. In addition, Mr. Northen resolved the proceedings, consenting to the entry of a cease-and-desist order based on each of the Sections cited in the Order. He agreed to pay a civil penalty in the amount of $100,000.

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