February 12th, 2016

Friday Roundup

Roundup2Scrutiny alerts and updates, double standard, ripple, job description, new website, quotable and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Vimpelcom / TeliaSonera

As highlighted in this recent post, when recently asked about the slowdown in 2015 DOJ corporate FCPA enforcement Andrew Weissmann (Chief of the DOJ Fraud Section) stated: “just wait three months, it might be a very different picture.”

According to this report:

“Vimpelcom “is set to announce a settlement with the US Department of Justice and Swiss and Dutch authorities that will be “just shy of a billion dollars.” [...]  A source close to the DoJ, which does not comment publicly on individual cases, said it is expected that approximately three-quarters of the funds would go to the US government and the remainder to the European governments. [...] [S]ources say [the Vimpelcom action] is a precursor for a much larger settlement coming down the line with TeliaSonera, the Swedish telecom operator.”

See this prior post titled “The Burgeoning Uzbekistan Telecommunication Investigations.”

SBM Offshore

Previous posts have highlighted SBM Offshore’s scrutiny including its disclosure in November 2014 that the DOJ informed the company “that it is not prosecuting the Company and has closed its inquiry” into allegations of improper conduct in Brazil and other countries.

Earlier this week, the company disclosed:

“[The DOJ] has informed SBM Offshore that it has re-opened its past inquiry of the Company and has made information requests in connection with that inquiry.  The Company is seeking further clarification about the scope of the inquiry.  The Company remains committed to close-out discussions on this legacy issue which the Company self-reported to the authorities in 2012 and for which it reached a settlement with the Dutch Public Prosecutor in 2014.”

British American Tobacco

This previous Friday roundup highlighted the scrutiny surrounding British American Tobacco. Recently, several members of Congress sent this letter to Andrew Weissmann (Chief of the DOJ’s Fraud Section) stating in pertinent part:

“We are deeply troubled by recent media reports alleging that British American Tobacco (BAT) conspired to bribe politicians and public health officials across Central and East Africa to block, weaken, and delay the passage and implementation of public health laws designed to protect people from the deadly effects of tobacco. We request the Department of Justice to investigate BAT’s alleged bribery to determine whether it violated the Foreign Corrupt Practices Act.”

General Cable

The company has been under FCPA scrutiny since approximately September 2014 and recently disclosed:

“As previously disclosed, we have been reviewing, with the assistance of external counsel, our use and payment of agents in connection with, and certain other transactions involving, our operations in Angola, Thailand, India, China and Egypt (the “Subject Countries”). Our review has focused upon payments and gifts made, offered, contemplated or promised by certain employees in one or more of the Subject Countries, directly and indirectly, and at various times, to employees of public utility companies and/or other officials of state owned entities that raise concerns under the Foreign Corrupt Practices Act (“FCPA”) and possibly under the laws of other jurisdictions. We have substantially completed our internal review in the Subject Countries and, based on our findings, we have increased our outstanding FCPA-related accrual of $24 million by an incremental $4 million, which represents the estimated profit derived from these subject transactions that we believe is probable to be disgorged. We have also identified certain other transactions that may raise concerns under the FCPA for which it is at least reasonably possible we may be required to disgorge estimated profits derived therefrom in an incremental aggregate amount up to $33 million.
The amounts accrued and the additional range of reasonably possible loss solely reflect profits that may be disgorged based on our investigation in the Subject Countries, and do not include, and we are not able to reasonably estimate, the amount of any possible fines, civil or criminal penalties or other relief, any or all of which could be substantial. The SEC and DOJ inquiries into these matters remain ongoing, and we continue to cooperate with the DOJ and the SEC with respect to these matters.”

Qualcomm 

As highlighted in previous posts, Qualcomm has been under FCPA scrutiny for over four years and recently disclosed:

“On March 13, 2014, the Company received a Wells Notice from the SEC’s Los Angeles Regional Office indicating that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company for violations of the anti-bribery, books and records and internal control provisions of the FCPA. The bribery allegations relate to benefits offered or provided to individuals associated with Chinese state-owned companies or agencies. The Wells Notice indicated that the recommendation could involve a civil injunctive action and could seek remedies that include disgorgement of profits, the retention of an independent compliance monitor to review the Company’s FCPA policies and procedures, an injunction, civil monetary penalties and prejudgment interest.

