Part III: SEC Enforcement Trends, 2009: Significant cases, FCPA
Background: Key areas of emphasis for the enforcement division in 2008 included the FCPA, insider trading and financial fraud. In the last few years, the SEC and DOJ have brought increasing numbers of FCPA cases and reportedly had a large inventory of open investigations in this area at year end. Likewise, the number insider trading cases being brought has continued to increase, while financial fraud will undoubtedly be a key area of emphasis in view of the current market crisis.
Last year, the enforcement division also brought a number of significant cases based on option backdating and the crash of the auction rate securities markets. It seems unlikely however, that either of these areas will be key in 2009 and beyond. The Commission is reportedly working through its inventory of option backdating cases and has tentative settlements with many of the key players in the auction rate securities markets.
The FCPA: The SEC, typically in conjunction with the Department of Justice, and at times other regulators in this country and around the globe, continues to focus on FCPA enforcement. The cases being brought frequently come from self-reporting arising out of pre-merger due diligence or from the U.N. Oil For Food Program. Regulators have been aggressive in pursing these matters, obtaining record setting settlements which at times push the edge of the statutes.
Largest FCPA settlement: Last year, Siemens A.G. paid the largest amount in history to settle and FCPA case, eclipsing a record set in 2007, discussed here. In the Siemens settlement, DOJ, the SEC and the Munich Public Prosecutor’s office were collectively paid $1.6 billion in fines, penalties and disgorgement to conclude an FCPA case involving Siemens AG and its subsidiaries. The case was settled with multiple guilty pleas. U.S. authorities were paid about half of the amount paid by Siemens. U.S. v. Siemens, Aktiengesellschaft, Case No. 08-367 (D.D.C. Filed Dec. 15, 2008); SEC v. Siemens Aktiengesellschaft, Case No. 1:08-cv-02167 (D.D.C. Filed Dec. 15, 2008).
The charges were based on violations in Latin America and the middle east from the following transactions:
• Middle east: From 2000 to 2002 four Siemens subsidiaries — Siemens Turkey, Siemens France, Osram Middle East and Gas Turbine — were awarded 42 contracts valued at more than $80 million with the Ministries of Electricity and Oil of Iraq under the U.N. Oil For Food Program. These contracts were secured by paying over $1.7 million in kickbacks to the Iraq government. The company made $38 million in profits. As with other OFP cases, the contract price was inflated prior to the submission of the agreement to the U.N. for approval. The payments were improperly recorded on the books and records of the company.
• Argentina: Beginning in September 1998 and continuing through 2007 Siemens Argentina made over $31 million in corrupt payments to various Argentine officials. These payments were improperly recorded in the books and records as “consulting fees,” “legal fees” and other types of legitimate payments. They were made to obtain favorable business treatment in connection with a $1 billion national identity card project.
• Venezuela: Siemens Venezuela also made corrupt payments beginning in October 2001. The subsidiary made over $18 million in corrupt payments to various Venezuelan officials to obtain favorable treatment in connection with two major metropolitan mass transit projects. The payments were not properly recorded.
• Bangladesh: Siemens Bangladesh admitted that from May 2001 to August 2006 it made corrupt payments of over $5.3 million. The payments were made to obtain favorable treatment during the bidding process on a mobile telephone project.
The settlements are based on extensive cooperation by the company. To resolve the actions with each regulator:
• DOJ: Siemens AG pled guilty to one count of failure to maintain internal controls and one count of books and records violations; Siemens S.A. Argentina pled guilty to one count of conspiracy to violate the books and records provisions of the FCPA; and Siemens Bangladesh Limited and Siemens S.A. Venezuela pled guilty to one count of conspiracy to violate the anti-bribery and books and records provisions.
• Munich Public Prosecutor’s Office: Siemens AG agreed to pay about $569 million which includes disgorgement
• SEC: Siemens consented to the entry of a permanent injunction prohibiting future violations of the anti-bribery and books and records provisions and to pay disgorgement of $350 million which does not include the payment under the Munich agreement.
A second record: DOJ and the SEC set another record with their settlement of FCPA cases against Kellogg Brown & Root, LLC, a former subsidiary of Halliburton. These cases were resolved with the largest combined settlement paid by U.S. companies in an FCPA case. U.S. v. Kellogg Brown & Root LLC, Case No. 4:09-cr-00071 (S.D. Tex Filed Feb 6, 2009); SEC v. Halliburton Co., Case No. 4:09-CV-399 (S.D. Tex. Filed Feb. 11, 2009).
