SEC, United Settle Internal Controls Case
When the Foreign Corrupt Practices Act was passed, a key portion of the statute centered on the books and records and internal control provisions written by the Commission. While the bribery provisions only apply to foreign officials, the books and records and internal control provisions apply to all issuers. In the Commission’s most recent internal control case the facts regarding a possible quid pro quo are reminiscent of many FCPA bribery cases. Yet the action centers on a U.S. issuer, a benefit to a state official and alleges internal controls violations based on not securing a waiver of typical but undocumented procedures. In the Matter of United Continental Holdings, Inc., Adm. Proc. File No. 3-17705 (December 2, 2016).
United Continental is a Chicago based issuer whose shares are listed on the New York Stock Exchange. The holding company is the parent of United Airlines. The official is David Samson, a member of the Port Authority, a political subdivision of the states of New York and New Jersey. The Authority operates Newark Airport, a United Airline hub. The airline has a significant presence at the airport.
Beginning in February 2011 Mr. Samson, after becoming Chairman of the Port Authority, began pressing United through a consultant and registered lobbyist to initiate a non-stop flight route from Newark to Columbia, South Carolina. Mr. Samson maintained a home in that city. Previously Continental Airlines, later merged into United, had a route between the two points. It was terminated because it was unprofitable.
During the summer and fall of 2011 United was negotiating a lease of three acres of land at the Newark Airport. The airline planned to construct a maintenance hangar for its wide-body aircraft. United estimated that the Hangar would result in efficient routings that would drive $47.5 million in value to the United network on an annual basis. During the summer and fall the negotiations regarding the Hangar proceeded.
In September 2011 Mr. Samson, the CEO of United and others met for dinner in New York City. The focus of the dinner was United’s priorities at Newark airport and the Hangar. During the course of the dinner Mr. Samson noted that Continental Airlines at one time had a route from the Newark Airport to Columbia, South Carolina. United’s CEO stated that generally the airline did not maintain unprofitable routes but noted he would look into the matter.
Subsequently, United personnel at the Newark Planning Group analyzed potential financial performance of the proposed Samson route. United did not have any written policies or procedures regarding the evaluation of possible routes. Typically the firm: 1) prepared and considered financial forecasts and other market data on how the route might perform; 2) conducted reviews and sought approvals at several levels within United’s Newark Planning Group; 3) obtained approval from the Chief Revenue Officer or his staff; and 4) presented the route and its details to a group of senior firm executives at a regularly scheduled marketing meeting.
With regard to the proposed Samson route, the preliminary financial analysis concluded that the route would likely lose money. The United government affairs office was informed of the analysis. The office was aware of Mr. Samson’s interest in the route. On October 13, 2011 United told the consultant who initially contacted the firm about the route that the airline was not interested in operating the route proposed by Mr. Samson.
In November 2011 United expected the lease for the Hangar project to be considered by the Port Authority. Ultimately the item was omitted from the agenda. The next month the lease was also omitted from the agenda for the Port Authority meeting.
After learning of the Port Authority action, United’s CEO approved the route proposed by Mr. Samson. The Port Authority approved the lease the same day. Ultimately, after again losing money, the route was terminated
At the time of its approval the route had not received initial approval from the Network Planning Group, been approved by the Chief Revenue Officer or his staff and had not been presented during a regular market meeting. The firm also had a Code of Business Conduct in effect that prohibited bribes and other improper acts, backed by Ethics and Compliance Guidelines. No waiver of the customary procedures had been obtained.
The Order alleges violations of Exchange Act Section 13(b)(2)(A) and (B).
To resolve the proceeding United undertook a series of remedial actions. Those included enhancing its Ethics and Compliance Office as well as its global code of conduct and anti-bribery policies. The firm also conducted extensive anti-bribery and corruption training. United consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm will pay a civil penalty of $2.4 million. In resolving the action United did not make admissions. The Order omits the standard neither admits nor denies language while stating that United consented to the entry of the Order.
Previously, Mr. Samson pleaded guilty to bribery in a criminal case initiated by the U.S. Attorney’s Office for the District of New Jersey. United entered into a non-prosecution agreement with the same U.S. Attorney’s Office, made certain admissions, agreed to continue enhancing its internal procedures and paid a fine of $2.25 million.