A Wells Notice is not a formal allegation or finding by the SEC of wrongdoing or violation of law. Rather, the purpose of a Wells Notice is to give the recipient an opportunity to make a “Wells submission” setting forth reasons why the proposed enforcement action should not be filed and/or bringing additional facts to the SEC’s attention before any decision is made by the SEC as to whether to commence a proceeding. On April 4, 2014 and May 29, 2014, the Company made Wells submissions to the staff of the Los Angeles Regional Office explaining why the Company believes it has not violated the FCPA and therefore enforcement action is not warranted.

On November 19, 2015, the DOJ notified the Company that it was terminating its investigation and would not pursue charges in this matter. The DOJ’s decision is independent of the SEC’s investigation, with which we continue to cooperate.”

Double Standard

While we wait for additional FCPA enforcement actions against financial service firms based on alleged improper internship and hiring practices in the mold of the BNY Mellon action, the Wall Street Journal reports:

“Wall Street is emerging as a particularly dominant funding source for Republicans and Democrats in the presidential election, early campaign-finance reports filed with the Federal Election Commission show. So far, super PACs have received more than one-third of their donations from financial-services executives, according to data from the nonpartisan Center for Responsive Politics.”

Separately, certain FCPA enforcement actions have been based on alleged “foreign officials” receiving speaking fees or excessive honorariums. Against this backdrop, here is the list of Hillary Clinton’s speaking fees for speeches delivered to Wall Street audiences after she left the State Department but while she was a presumptive presidential candidate.

Ripple

Och-Ziff Capital Management has been under FCPA scrutiny since 2011. In this recent investor conference call, a company executive stated: “Uncertainty stemming from the FCPA investigation has also had some impact on investment decisions by certain LPs.”

In other words, a ripple of FCPA scrutiny.

To learn how FCPA scrutiny and enforcement has a range of negative financial impacts on a company beyond enforcement action settlement amounts, see “FCPA Ripples.”

Job Description

What is the Assistant Deputy Chief of the DOJ’s Foreign Corrupt Practices Act Unit expected to do? See here for the job opening and expected duties.

New Website

The U.K. Serious Fraud Office recently unveiled a new website. Among the feature is a “current cases” page which specifically lists the following companies are under investigation for bribery/corruption offenses.

  • Alstom Network UK Ltd & Alstom Power Ltd
  • ENRC Ltd
  • GPT Special Project Management Ltd
  • Innovia Securency PTY Ltd
  • Rolls-Royce PLC
  • Soma Oil & Gas

Quotable

In this Corporate Crime Reporter interview, Crispin Rapinet (a partner at Hogan Lovells in London) states:

“The danger of deferred prosecution agreements is the commercial temptation to deal with a problem that may or may not be in reality a real problem. If you pushed the prosecutor to actually establish that it is a criminal offense, it may not be that straight-forward. But the temptation for any corporate to deal with that risk through a commercial settlement which involves a sum of money and living with someone looking over your shoulder for a period of time is understandably great.

Whether that, from a jurisprudential point of view, is the ideal world is questionable. You can see why people might take the view of — we don’t actually know whether these people have committed a criminal offense or not. But the power of the threat of the cost and time and management distraction associated with defending a claim, to say nothing of the ultimate risk if you are ultimately unsuccessful in your defense, is such that in the overwhelming majority of circumstances where these problems arise, the commercial temptation is to enter into a deferred or non prosecution agreement.”

Spot-on.

For The Reading Stack

An informative read here from Jon Eisenberg (K&L Gates) regarding SEC civil monetary penalties.





February 11th, 2016

Delaware Clamps Down On Parasitic Shareholder Litigation

Feeding FrenzyFCPA Professor has been highlighting for years the parasitic nature of many FCPA-related civil claims.

The actions are as predictable as the sun rising in the east and generally unfold as follows.

