by T. GormanPosted on Posted in SECActions

The SEC and the DOJ resolved FCPA charges with California based life science research and clinical diagnostics company Bio-Rad Laboratories, Inc. The charges stem from bribes paid in Russia, Vietnam and Thailand. The company self-reported and provided what the SEC and the DOJ acknowledged as extensive cooperation. Nevertheless, the disgorgement award was one of the largest in a Commission action. In the Matter of Bio-Rad Laboratories, Inc., Adm. Proc. File No. 3-16231 (November 3, 2014).

Bio-Rad has two industry segments, Life Science and Clinical Diagnostics. Its international operations are overseen by its international sales organization. From 2005 through early 2010 a substantial portion of subsidiary Bio-Rad Russia’s business consisted of sales of clinical diagnostic products to the Russian government. The contracts came from a public tender offer process. The products sold in Russia were manufactured by the firm’s indirect French subsidiary and recorded on its books and records. Because of certain Russian regulations and tax provisions, the French subsidiary in some instances sold the products directly to the Russian government.

The French subsidiary, during the time period, paid two foreign corporations called the Russian agents in the papers, commissions of 15% to 30% “demonstrating a conscious disregard for the high probability that the Russian Agents were passing along at least a portion of their commissions to the Russian government officials . . .” according to the Order. The practice of using the agents began prior to 2005 primarily for their influence. The Russian agents had no offices in Russia, no employees and thus no likely capability to perform the services outlined in the contracts. When a new country manager took over in 2007 he conducted no due diligence regarding the agents although he knew that distribution costs were about 2% to 2.5% in contrast to the large commissions paid to the agents. Overall the agents were paid $4.6 million on sales of $38.6 million. When the contract with the agents was terminated in 2010 the Russian subsidiary of the company lost its first government contract in Russia.

Throughout the period the international managers ignored a series of red flags. Those included the fact that the agents could not perform the services required, their payments were requested in installment amounts that avoided the need for additional approvals, many of the contracted for service were not necessary and many of the invoices for the agents were generated by the Russian subsidiary of the firm.

From 2005 through 2009 the country manager of the Vietnam office authorized the payment of bribes to government officials to obtain business. In 2006 when it was discovered that bribes were being paid, the Vietnam office country manager stated that paying bribes was customary in the country. Later in an e-mail the country manager told a Singapore finance employee that paying third party fees was outlawed by the firm’s ethics policy but that Bio-Rad would lose 80% of its Vietnam sales without the practice. Subsequently, the sales practices were altered to sell in Vietnam through a distributor at a deep at a deep discount. The distributor then sold the products at full price to the government. The charges were booked under various labels. Gross revenue was $23.7 million.

In Thailand Bio-Rad acquired a 49% interest in Diamed Thailand as part of an acquisition in October 2007. Little due diligence was done on the subsidiary. At the time of the acquisition Diamed Thailand had an established bribery scheme using a Thi agent to sell diagnostic products to government customers. Bio-Rad’s Asia Pacific GM learned about the practice at a conference but failed to halt the improper payments. From 2007 through 2010 Diamed Thailand made improper payments of $708, 608 which generated sales revenues of $5.5 million.

When the firm discovered the practices it self-reported and conducted an extensive investigation. It provided extensive cooperation to the SEC and the DOJ and undertook significant remedial actions.

The Commission’s Order alleged violations of the bribery and books and records and internal control provisions of the FCPA. The company resolved the charges by consenting to the entry of a cease and desist order based on Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B). The firm agreed to pay disgorgement of $35,100,000 and prejudgment interest. The criminal charges, based on the actions in Russia, were resolved with a non-prosecution agreement and the payment of a $14.35 million criminal fine.

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by T. GormanPosted on Posted in SECActions

The Commission instituted administrative proceedings centered on an offering fraud orchestrated by a former adjunct Professor at Columbia Business School who taught, and previously specialized in, turning around troubled companies, along with his firm. Related actions were instituted naming the broker-dealer that served as placement agent its managing partner who was in charge of the relationship. In the Matter of Navagate, Inc., Adm. Proc. File No 3-16118 (October 31, 2014); In the Matter of Gregory Osborn, Adm. Proc. File No. 3-16229 (October 31, 2014); In the Matter of Middlebury Securities, LLC, Adm. Proc. File No. 3-16227 (October 31, 2014).