The case is based on a conspiracy involving KBR and its joint venture partners to pay bribes to Nigerian government officials in connection with the award of four contracts between 1995 and 2004. The contracts were valued at over $6 billion. The company paid over $182 million in bribes to two agents.
To resolve the case with DOJ, KBR pled guilty to conspiracy to violate the FCPA and agreed to pay a fine of $402 million and to retain a monitor The company settled with the SEC, agreeing to pay disgorgement of $177 million.
Failure to follow instructions: Another significant case brought last year is In the Matter of Faro Technologies, Inc., Adm. File No. 3-13059 (June 5, 2008). Here, DOJ brought criminal charges and the SEC filed a civil administrative proceeding focused on bribes paid by a Faro subsidiary in China. In this matter an official at the China subsidiary requested permission to do business the “Chinese way,” that is by paying bribes. The employee was instructed not to pay bribes. Later supervisors circulated an article about bribes paid in China to various employees including those in the China subsidiary. Nevertheless, the employees paid bribes to government officials. Although not reported in the court papers, DOJ officials note that when the employee who paid the bribes was hired he indicated he wanted to do business the “Chinese way.” The company hired him despite this statement.
To resolve the matter with the Department of Justice, the company entered into a non-prosecution agreement and agreed to pay a $1.1 million fine. The case was resolved with the SEC by agreeing to the entry of a cease and desist order and adopting a compliance program.
Other cases: Examples of other FCPA cases brought last year include the following:
• SEC v. ITT Corp., Civil Action No. 1:09-cv-00272 (D.D.C. Filed Feb. 11, 2009). Here, the Chinese subsidiary of ITT Corp. is alleged to have made $200,000 in illegal payments in connection with the sale of water pumps, yielding $4 million in sales and $1 million in profits. To settle the case, the company consented to the entry of a permanent injunction prohibiting future violations of Section 13(b)(2)(A) and (B) of the Exchange Act and an order requiring the payment of $1 million in disgorgement along with prejudgment interest and a civil penalty of $250,000.
• SEC v. Fiat, S.p.A., Case No. 1:08cv-02211 (D.D.C. Filed Dec. 22, 2008); see also U.S. v. IvecoSpa, No. 08-cr-377 (D.D.C. Filed Dec. 22, 2008); U.S. v. CNH Italia S.p.A., No. 08-cr-378 (D.D.C. Dec. 22, 2008). In this case, subsidiaries of Fiat made corrupt payments in connection with the U.N. Oil For Food Program. To settle with DOJ two subsidiaries entered guilty pleas to conspiracy counts and agreed to pay a $7 million fine. To resolve the action with the SEC, the company consented to the entry of a permanent injunction prohibiting future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and agreed to pay $5.3 million in disgorgement and a civil penalty of $3.6 million.
• SEC v. Con-way, Inc., Civil Action No. 1:08-CV-01478 (D.D.C. Aug. 27, 2008); In the Matter of Con-Way, Inc., Adm. Proc. File No. 3-13148. This was an FCPA books, records and internal controls action based on hundreds of small payment to Philippine customs officials. The matter was resolved with a consent to the entry a cease and desist order and the agreement to pay a fine of $300,000 civil penalty.
• SEC v. Willbros Group, Inc., Civil Action No. 4:08-CV-01494 (S.D. Tex. May 14, 2008). The FCPA action here is based on schemes in Nigeria and Bolivia to pay bribes and create false documents to conceal that fact. To settle with the SEC, the company consented to the entry of a permanent injunction prohibiting future violations of the FCPA anti-bribery and books and records and internal controls provisions. In addition, the company agreed to the entry of an order requiring the company to pay disgorgement of $8.9 million plus prejudgment interest. The company settled with DOJ by entering into deferred prosecution agreement, agreeing to the appointment of a monitor and agreeing to pay a $22 million penalty.
In many FCPA cases, the SEC and DOJ also name individuals as defendants. For example, in Willbros, the SEC named four individuals as defendants. Individuals have been a traditional area of focus for the SEC and DOJ in FCPA cases as discussed here.
Next: Insider trading