A company becomes the subject of Foreign Corrupt Practices Act scrutiny or resolves an FCPA enforcement action.

Then a feeding frenzy follows as plaintiffs lawyers representing (after recruiting) shareholders file civil suits alleging either breach of fiduciary claims under state law or securities fraud claims under federal law.

Like most shareholder litigation of this nature, success is often defined as passing the motion to dismiss stage, and in the FCPA context such FCPA-related civil claims rarely get past this most basic hurdle.

Yet some claims do indeed get past the motion to dismiss hurdle or even they do not are otherwise settled by companies because settlement represents the path of least resistance. In such situations, shareholders receive nothing of significance in the settlement, but the plaintiffs lawyers sure do make out nicely. (See this prior post “Nice Pay Day, But What Did You Accomplish?)

Yet, the actions, as well as the purported investigations by plaintiffs firm surrounding the issues, continue. As this 2010 Forbes column rightly observed:

“[The general increase in FCPA enforcement] has made corporate lawyers and accountants rich as big companies pay big law and accounting firms to investigate and defend potential violations. Plaintiff lawyers have noticed the enormous fees, which are often reaching into the hundreds of millions of dollars, enhanced FCPA enforcement is generating and are moving to extract their own cut.”

The latest company to find itself in the crosshairs of plaintiffs lawyers is Freeport-McMoRan Inc. concerning its business practices in Indonesia after an Indonesian politician resigned after allegedly asking for Freeport shares in exchange for assistance in securing a contract renewal for the company.

Within days, the usual cadre of plaintiffs firms filed lawsuits or otherwise announced investigations (see here, here, here, here, here, here) claiming that Freeport violated the FCPA and as a result various Freeport public statements were materially false and misleading.

Against the above backdrop and general dynamics was a recent notable decision by the Delaware Court of Chancery (the most high-profile trial court in the country when it comes to intra-corporate disputes).

The decision (here - in which Trulia, Inc. shareholders alleged that company directors breached their fiduciary duties in approving a proposed merger with Zillow at an unfair exchange ratio) did not involve FCPA-related civil claims, but did involve another vexatious form of shareholder litigation that typically follows corporate mergers. Perhaps you’ve heard the term “first the merger, then the lawsuit.”

While the decision is not a perfect parallel to FCPA-related civil claims, the language of the court in denying the proposed settlement between the parties is analogous to the FCPA context.

In denying the settlement, the court stated:

“The proposed settlement is of the type often referred to as a “disclosure settlement.” It has become the most common method for quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation. In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia’s stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel.”

[...]

Today, the public announcement of virtually every transaction involving the acquisition of a public corporation provokes a flurry of class action lawsuits alleging that the target’s directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. On occasion, although it is relatively infrequent, such litigation has generated meaningful economic benefits for stockholders when, for example, the integrity of a sales process has been corrupted by conflicts of interest on the part of corporate fiduciaries or their advisors. But far too often such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.”

Posted by Mike Koehler at 12:01 am. Post Categories: Freeport McMoRanRelated Civil Litigation




February 10th, 2016

And The Apple Goes To …

applepicA top DOJ official recently stated that “greater transparency benefits everyone.”

Hard to disagree with that.

Yet given the opportunity to be transparent in the HSBC prosecution by releasing the corporate monitor reports (a requirement of the DPA) the DOJ (as well as HSBC) strongly objected.

Enter U.S. District Court Judge John Gleeson (E.D.N.Y.) who in this recent opinion ordered the monitor report to be released.

For championing transparency and not acquiescing in secret criminal law enforcement, Judge Gleeson earns the FCPA Professor apple award.

In pertinent part, Judge Gleeson stated (internal citations omitted):

“HSBC and DOJ do not want the public to have access to the Report. I find that the Report is a judicial record, and that the public has a First Amendment right to see the Report.

[...]

The inquiry in this case—whether to allow the public to see the Monitor’s Report—explores the bounds of a court’s duty to “ensure that ours is indeed a government of the people, by the people, and for the people.” One of the ways this seemingly abstract principle of governance directly affects the job responsibilities of a federal judge is the duty it creates to uphold the public’s right of access to judicial documents. Both the common law and the First Amendment give the public this right.