Navagate claimed to be a New York based creator and seller of computer software that provided sales force automation to financial services organizations. Respondent Gregory Rorke is the co-founder of the firm. Since1989 Mr. Rorke specialized in turning around companies facing financial difficulties and building new businesses. From 1997 through 2012 he served as an adjunct professor at Columbia Business School where he taught turnaround management, bankruptcy and restructuring in the MBA program.

Mr. Rorke formed the predecessor to Navagate in 2000. The firm developed software into a program known as Agility Source Platform which claimed to provide customer relations management and sales force automation software.

In October 2009 Navagate retained Middlebury Securities LLC, a FINRA registered broker dealer, as placement agent. Its managing partner who handled the account was Gregory Osborn. The plan was to sell Notes with a six month maturity that paid an annual rate of 12%. The rate increased in the event of a default. The Notes were planned as bridge financing to raise between $2 and $2.5 million – later increased to $3.25 million — to an eventual IPO. Between December 2009 and April 2011 Middlebury and Mr. Osborn sold about $3.2 million in Notes.

Key to the sale of the Notes was the personal guarantee of Mr. Rorke. The initial drafts of offering documents, prepared in November 2009, contained a general personal guarantee from Mr. Rorke. A request for a similar guarantee by Mr. Rorke’s wife from aa potential investor was refused, although Mr. Rorke did agree to provide more a more detailed financial statement.

In April 2010 Middlebury’s attorneys inserted the Personal Guarantee in the Offering Documents along with a Personal Financial Statement signed by Mr. Rorke. The documents represented that he had no liabilities except those disclosed and that the listed assets were in his name only. The assets included cash, marketable securities, real estate, shares of Navagate and illiquid investment that totaled over $12 million.

For the most part, the assets pledged as collateral did not belong to Mr. Rorke. Most of the assets were titled or belonged to his wife. She did not execute a guarantee. The value of the assets was also inflated while the claim that Mr. Rorke did not have any liabilities omitted the over $1 million in taxes owed to the IRS.

In January 2010 Middlebury and its lawyers uncovered approximately $543,000 of outstanding tax liens. Mr. Rorke and his firm represented that the tax liabilities would be extinguished within two weeks without disclosing that they were substantially more than those discovered by the broker and its lawyers. The tax liabilities were not paid down. To the contrary, the broker and its lawyers discovered more. The liabilities also increased, reaching about $1.8 million.

Mr. Rorke agreed to amend the offering documents after being confronted. While many investors were given amended disclose documents, those materials failed to include all of the tax liabilities. Some investors requested that their funds be held in escrow until Mr. Rorke paid certain sums to the IRS. Mr. Rorke told Middlebury’s attorneys that he had paid $350,000 to the IRS by check and executed an affidavit to that effect to secure the release of $100,000 in investor funds. The funds were released. The affidavit, however, was false. Mr. Rorke had not paid the IRS.

Navagate began defaulting on the Notes in June 2010. Nevertheless, the firm and its founder continued to sell more Notes, raising an additional $2.2 million following the first default. By early 2014 Navagate owed about $1.25 million in principal and about $1.4 million in interest on the Notes.

The Order in the Navagate proceeding alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.

The Osborn proceeding alleges violations of the same Sections. Mr. Osborn partially resolved that action, consenting to the entry of a cease and desist order based on the Sections cited in the Order and to the entry of an order barring him from the securities business. A hearing will be held to determine the amount of the disgorgement, prejudgment interest and civil penalties.

The Middlebury proceeding alleges violations of the same Sections as the other two actions. The firm partially resolved the matter by consenting to the entry of a cease and desist order based on those Sections and to a censure. Like the Osborn action, a hearing will be held to determine the amount of disgorgement, prejudgment interest and civil penalties.

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