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Ralph Lauren Enforcement Action Commentary – Hits And Misses

Monday, April 29th, 2013

Much of what is written about Foreign Corrupt Practices Act enforcement these days seems to be mere carrying forward of DOJ and SEC statements, as if those comments represent a universal truth.

Last year at this time, Morgan Stanley’s so-called “declination” dominated the conversation. Why was it a “declination”? It seemed simply because the DOJ said it was, even though a bit of independent analysis would quickly reveal that there was likely no criminal case to be made against Morgan Stanley based on the DOJ’s own allegations and comments from the judge who sentenced Garth Peterson. (See here for the prior post “Stop Drinking the Kool-Aid”).

Last week, the DOJ and SEC announced double non-prosecution agreements against Ralph Lauren Corporation (“RLC”). (See here for the prior post). Because it was the SEC’s first use of an NPA in the FCPA context, the SEC portion of the enforcement action received the most attention.

Why did the SEC use an NPA to resolve RLC’s alleged scrutiny? The SEC said that it was because RLC voluntarily disclosed, provided extensive and thorough cooperation, and implemented various remedial measures.

Sensing an avalanche of FCPA Inc. information carrying forward the SEC’s comments, I noted in this post last Tuesday as follows.

“Of course, these are not distinguishing factors. Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively the same thing. In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.”

The RLC enforcement action was released during the early days of a new era of SEC leadership and one law firm alert on the action stated that ”the SEC’s enforcement division is clearly using the NPA with RLC as an opportunity to do some cheerleading for the Enforcement Cooperation Initiative” (see here for more of that initiative launched in January 2010).

Many FCPA Inc. industry participants picked up the pom-poms are started cheering alongside the SEC.

One headline read – ”Self-Reporting FCPA Violations Pays Off: Just Ask Ralph Lauren.”

Another headline read – “Another Example Of The Benefits Of FCPA Self-Reporting.”

A law firm alert stated as follows. “The NPA in this case resulted from Lauren’s prompt self-reporting and extensive cooperation. Prior to the Lauren NPA, the SEC seemed to provide limited credit to public companies for cooperation in FCPA investigations.”

Another law firm alert stated as follows. ”With the announcement of the Ralph Lauren resolution … the SEC and DOJ have taken pains to highlight that beyond self-disclosure, the expedient and thorough reporting of a potential violation, real-time cooperation, and implementation of effective remedial measures may yield more positive results for companies subject to the FCPA.”

As is often the case, the FCPA Inc. material then closed with marketing pitches concerning FCPA compliance services.

Many others highlighted that the SEC mentioned that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA. However, as noted in my post last Tuesday, a few minutes of internet research will quickly reveal that RLC made the decision in August 2012 to suspend and wind-down its Argentine operations based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world. In doing so, RLC joined several other luxury brands Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

Against the backdrop of misses, it was refreshing to read a hit - Covington & Burling’s release titled “The Ralph Lauren Case: Inadequate Rewards for Exemplary Corporate Cooperation.” The alert states, in pertinent part, as follows.

“Although the government will no doubt cite these NPAs as an exemplar of the benefits of self-reporting and cooperation, we think they reaffirm the importance of careful consideration before a company decides to self-report potential unlawful conduct.

Based on the facts recited in the SEC NPA, Ralph Lauren appears to have held itself to an extremely high standard of compliance. On its own initiative, the company adopted a new Foreign Corrupt Practices Act policy and distributed it to employees, which led some Argentine employees to raise concerns about the company’s customs broker. The company immediately conducted an internal investigation, which ultimately uncovered improper payments and gifts to government officials. Within two weeks of this discovery, Ralph Lauren self-reported its findings to both the SEC and the DOJ. The NPA also highlights that Ralph Lauren adopted numerous remedial measures, including firing its customs broker and implementing further enhancements to its compliance program, cooperated extensively with the SEC, and undertook a world-wide review of its operations that uncovered no other violations.