[...]

Before I can analyze whether the public’s right of access under the common law or the First Amendment compel me to unseal the Monitor’s Report, I must determine whether the Report is a judicial document.  I may consider the Monitor’s Report a “judicial document” if it is “relevant to the performance of the judicial function and useful in the judicial process.” I conclude that it is.

[...]

There is an open criminal case before me. As the government puts it, my authority here “is to ensure that the DPA remains within the bounds of lawfulness and respects the integrity of this Court.” I cannot perform that task without receiving at least some updates from the parties about HSBC’s compliance with the DPA.

[...]

I care a great deal about the results of the Monitor’s investigation; my review of those results is necessary to do my job properly.

The government argues that I am “charged neither with enforcing or granting relief from the Monitor’s efforts nor with playing any role in the Monitor’s work,” but that argument misses the point. My job is to oversee the unfolding of the criminal case that the government chose to file in my court. The parties, in the DPA, made the Monitor’s work a component of the case, and thus made the instant Report critical to the execution of my duties. If, for example, the Monitor’s Report disclosed that HSBC were systematically and extensively laundering money for drug traffickers, it would demean this institution for me to sit by quietly while the government took no action. Indeed, my oversight of the DPA and the open criminal case goes to the heart of the public’s right of access: federal courts must “have a measure of accountability,” and the public must have “confidence in the administration of justice.” Most tellingly, even a “[d]istrict [c]ourt’s inaction is subject to public accountability.” These are important interests that the government itself chose to implicate by resolving its investigation of HSBC in a manner that involved the filing of a pending criminal case.

[...]

The Monitor’s Report here is thus directly relevant to my judicial function, and as a result falls squarely within the definition of a judicial document. Having so concluded, I would ordinarily analyze the public’s common law right of access. However, because I find “that the [Monitor’s Report] [is] subject to a First Amendment right of access, which is stronger and can only be overcome under more stringent circumstances than the common law presumption,” I turn directly to the protections given to the public by the First Amendment.

A First Amendment right attaches to judicial documents for which “experience and logic” support public access.

[...]

The government argues that its decision “whether a defendant is abiding by the terms of a DPA” is akin to a charging decision, and that documents supporting that decision are typically non-public.  But this argument skates over the fact that the government has already brought charges against HSBC. A DPA is not analogous to documents related to building a case; it provides for the undoing of an already-filed case. The government did not begin to employ DPAs with companies until the early 1990s, so there is scant historical evidence of public access to documents in the precise posture of the Monitor’s Report at issue here.

[...]

When all goes well for the defendant, a DPA is, at its core, a substitute for a plea agreement or a trial—to both of which the public has historically had a First Amendment right of access. And the Monitor’s Report is integral to the fulfilment of my continuing obligation to monitor the execution and implementation of the DPA. I conclude that the public’s right of access extends to such documents. Accordingly, I find that “experience” supports unsealing the Monitor’s Report.

I also find that “logic bears out this experience, since ‘public access plays a significant positive role in the functioning of the particular process in question.’” This case implicates matters of great public concern, and is “therefore one[] which the public has an interest in overseeing.” DOJ and the Court are public institutions.

[...]

[B]ecause of the historical practice of allowing public access to documents filed in connection with important criminal proceedings, and because the interests of transparency, accountability, and credibility remind me “of the logic of democratic monitoring of judicial processes,” I find that the First Amendment right of access attaches to the Monitor’s Report.”

[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]

Posted by Mike Koehler at 12:03 am. Post Categories: Apple AwardDeferred Prosecution AgreementsMonitor




February 9th, 2016

Issues To Consider From The SciClone Enforcement Action

IssuesThis recent post highlighted the SEC’s $12.8 million Foreign Corrupt Practices Act enforcement action against SciClone Pharmaceuticals.

The action was based on the marketing and promotional activities of a subsidiary that provided various things of value to healthcare professionals employed by state-owned hospitals in China including weekend trips, foreign language classes, “golf in the morning and beer drinking in the evening,” and travel to the Grand Canyon and Disneyland.

