SEC: Firm’s IC Failure Equals Liability For Subsequent Acquirer
The books, records and internal control provisions are an integral part of the FCPA. The Commission’s most recent action involving those provisions, however, centers on a claimed internal control failure by a firm when retaining a foreign agent and imposes liability on that firm and its subsequent acquirer without specifying an facts supporting the claim as to the acquiring firm. In the Matter of Cadbury Limited, Adm. Proc. File No. 3-17759 (January 6, 2017).
Cadbury is a U.K. based distributer of confectionaries and snack beverages. Its shares were listed on the NYSE at the time the firm was acquired by Respondent Mondelez International, Inc., on February 2, 2010. Cadbury’s shares were delisted later in 2010. Mondelez at the time was known as Kraft Foods.
Prior to its acquisition Cadbury conducted business in more than 30 countries, including India. In November 2009 the firm decided to increase production capacity in that country. To assist with the implementation of the project the firm decided to retain Agent No. 1. Following meetings with the company in January 2010, and obtaining two quotations from Agent No. 1, Cadbury India employees in Baddi where the project would take place recommended retention of the agent. No additional due diligence was undertaken. Shortly thereafter the Agent began work. A letter authorizing the representation was executed by Cadbury India on February 23, 2010.
Between February 10, 2010 and July 2010 Agent No. 1 submitted five invoices totaling $110,446. The Order quotes the invoices as stating that the services were for “providing consultation, arrange statutory/government prescribed formats of applications to be filed for the various statutory clearances, documentation, preparation of files and the submission of the same with govt. authorities” for specific licenses. The actual license applications were prepared by employees in the local subsidiary. Cadbury India obtained some of the licenses and approvals for the project.
At the time of the February 2, 2010 acquisition, Mondelez was unable to conduct complete pre-acquisition due diligence. Later in the year substantial, risk based post-acquisition compliance was conducted. That work did not identify the relationship with Agent No. 1.
In late 2010 the firm conducted an internal investigation related to Agent No. 1. The relationship was terminated. Mondelez took extensive remedial actions.
The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Cadbury India “did not conduct appropriate due diligence on, and properly monitor the activities of, Agent No. 1, which created the risk that funds paid to Agent No. 1 could be used for improper or unauthorized purposes. In addition, Cadbury India’s books and records did not accurately and fairly reflect the nature of the services rendered by Agent No. 1.” There is no specification of what additional work Cadbury should have conducted. There is no allegation that Mondelez should have conducted additional post acquisition due diligence. And, there is no specification of facts supporting the claim that the books and records were false other than the quotation from the invoices set forth above.