It is difficult to imagine a set of facts more deserving of a non-public declination based on the criteria outlined by the SEC and the DOJ late last year in their FCPA Resource Guide: detection of the wrongdoing by the corporation itself; a thorough internal investigation of the misconduct; implementation of remedial measures, including termination of employees engaged in wrongdoing and improvements in internal controls and compliance programs; and voluntary disclosure to the DOJ and/or the SEC.

[…]

The Ralph Lauren NPAs are far less advantageous to the company than a declination, which would have involved no public allegations of wrongdoing and no fines. By contrast, in addition to paying approximately $1.6 million in penalties and disgorgement, under the DOJ NPA, the company had to publicly admit and accept responsibility for the illegal conduct, which potentially exposes it to shareholder lawsuits and reputational damage. The company also was required to agree to toll the statute of limitations, implement further extensive changes to its compliance program, and submit annual reports to the DOJ detailing its remediation efforts. If Ralph Lauren is found to have breached any of the terms of the agreements — determined solely by the SEC or the DOJ — it may still face the original charges by both agencies, plus potentially new charges based on any information collected during the course of the NPAs.

The benefits to the government from entering into these NPAs are clear. NPAs — unlike deferred prosecution agreements and SEC injunctive actions — are not filed with any court, thus escaping the kind of judicial scrutiny that has recently been given to some SEC settlements. Moreover, the SEC and DOJ are able to emphasize, once again, the importance of voluntary disclosure and cooperation, while still requiring significant ongoing obligations on the part of the company.

The benefits to Ralph Lauren, on the other hand, are less clear. It is likely that the government applied a discount when deciding what sanctions to impose based on the company’s self-reporting and cooperation. However, it is not at all clear that any such discount was sufficient to cover the incremental investigative and other costs incurred by the company as a result of the self-report, and the additional burdens the company has agreed to shoulder by entering into the NPAs. For other companies contemplating whether to self-report potential FCPA violations, the case reinforces the importance of closely evaluating the risks and rewards of potential outcomes, especially given the government’s apparent reluctance to grant a declination even when presented with a textbook case of extraordinary cooperation.”

Covington & Burling of course is the law firm former Assistant Attorney General Lanny Breuer recently joined as Vice-Chair (see here for the prior post). Breuer was not listed as an author of the alert, but several former DOJ and SEC enforcement attorneys, including Steve Fagell (a former member of Breuer’s DOJ senior leadership team) are listed as authors.

The RLC enforcement action involved, per the DOJ / SEC allegations, payments by one person in one of RLC’s approximate 95 subsidiaries. The payments at issue, involving customs issues, likey did not even violate the FCPA as Congress intended. [For more on what Congress intended - including, as to alleged payments to ministerial officials, see my article "The Story of the Foreign Corrupt Practices Act.'). Indeed, when the government has been put to its ultimate burden of proof in cases occurring outside the context of procurement, the government has an overall losing record. (See this prior post). In the only case that the government has won in this context, - the Fifth Circuit decision in U.S. v. Kay- the decision was equivocal and the Court recognized that “there are bound to be circumstances” in which a custom or tax reduction merely increases the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business." Indeed, the Court specifically rejected the DOJ's contrary argument and stated as follows. “[I]f the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”]

Against this backdrop and as a further sign of just how backwards the FCPA conversation of late has become, the Society of Corporate Compliance & Ethics (SCCE) released this statement praising the DOJ and SEC for its handling of the RLC action.

SCCE representatives stated as follows.

“As with the recent Morgan Stanley case, the government has made it clear that companies who take compliance seriously and are committed to finding, fixing, and solving legal and regulatory problems are in a far better position than those who do not invest in real, robust, and effective compliance programs. I can think of no better proof of the value of strong compliance and ethics programs than the DOJ’s and SEC’s recent actions.”

