by T. GormanPosted on Posted in SECActions

“Two out of three ain’t bad” was the refrain of a well known song by rock star Meatloaf some years back. While Meatloaf probably was not thinking about government investigations, sometimes the notion applies as aircraft manufacturer Embraer S.A. recently learned. The firm failed to self-report, but did cooperate after receiving an SEC subpoena and individuals were charged – two of the three keys to cooperation credit. Those efforts yielded the firm a global settlement and, with the DOJ, a deferred prosecution agreement with a fine below the sentencing guideline calculation. See SEC v. Embraer, S.A., Civil Action No. 0:16-cv-62501 (S.D. Fla. Filed Oct. 24, 2016).

Embraer is the world’s largest manufacturer of mid-sized commercial jets. Its North American Office is in Fort Lauderdale, Florida. The manufacture’s ADRs are listed on the NYSE. Beginning in August 2008, and continuing over the next three years, the firm paid bribes to government officials in the Dominican Republic, Saudi Arabia and Mozambique. The bribes, paid to facilitate aircraft sales, totaled over $83 million. Bribes were also paid in India.

In the Dominical Republic the firm paid about $3.52 million to an official of the government to obtain a defense contract valued at about $96.4 million. Embraer officials initiated efforts to sell the firm’s Super Tucano aircraft to the military in 2007. Company employees negotiated directly with representatives of the Dominican Air Force and, in particular, a colonel with close ties to the Secretary of the Air Force.

In August 2008 when the Dominican Senate Finance Committee approved the financing for the project, the official requested a commission. It was agreed that the commission would be spread over three agents. Each had an agreement. No legitimate services were rendered under the agreements.

Subsequently, the government approved the purchases. The official with whom the firm had been negotiating was designated to oversee the transaction. Payment, however, had not been made and firm policy required approval from the legal department. To circumvent that requirement an arrangement was made with a fourth agent, another sham agreement was arranged, and eventually payment was made through New York with the assistance of a legal department official.

The firm made similar payments in Saudi Arabia beginning in 2009 to effectuate the sale of $93 million of aircraft. While the transaction traces to 2007 when a state owned company expressed interest in purchasing three used executive jets as replacements, it did not move forward until late 2009. At that time a then senior Embraer executive met with a Saudi Official to negotiate the deal. The Official was an employee of a state owned enterprise.

In December 2009 senior executives at the firm approved the deal. Arrangements were made to channel the payment through a South African company. The same legal department official involved in the Dominican Republic deal participated in the approval. By year end 2010 the deal was finalized and the payment made. The commission was falsely recorded as a sales commission.

In 2008 the aircraft manufacturer also negotiated a deal to sell two commercial aircraft to a state-owned commercial airline in Mozambique. The firm was a state owned enterprise. In negotiations with a Mozambican Agent, senior executives initially agreed to pay between $50,000 and $80,000 for each aircraft sold. That sum, however, proved to be insufficient. A modified agreement required payment of $400,000 per aircraft. By year end 2008 the agreement was concluded and the commissions were paid. Those payments were booked as sales commissions.

Finally, the firm entered into a contract to sell three specialized military aircraft to the Indian Air Force for a total contract price of $208 million in 2008. Embraer paid an Indian national as a Consultant to assist with the deal.

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by T. GormanPosted on Posted in SECActions

Earlier this month the Supreme Court head argument in Salman, perhaps the most significant insider trading case to be considered by the High Court in decades. The issue there centers on what constitutes a personal benefit and, more specifically, how a gift of inside information fits into that notion. While those issues are critical, and the Court’s decision may alter the scope of insider trading liability, a more fundamental question revolves around the issue of what constitutes material non-public information. The SEC’s most recent insider trading case raises that question. SEC v. Cope, Civil Action No. 3:16-cv-02764 (M.D. Tenn. Filed October 21, 2016).

The action centers on the acquisition of Avenue Financial Holdings, Inc. by Pinnacle Financial Partners, Inc., announced on January 28, 2016 and closed on July 1, 2016. Defendant James Cope is a name partner in a Murfreesboro, Tennessee law firm. He served on Pinnacle’s board of directors from March 2006 until his resignation in April 2016 as a result of the conduct alleged in the SEC’s complaint. He was also a member of Pinnacle’s seven member executive committee by virtue of being the chair of a board committee. Pinnacle Financial is a bank holding company based in Nashville, Tennessee. Avenue Financial is also a bank holding company headquartered in Nashville, Tennessee.

Pinnacle’s policies and procedures precluded directors and others from trading on material, non-public information. Specifically, the firm had a code of conduct which included a “Statement of Policy on Prevention of Insider Trading.” Mr. Cope and other board members received a copy of the policy in a memo dated January 1, 2016. The same month Mr. Cope and others executed a certification acknowledging receipt of the policy. Mr. Cope executed a similar certification the prior year. That certification was augmented by an October 2015 training session on the policy given to Mr. Cope and others.

Pinnacle had grown its business through a series of acquisitions with local Tennessee banks. At a September 2015 board retreat, attended by Mr. Cope and others, an investment banking firm made a presentation regarding possible future acquisition targets. One of four targets discussed was Avenue Financial. That firm was considered the most attractive because its branch network’s geographic footprint would permit consolidation with that of Pinnacle, effecting significant cost savings for the combined firm. A November 2015 report prepared by another investment banking firm echoed that thought.

In a December 2016 Executive Committee meeting attended by Mr. Cope, Pinnacle President and CEO Terry Turner briefed the members on the November report and his effort to initiate discussions with his long-time acquaintance, Ron Samuels, the President of Avenue Financial, to whom he had sent a copy of the report with a note – a communication which was later discovered to have been misdirected.

Later in December Mr. Turner discovered and corrected the transmission error. Pinnacle Financial retained an investment banking firm to advise it and an informal offer was made to Mr. Samuels to acquire the shares of his firm. A nondisclosure agreement was also forwarded to the Avenue Financial CEO. Mr. Samuels responded to the overture by noting that a special committee of Avenue Financial was considering the transaction but the firm was not prepared to move forward or execute a nondisclosure agreement.

On January 5, 2016 Pinnacle held its January Executive Committee meeting, attended by Mr. Cope and others. Pinnacle’s CFO, Harold Carpenter, planned an extensive discussion of the possible merger at the meeting. Materials on the proposal were distributed to Committee members prior to the meeting through a secure portal. During the two hour meeting details of the potential deal were reviewed. “Several” of the Committee members “believed that, given the status of the negotiations, it was likely the merger would occur . . . [and] the negotiations were sufficiently advanced to be sufficiently material . . .” that members were precluded from trading, according to the complaint.

During the meeting Mr. Cope began purchasing shares of Avenue Financial. Specifically, during the meeting he purchased 6,179 shares of Avenue Financial through his account at TD Ameritrade. As management moved the deal forward to conclusion he purchased additional shares. Following the deal announcement Mr. Cope had trading profits of $56,302. The complaint alleges violations of Exchange Act Section 10(b). The action is pending. See Lit. Rel. No. 23675 (October 21, 2016). The U.S. Attorney’s Office for the Middle District of Tennessee filed a parallel criminal action.

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