This post continues the analysis of the enforcement action by highlighting various issues to consider.

Time Line

In August 2010, SciClone disclosed that the SEC had issued the company a subpoena inquiring about its business practices in China.

If the SEC wants the public to have confidence in its SEC enforcement program, it must resolve instances of FCPA scrutiny much quicker. 5.5 years is simply inexcusable.

For instance, SciClone previously disclosed that in “July 2015, SciClone reached an agreement in principle with the staff of the US Securities and Exchange Commission (SEC) for a proposed settlement” and its disclosure specified the exact amount in last week’s settlement.

Should it really take 7 months to finalize an agreement in principle to settle?

Nearing 20

According to my figures, SciClone is the 18th corporate FCPA enforcement action based on the enforcement theory that employees of certain foreign health care systems are “foreign officials” under the FCPA.

This enforcement theory has never been subjected to any meaningful judicial scrutiny and, perhaps most telling as to its validity and legitimacy, is that none of the corporate enforcement actions based on this theory have resulted in related charges against an individual.

Initial Disclosure of Settlement Amount

In March 2014, SciClone disclosed, in connection with its FCPA scrutiny, “that a payment of $2.0 million to the government in penalties, fines and/or other remedies is probable.”

As highlighted above, the final settlement was $12.8 million.

Anything of Value

The enforcement action contains the following list of things of value.

  • “weekend trips, vacations, gifts, expensive meals, foreign language classes, and entertainment”
  • attendance at “the annual Qingdao Beer Festival consisting of golf in the morning and beer-drinking in the evening”
  • “vacations to Anji, China”
  • “paying for family vacations and regular family dinners”
  • “$8,600 in lavish gifts”
  • non-business “travel to Las Vegas and Los Angeles with tours of the Grand Canyon or Disneyland.”
  • “sightseeing and [travel to] tourist locations such as Mt. Fuji.”
  • “a weekend stay on the island of Hainan, a resort destination”

Chinese Travel Companies

Purported travel companies, as well as the fapiao’, are well-known compliance risks in China. On these issues, the SEC’s order states:

“Local Chinese travel companies were routinely hired to provide services (such as arranging transportation, accommodations, and meals for HCPs) in connection with what were ostensibly legitimate conferences, seminars, and other events. In addition to a lack of due diligence for these third party vendors … there was a lack of controls over the events to ensure they had an appropriate business purpose and that the events actually occurred. Many events did not include a legitimate educational purpose or the educational activities were minimal in comparison to the sightseeing or recreational activities.”

[...]

As part of its remedial efforts, SciClone conducted a detailed, comprehensive internal review of promotion expenses of employees … This review found high exception rates indicating violations of corporate policy that ranged from fake fapiao, inconsistent amounts or dates with fapiao, excessive gift or meal amounts, unverified events, doctored honoraria agreements, and duplicative meetings.”

Professional Fees and Expenses

Even though SciClone, in its March 2015 annual report, disclosed for the FY ended December 31, 2013 “$5.3 million related to legal matters associated with the ongoing government investigation and our ongoing improvements to our FCPA compliance efforts,” the company’s other disclosures over its long period of FCPA scrutiny lack specifics regarding pre-enforcement action professional fees and expenses.

Nevertheless, it is a safe assumption that the aggregate of such fees and expenses exceeded the $12.8 million settlement amount. Add to this SciClone’s post-enforcement action reporting obligations and the biggest “winner” of SciClone’s FCPA journey would appear to be the law firm representing SciClone.

Other Ripples

FCPA Professor has followed SciClone’s FCPA scrutiny since day one in August 2010 (see here).

As chronicled on FCPA Professor, the biggest storyline was how SciClone’s disclosure of the SEC subpoena triggered a nearly 40% drop in the company stock price, resulting in an absolute feeding frenzy of plaintiff lawyers filing FCPA-related civil claims. (See here and here).

Indeed, SciClone’s FCPA scrutiny is prominently featured in the article “Foreign Corrupt Practices Act Ripples“ which highlights how settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.

