by T. GormanPosted on Posted in SECActions

Gifts and hospitality continue to be a key theme in the SEC’s latest FCPA case. The action also involves hiring relatives of officials and ignoring risk in the face of a weak compliance and internal control environment. In the Matter of Qualcomm Inc., Adm. Proc. File No. 3-17145 (March 1, 2016).

Qualcomm designs and sells wireless telecommunication products. The firm develops and patents wireless communications technologies including those incorporated into CDMA, WCDMA and LTE, all used by wireless carriers. As the wireless technology evolved Qualcomm began warning investors that its licensing program for certain non-CDMA technologies that might be adopted by 4G products were less established.

By 2010 95% of the firm’s revenue came from international handset manufactures and other customers and licensees. By 2012 about 42% of its revenue came from Chinese handset manufacturers and other customers in China.

In May 2008 China announced the restructuring of its telecommunications industry. Three SOEs were created each with a different technology. One license was issued to SOE 2 the next year which launched a version of Qualcomm’s CDMA technology. SOE 1 was awarded a license for WCDMA and deployed a network using that technology.

Beginning in 2002 Qualcomm provided various things of value to officials from a Chinese government agency to help expand the use of the firm’s technology and ensure that executives at SOE 1 and 2 adopted Qualcomm technology. The company also provided or offered full-time employment and paid internships to family members and other referrals of foreign officials at SOE 1 and 2 was well as at the Agency. FCPA compliance was not considered. Qualcomm also offered foreign officials hospitality packages to world-class sporting events. The employees involved in planning the events for foreign officials did not have FCPA training. The firm did have FCPA compliance policies but there was no head of compliance for the firm or in China.

Qualcomm failed to maintain a system of internal accounting controls that was sufficient to provide reasonable assurances that transactions were executed and that access to assets was permitted in accord with authorization. Meal, gift and entertainment entries, for example, were repeatedly missing from logs. Internal audit reports found that employees repeatedly failed to request pre-approvals for furnishing things of value to foreign officials or to keep the appropriate records. Neither the local management in China, nor the executive management team, adequately identified the FCPA risks in offering lavish hospitality packages to foreign officials. The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B).

To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also agreed to pay a penalty in the amount of $7.5 million and to report to the staff for a two year period on its progress regarding remediation and the implementation of compliance procedures.

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by T. GormanPosted on Posted in SECActions

The SEC prevailed in its insider trading/tipping case against two New York brokers were Newman and its tipping standard was a key issue. SEC v. Payton, Civil Action No. 14 civ 4644 (S.D.N.Y.). On Monday a jury in New York found in favor of the SEC and against the defendants.

The action involved insider trading claims centered on the IBM acquisition of SPSS. Defendants Daryl Payton and Benjamin Durant were remote tippees as were the defendants in Newman. The inside information on the deal traced to attorney Michael Dallas, an associate at New York law firm Cravath Swaine & Moore LLP who had been assigned to work on the deal.

Mr. Dallas was close friends with broker Trent Martin. The two men had a history of sharing confidential information. Beginning in the spring of 2009 Mr. Dallas told his friend about the SPSS deal. Over time he provided updates. Both men understood that the information they shared regarding their work was non-public and confidential. Both expected that confidentiality would be maintained, according to the SEC complaint.

Mr. Martin was roommates with Thomas Conradt, an attorney employed at another New York brokerage firm. They had a close, mutually dependent financial relationship with a history of personal favors. Mr. Martin told his roommate about the SSPS deal. Mr. Conradt purchased shares of SPSS prior to the deal announcement on July 28, 2009.

Defendants Payton and Durant were co-works of Mr. Conradt. The three men had discussions about Mr. Conradt’s roommate – Trent Martin. Each knew that Mr. Martin worked at a brokerage firm. Mr. Conradt told his co-workers that he learned about the SPSS acquisition from his roommate. Messrs. Payton and Durant did not ask more about the roommate. They did purchase shares of SPSS just prior to the public announcement of the deal. The SEC charged Messrs. Payton and Durant with insider trading.

At trial a critical issue at trial was whether there was a Newman type benefit. That same issue was the focal point of a Motion to Dismiss brought at the outset of the SEC’s action. In an opinion written by Jude Rakoff, that motion was denied.

A parallel criminal case was filed. U.S. v. Conradt, 12 cr. 887 (S.D.N.Y.). Messrs. Martin and Payton, among others, were each charged with insider trading based on essentially the same facts as in the SEC case. Each pleaded guilty prior to the decision in Newman. Following the Second Circuit’s decision in Newman, Judge Carter vacated the guilty pleas and dismissed the criminal charges. U.S. v. Conradt, 12 – 887 (S.D.N.Y. Order Dated January 22, 2005). The court concluded that there was an insufficient factual basis for the pleas as required by Rule 11(b)(3) of the Federal Rules of Criminal Procedure.

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