by T. GormanPosted on Posted in SECActions

Significant pending cases

There docket for this year contains significant and high profile FCPA cases which are heading for trial. One of these cases is the sixteen-count indictment against U.S. Congressman William Jefferson. U.S. v. Jefferson, 07-00209 (E.D Va. Filed June 4, 2007). The indictment alleges that the Congressman promised to make a $500,000 “front-end payment” to a Nigerian official for regulatory approvals. In addition, the scheme included a “back end payment” of 50% of the joint venture’s profits to he official. The charges include alleged violations of the FCPA anti-bribery provision along with wire fraud, money laundering, obstruction of justice and RICO.

A second significant FCPA case heading toward trial later this year is U.S. v. Smith, No. 07-69 (S.D. Cal. Filed April 25, 2007). Mr. Smith is the co-founder of Pacific Consolidated Ind. The indictment claims that the defendant made more than $300,000 in bribes to an official of the Ministry of Defense for the award of Royal Air Force contracts. The charges include alleged violations of the FCPA anti-bribery provisions, money laundering and tax offenses.

Analysis and Conclusions

A review of the FCPA cases brought over the last year demonstrates that both the SEC and DOJ have reemphasized FCPA enforcement. Last year, there were a record number of cases. The large number of open investigations at year end and the docket of significant cases heading toward trial clearly suggest that this trend will continue.

Key factors to consider in view of the increased emphasis on FCPA enforcement include:

• the expansive view of the statutes used by the SEC and DOJ, including as to the key “obtain/retain business” clause and the “promotional expenses” provisions;

• increased size of the fines being imposed, particularly where there is a prior violation;

• increased emphasis on expansive industry and “other subsidiary” investigations;

• focus on individuals;

• emphasis on due diligence in advance of mergers to identify past violations which may not have been previously discovered;

• inconsistent use of non-prosecution and deferred prosecution agreements;

• impact of prior consent decrees;

• increased use of monitors and undertakings; and

• opportunities for coordinated resolutions among regulators, possibly obtaining “joint” credit.

All of these points suggest that issuers and their officers, directors and general counsels would be well advised to consider: 1) effective compliance procedures consistently applied; 2) periodic education of employees; 3) careful assessment of “country risk” when doing business abroad; and 4) complete due diligence when hiring agents – due diligence which is periodically reviewed and updated.

by T. GormanPosted on Posted in SECActions

This week, turmoil continued in the credit markets as the New Century Trustee released a comprehensive report on lending activities at the giant subprime lender, disclosing shoddy lending and accounting practices. At the same time, the SEC and DOJ continued their renewed focus on FCPA enforcement. Finally, a new academic study concluding that procedural walls used at investment banks are porous may raise new concerns on Wall Street and with regulators.

New Century Report

New Century may not be the cause of all the instability in the financial markets, but following a report prepared at the request of its Trustee, the company will no doubt become the poster child for the subprime crisis.

The 581-page report details how the subprime lender significantly expanded its loan portfolio while suggesting possible causes of actions against its outside auditor, KPMG and perhaps others. The report provides a detailed analysis of the lending practices employed by the company, demonstrating how it expanded its loan originations from about $14 billion in 2002 to $60 billion in 2006. According to the report, this dramatic increase followed in the wake of increasingly risky lending practices and exceptions to company underwriting guidelines. These practices permitted the company to extend loans to those who could only afford the low, introductory “teaser rates,” but little beyond that. This created a situation which predictably unraveled.

The report goes on to detail seven improper accounting practices implemented by New Century. Under one practice the company understated its repurchase reserve, that is the funds set aside to repurchase bad loans. This reserve was understated by at least $104.8 million in the third quarter of 2006, for example. This permitted the company to report a profit of $63.5 million, when it actually had a loss. This and other improper accounting practices resulted in inflated bonuses to executives and false regulatory filings. According to the report, KPMG was involved in these improper accounting practices.

The report is on file in the bankruptcy proceeding, In re New Century TRS Holdings, Inc., 07-10416 (U.S. Bank. D. Del.). A good summary is available here at The D&O Diary, March 27, 2008, by Kevin LaCroix.

FCPA

The increased emphasis on FCPA enforcement continued this week with three new matters. As briefly mentioned last week, the SEC filed a settled books, records and internal controls case against AB Volvo, based on claimed improper payments under the U.N. Oil for Food Program. This case is one in a series of similar cases involving both the oil and humanitarian sides of the program that have been brought by the SEC and DOJ. SEC v. AB Volvo, Civil Action No. 08CV 00473 (D.D.C. Filed March 20, 2008). The SEC’s Litigation Release is here.

In its complaint against AB Volvo, the Commission alleged that from 1999 to 2003 two subsidiaries and their agents and distributors made approximately $6,206,331 in kickback payments and authorized additional payments of $2,388,419 in connection with their sales of humanitarian goods. The payments were booked as “after-sales service fees.” No bona fide services were performed, according to the complaint.

The case was settled with a statutory injunction prohibiting future violations of the FCPA books, records and internal controls provisions. In addition, the company agreed to disgorge over $7.2 million in profits plus over $1.3 million in pre-judgment interest and to pay a civil penalty of $4 million. As part of a deferred prosecution agreement with DOJ, the company also agreed to pay a $7 million penalty.

DOJ also moved to intervene in a private action brought by Aluminum Bahrain B.S.C. against Alcoa, Inc. and others which is based on FCPA claims. Specifically, the complaint alleged that the defendants bribed unidentified Bahraini government officials and overcharged for alumina, an ingredient used to make aluminum, for a period of 15 years. DOJ has been conducting a criminal investigation based on similar conduct. Aluminum Bahrain B.S.C. v. Alcoa, Inc., Civil Action No. 2:08-cv-00299-DWA (W.D. Pa. Filed Feb. 27, 2008). DOJ is, reportedly, focusing on companies and executives in industries ranging from oil and gas services to defense. DOJ has approximately 80 pending FCPA bribery investigations open. The New York Times discusses the matter here (membership required).

One of the open bribery investigations concerns Royal Dutch Shell Plc’s U.S. unit. The focus of the investigation is the use of Swiss freight-forwarding firm Panalpina. The SEC is also investigating this matter. The company announced that it has commenced an internal investigation and is cooperating with both the SEC and DOJ.

Walls at Investment Banks

A new study being published in the Journal of Law, Economics and Policy analyzed insider trading around times when investment bankers appoint their representatives to boards of directors. The forthcoming study concludes that the walls are porous. This finding has important implications for investment banks as well as other regulated entities. Previous academic studies became the predicate for the option backdating scandals and Rule 10b5-1 trading plan inquiries.