Nevertheless, savvy investors know that FCPA-induced dips often present buying opportunities and SciClone’s stock closed last Friday (the first day of trading after announcement of the FCPA enforcement action) up 8% and substantially higher compared to its August 2010 close (recognizing of course that a number of factors can influence a company’s stock price over the course of nearly 6 years).

For Your Viewing Pleasure

In this 2014 video, SciClone’s CEO talks about the company’s FCPA scrutiny and, more generally, compliance.





February 8th, 2016

Current CEO Of LAN Airlines Resolves SEC FCPA Enforcement Action Based On A Payment He Authorized 10 Years Ago In Connection With A Labor Dispute

PlazaLast week was busy for SEC Foreign Corrupt Practices Act enforcement.

First, there was the $3.9 million enforcement action against SAP (see here).

Then, there was the $12.8 million enforcement action against SciClone Pharmaceuticals (see here).

And then, as highlighted in this post, there was an individual action against Ignacio Cueto Plaza, the current CEO of LAN Airlines (pictured at left).

The Cueto enforcement action was noteworthy in at least five respects.

  • First, it was a rare SEC individual FCPA enforcement action (the Cueto action represents only the fourth core individual action since April 2012).
  • Second, it was an FCPA enforcement action against a CEO (rarely do individual FCPA enforcement actions involve an executive officer).
  • Third, it was an FCPA enforcement action against an existing CEO (most individual FCPA enforcement involve former employees because the company, as part of its remedial measures, terminates the employee found to be in violation of the FCPA).
  • Fourth, even though most FCPA enforcement actions are based on “old” conduct, a 2016 enforcement action based on 2006 conduct stretches the credibility of the SEC’s enforcement program to a new level, coupled with the fact that a U.S. law enforcement agency brought an enforcement action against a Chilean citizen based on alleged improper conduct in Argentina.
  • Fifth, most FCPA enforcement actions, even those that “only” charge or find FCPA books and records and internal controls violations, are still based on the alleged “foreign officials.” In this regard, the Cueto enforcement action is vague whether the SEC viewed the Argentine “union officials” to be “foreign officials” under the FCPA. If the SEC did view the “union officials” as such, it stretches the definition of “foreign official” even further. If the SEC did not view the “union officials” as foreign officials, the Cueto action represents a rare enforcement action concerning improper booking and insufficient internal controls concerning an instance of commercial bribery.

In this administrative action, the SEC found as follows.

“In 2006 and 2007, Ignacio Cueto Plaza (“Cueto”), the CEO of LAN Airlines S.A. (“LAN”), authorized $1.15 million in improper payments to a third party consultant in Argentina in connection with LAN’s attempts to settle disputes on wages and other work conditions between LAN Argentina S.A. (“LAN Argentina”), a subsidiary of LAN, and its employees. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. The payments were made pursuant to an unsigned consulting agreement that purported to provide services that Cueto understood would not occur. Cueto authorized subordinates to make the payments that were improperly booked in the Company’s books and records, which circumvented LAN’s internal accounting controls.”

Cueto is described as follows.

” [A] Chilean citizen and, since 2012, has been CEO of LAN. From 1995 to 1998, Cueto served as President of LAN Cargo, a LAN subsidiary located in Miami, Florida. He served on the Board of Directors of LAN from 1995 to 1997. From 1999 to 2005, Cueto was CEO of LAN’s passenger airline business. In 2005, Cueto became President and COO of LAN Airlines S.A. He remained in that position until June of 2012, when LAN merged with Brazilian Airline TAM, S.A. (“TAM”) and became LATAM Airlines Group S.A. (“LATAM”). Cueto remains CEO of LAN, which is now part of LATAM.”

The enforcement action focuses the “obstacles that LAN might face in trying to enter the Argentine airline market.” Under the heading “LAN Faces Major Issues Upon Entering the Argentine Market,” the order states:

“Upon entering the Argentine passenger airline market LAN immediately faced several major issues impacting its viability and began losing money. First, it needed to meet demands from labor unions representing the employees acquired from LAFSA and Southern Winds. Second, LAN needed majority ownership of its Argentine subsidiary, and therefore had to persuade the Argentine government to change its existing law on foreign ownership of domestic airlines and to increase caps on airfares. Third, LAN needed regulatory authorization to operate various flight routes, both domestically and internationally, in Argentina. Since the Argentine passenger airline market was heavily regulated by the government, particularly officials within the Department of Transportation who had close ties to the unions, LAN sought help from the government officials with each of these issues.

