by T. GormanPosted on Posted in SECActions

A Massachusetts based medical imaging company resolved FCPA charges with the DOJ and the SEC stemming from actions taken by its Danish subsidiary and its CFO. The actions center on about 180 suspicious transactions in Russia involving $21.6 million in revenue and another 80, valued at about $3.8 million, in Ghana, Israel, Kazakhstan, Ukraine and Vietnam. The transactions took place from 2001 through early 2011. The DOJ resolved the action with a non-prosecution agreement and the payment of a criminal fine based on partial cooperation. The SEC, noting that the firm “generally cooperated,” resolved its case with a settled administrative proceeding involving the firm and the former CFO of the subsidiary. In the Matter of Analogic Corporation, Adm. Proc. File No. 3-17305 (June 21, 2016).

Analogic Corporation is based in Peabody, Massachusetts. The firm sells advanced medical imaging, ultrasound and security technology systems. Lars Frost, also named as a Respondent by the SEC, is a resident of Denmark. Beginning in late October 2008, and continuing through September 2011, he served as the corporate controller and CFO of BK Medical ApS, a wholly owned Danish subsidiary that sells ultrasound equipment.

Analogic’s ultrasound business is largely conducted by BK Medical. Sales are to end users either directly or through distributors. The scheme at the center of the two actions was implemented through distributors. The transactions in Russia are typical. They were implemented in a series of steps:

Sale terms: The terms of the deal were set. BK Medical and the Russian distributor agreed on the terms of a sale and its actual price. BK Medical then created a fictitious invoice at an inflated price which was often 100% higher than the actual price.

Invoice: BK Medical’s customer service staff created a false invoice using a cut and paste process. The false invoice would accompany the product when shipped.

Contract: Frequently the distributor would send BK Medical a proposed contract for the sale at the inflated price. The contract would be executed.

Payment: The distributor would pay the inflated price. BK Medical only recorded the agreed upon actual price. The balance of the payment was credited to the accounts receivable for the distributor. That resulted in a net credit position for the distributor.

Third party payments: Later the distributor would direct BK Medical to make a payment from the accounts receivable balance to a third party. The payment would be made without any due diligence. The payees included apparent shell companies in various parts of the world. The payments were not made through BK Medical’s accounts payable system as required by the internal controls. Rather, there was just a credit to cash and an offsetting debit to the distributor’s receivables account. Signatures were executed on the fake invoice.

Amounts: The majority of the third party payments were less than the amounts by which the distributor had previously overpaid.

A similar procedure was used to implement the scheme in the five other countries involved. The BK Medical CFO personally signed off on 150 of the payments.

The scheme either emerged, or a red flag appeared, in two instances during its course, but it continued. The first was in 2004 when the BK Medical vice president of sales made inquiries at the Russian distributor. He learned that in the Russian market the word “bribe” is not used. Rather, the discussion focused on customer obligations. The second was in 2008 when a senior vice president at Analogic concluded that BK Medical presented a significantly greater risk of FCPA violations than the firm’s other lines of business. A recommendation was made to validate the partners of the distributor and business ethics and training was undertaken.

The DOJ resolved this matter with BK Medical by entering into a non-prosecution agreement. The firm admitted to the facts of the scheme in the agreement and paid a $3.4 million penalty. The DOJ considered the fact that the firm self-reported and its remediation for which it received credit. Only partial credit was given because initially only part of the facts learned in the firm’s internal investigation were disclosed.

The SEC’s Order alleged violations of Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The firm consented to the entry of a cease and desist order based on Sections 13(b)(2)(A) and 13(b)(2)(B). It will pay disgorgement of $7,672,651 and pre-judgment interest. Mr. Frost consented to the entry of a cease and desist order based on the same Sections, and, in addition, Section 13(b)(5). He will pay a penalty of $20,000.

In resolving the case the SEC considered the firm’s cooperation which included: 1) self-reporting; 2) improving BK Medical’s distributor due diligence and distribution agreements; 3) terminating a number of employees including Mr. Frost, the vice president of sales and disciplining others; 4) enhancing the parent’s general oversight of the subsidiary and hiring a corporate compliance officer; 5) remediating and improving the internal controls; and 6) requiring additional and ongoing compliance training at the parent and subsidiary agreement.

Tagged with: , , ,

by T. GormanPosted on Posted in SECActions

Repeated insider trading, no matter how small the amounts, is likely to be found by the SEC’s big data approach to surveillance. A former vice president of a retail chain learned this lesson the hard way. SEC v. Hammon, Civil Action No. 1:16-cv-11148 (D. Mass. Filed June 20, 2016).

James Hannon was the Northeast Regional Vice President in 2012 – 2013 of retail chain T.J. Maxx, a division of TJX Companies, Inc. TJX also owned and operated Marshalls Department Stores and HomeGoods. The firm had similar discount stores in Canada and Europe. In his position as Northeast Regional Vice President for T.J. Maxx, Mr. Hannon was responsible for overseeing 122 stores.

Mr. Hannon received daily emails from the finance division of TJX that contained consolidated daily comparable store sales. The data included the current year’s sales and those of the prior year. He also received monthly emails showing nationwide results on a month, quarter and year-to-date basis. At meetings about HomeGoods stores he received information about those stores as well as superstores in the region, combinations of either T.J. Maxx or Marshalls and HomeGoods stores. Overall Mr. Hannon had financial information about 76% of TJX’s worldwide stores.

Beginning in mid-2012, and continuing through early 2013, Mr. Hannon purchased shares of his firm while in possession of inside information on five occasions:

July 3, 2012: Purchase of 5,600 shares just prior to the July 5, 2012 earnings announcement discussing a 7% increase in consolidated comparable store sales for June 2012. He sold the shares for a profit of $8,768.

August 1, 2012: Purchased 5,600 shares of company stock one day before an earnings announcement reporting a 7% increase in consolidated comparable store sales for July 2012. The shares were sold for a profit of $5,906.

August 10, 2012: Purchased 5,700 shares just ahead of the August 14, 2012 press release reporting a 24% increase in second quarter earnings per share. The shares were sold at a profit of $8,615.

September 18, 2012: Purchased 5,200 shares of firm stock two days before the announcement of the quarterly dividend. The shares were sold at a profit if $2,288.

February 20, 2013: Purchased 5,500 shares of company stock just prior to the February 27, 2013 report of a 28% increase to adjusted earnings per share. The shares were sold for a profit of $1,100.

The purchases were made in violation of the company Global Code of Conduct Guide and its Insider Trading policy. The complaint alleges violations of Exchange Act Section 10(b).

Mr. Hannon resolved the action, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay disgorgement of $26,679, prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 23574 (June 20, 2016).

Tagged with: ,