In early 2006, the consultant again contacted the Vice President of Business Development and offered to assist LAN in Argentina. By this time, the consultant was a government official in the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. On January 31, 2005, the Secretary of Transportation appointed the consultant as a Cabinet Advisor “ad-honorem.”

LAN executives, including Cueto, knew that for LAN Argentina to become profitable it would need an infusion of cash. LAN asked Argentine government officials to liberalize the laws on foreign ownership so that LAN could own a majority share of LAN Argentina and sought government authorization to raise regulated airfares. On or about August 8, 2006, the President of Argentina signed a Decree that enabled LAN to become a majority owner of LAN Argentina and allowed LAN to raise airfares by 20%. LAN Argentina was also awarded critical additional flight routes by the Transportation Secretary.”

Under the heading “LAN Encounters Problems with the Unions in Argentina,” the order states:

“As part of the deal that LAN reached with the Argentine government in March 2005, LAN was required to hire between six and eight hundred employees from the defunct LAFSA and Southern Winds airlines. LAN was bound by the existing bargaining agreements between LAFSA, Southern Winds and the labor unions.

There were five unions representing airline employees in Argentina. They included the grounds crew union, the Asociación del Personal Aeronáutico (APA), the pilots’ union, the Asociación de Pilotos de Lineas Aereas (APLA), the mechanics’ union, Asociacion del Personal Técnico Aeronáutico (APTA), the flight attendants’ union, Asociación de Tripulantes de Cabina de Pasajeros de Empresas Aerocomerciales (ATCPEA), and the supervisors’ union, Unión del Personal Superior y Profesional de Empresas Aerocomerciales (UPSA).

All of the unions were powerful and unafraid to make demands on LAN. They sought wage increases and additional benefits, and used the terms of their respective Collective Bargaining Agreements (“CBAs”) as leverage. These labor agreements contained provisions that LAN believed were unfavorable, such as restrictions on the hours employees could work and their work locations.

The mechanics’ union, the flight attendants’ union and the supervisors’ union each had a single-function rule contained in their CBAs. The single-function rule was a provision that limited workers from performing more than one work function at a time for LAN. The single-function rule was loosely interpreted and for the most part not enforced by the unions. Had it been enforced, the single-function rule would have required LAN to double its work force and would have seriously imperiled LAN’s ability to continue its operations in Argentina.

Around 2006 the unions began campaigning for wage increases. The unions threatened to enforce the single-function rule unless LAN Argentina agreed to a substantial wage increase. LAN’s management, including Cueto, attempted to negotiate on the wage issues but made no progress and things worsened over time. Eventually there were work stoppages and slowdowns on the part of the workforce, including strikes involving the pilots’ and the mechanics’ unions.”

Under the heading “Cueto Approves Improper Payments,” the order states:

“Beginning in the summer of 2006, the consultant supplied LAN executives with information on how to deal with specific union members and the unions in general. Eventually, the consultant offered to negotiate directly with the unions on LAN’s behalf, making it clear that he would expect compensation for such negotiations, and that payments would be made to third parties who had influence over the unions. After his staff informed Cueto that the consultant was well connected with the unions and could effectively negotiate an agreement with union officials, Cueto approved the retention of the consultant.

During the summer of 2006, Cueto approved payments totaling $1,150,000 to the consultant in connection with LAN’s attempts to settle disputes on wages and other work conditions with the unions. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. Cueto approved the payments to get the unions to abandon their threats to enforce the single-function rule and to get them to accept a wage increase lower than the amount asked for in negotiations. LAN and the consultant agreed that LAN would make the payment to a company controlled by the consultant in Argentina. In 2006, LAN did not have a policy requiring that due diligence be performed on consultants, and neither Cueto nor LAN conducted any due diligence on the consultant or any of his related entities.

Around August 2006, Cueto’s staff informed him that the consultant had reached an oral agreement to settle the wage dispute with the mechanics’ union on LAN’s behalf. Although the existing Collective Bargaining Agreement with the mechanics’ union would remain unchanged, Cueto understood that the union would orally agree not to seek enforcement of the single-function rule for a period of four years in exchange for a wage increase of approximately 6 15% of salary. The wage increase of approximately 15% was lower than the amount originally sought by the mechanics’ union.

Around August 2006, the flight attendants’ and supervisors’ unions both agreed to accept wage increases of approximately 15% and 10% respectively of salaries. The amounts were lower than the amounts originally sought by each union.”

Under the heading, “Cueto Authorized Improper Payments That Were Not Accurately and Fairly Feflected on LAN’s Books and Records,” the order states:

“Cueto directed subordinates to make the improper payments. The improper payments authorized by Cueto were improperly described in the books and records as “other debtors” costs in a LAN subsidiary that had no role in LAN’s argentine business.”

Under the heading, “Cueto Caused LAN’s Internal Accounting Control Failure,” the order states:

“As President and Chief Operating Officer of LAN, Cueto, along with others, was responsible for devising and maintaining compliance with internal accounting controls at LAN. Cueto did not follow the company’s existing internal accounting controls when he authorized the payment of $1,150,000 to the consultant’s company and failed to prevent the payment of $58,000 to another company owned by consultant’s son and wife. Cueto received and approved the sham contract for the consultant’s company to provide consulting services to LAN, knowing that such services would never be provided. Cueto also authorized payment of invoices from the consultant’s company that contained a description of services listed on the invoices that was false.”

Based on the above findings, the order finds that Cueto caused books and records and internal controls violations by LAN and that Cueto also knowingly circumvented or knowingly failed to implement a system of internal accounting controls or knowingly falsified book, record or account and that Cueto also violated falsified or cause to be falsified, a book, record, or account.

Under the heading “Remedial Actions and Undertakings,” the order states:

“As the CEO of LAN, which is now a division of LATAM, Cueto is subject to LATAM’s enhanced compliance structure and internal accounting controls. Cueto is required to certify compliance with LATAM’s new Code of Conduct that was adopted in 2013, as well as other internal corporate policies, including an Anti-Corruption Guide, a Gifts, Travel, Hospitality and Entertainment Policy, an Escalation Policy, and Procurement and Payment policies.

Cueto has attended the Corporate Governance Training provided by the LATAM Chief Compliance Officer and has provided a certification confirming acknowledgement of the Code of Conduct, the relevant applicable regulations, as well as the Company policies. Cueto has also executed an amendment to his employment agreement whereby Respondent acknowledges having been informed regarding the LATAM Manual for the Prevention of Corruption, among other matters, and his responsibilities to perform his duties with the highest ethical standards, in compliance with all Company Policies and Procedures.

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Cueto also undertakes to attend all anti-corruption training sessions required for senior executives at LAN. These sessions will include, but are not limited to, both live and online anti-corruption trainings to be completed on at least an annual basis and according to LAN’s Compliance Department’s training schedule. These sessions will include, in addition to anticorruption laws and regulations, such as the FCPA, training on anti-trust laws, the Company’s Code of Conduct and all other applicable policies that each LAN employee must follow. After the conclusion of each session Cueto will sign the appropriate documentation that acknowledges his attendance and understanding of the topics presented. Should LAN modify the schedule of such  training sessions for any reason, Cueto will, so long as he is a senior executive of LAN, attend a comparable anti-corruption session on an annual basis and complete appropriate documentation attesting to his attendance and the session’s contents.”

Without admitting or denying the SEC’s findings, Cueto agreed to cease and desist from future legal violations and agreed to pay a $75,000 civil penalty.

Cueto was represented by Richard Grime (Gibson, Dunn & Crutcher –  a former Assistant Director of Enforcement at the SEC heavily involved in FCPA enforcement). Commenting generally on the SEC’s evolving and expansive FCPA enforcement theories, Grime recently stated:

“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”