“When the government visibly acknowledges and credits internal compliance efforts, Boards and management take note of their tangible value and are reminded of the need to support empowered, independent compliance officers and functions.”

When the DOJ (and now the SEC) use resolution vehicles that are not subject to one ounce of judicial scrutiny, this is not something to praise, it is something to lament.

When the DOJ and SEC take action against an entity (one of the world’s most admired companies according to this recent Fortune list) that had an isolated instance of conduct that likely did not even violate the FCPA as Congress intended, this is not something to praise, it is something to lament.

When the DOJ and SEC extract approximately $1.6 million from an entity that acted like a responsible corporate citizen upon learning of an issue, and then imposes annual government reporting obligations on that company, and otherwise “muzzles” the company, this is not something to praise, it is something to lament.

Friday Roundup

Friday, April 26th, 2013

Simply inexcusable, tell us who, an interesting case study, and for the reading stack. It’s all here in the Friday roundup.

Simply Inexcusable

The government holds those subject to the FCPA to high standards. If the proverbial “right hand” in a company doesn’t know what the “left hand” is doing, the government is likely to call that an internal control failure.

Ought not the government be held to the same standard?

What follows is simply inexcusable.

In February 2012, Judge Lynn Hughes (S.D.Tex.) signed this final dismissal of the FCPA enforcement action against John O’Shea. The motion followed Judge Hughes granting O’Shea’s motion for acquittal after the DOJ’s case in chief in the FCPA trial. (See here for the prior post). During the case, Judge Hughes stated, among other things, as follows. “The problem here is that the principal witness against Mr. O’Shea . . . knows almost nothing. . . .; The government should have been prepared before they brought the charges to the Grand Jury. . . . You shouldn’t indict people on stuff you can’t prove.’’

Following the acquittal and dismissal, O’Shea has attempted to resume a normal life without the specter of criminal charges and possible jail time occupying his mind. It is understandable that O’Shea wants his reputation and “old” life back. But removing the taint of being labeled a criminal law violator by the government has not come easy for O’Shea.

Case in point is the following story.

O’Shea was recently hired by a company and traveled to Canada for a business trip. The trip was uneventful until O’Shea tried to enter Canada. It turns out the relevant government databases were not updated to reflect the disposition of his case – something that happened 14 months ago!

O’Shea indicated that he spent the entire afternoon with officials of the Canadian government to persuade them that he should not be put on the next plane back to the U.S. with U.S. marshals. O’Shea reports that the Canadian official was open-minded enough to visit internet sites suggested by O’Shea (including FCPA Professor) as proof that he was no longer a criminal defendant in the U.S.

After his business trip to Canada, O’Shea also had problems re-entering the U.S. from Canada and could not help but wonder whether someone would be waiting for him upon arrival in Houston. O’Shea reports that thankfully his fears were not realized, but he can not help but wonder what would have happened if his business trip was to some country other than Canada.

In short, the government’s internal control failure was simply inexcusable.

Tell Us Who

In the aftermath of this week’s Ralph Lauren enforcement action (see here for the prior post) alleging payments to Argentine customs officials, the Argentine government wants to know who the customs officials are.

As noted in a Law360 article, “in a letter to U.S. Ambassador to Argentina Vilma Martinez, the head of Argentina’s tax agency, Ricardo Echegaray, said that it was necessary for the Argentine government to have names and more detailed information about the alleged bribery to aid in a newly launched criminal investigation into the matter.” The article further stated as follows. “While seeking the names of Argentine officials implicated in the scheme, Echegaray also put the blame on Ralph Lauren’s customs brokers, who are not government officials, but rather private professionals hired to deal with trade matters. Echegaray likened these brokers’ roles to those of a tax adviser or accountant which companies hire for assistance.”

The question asked by the Argentine official is obviously a legitimate question.

But query whether the DOJ and/or SEC even know who the officials are.

As noted in this previous post concerning the SEC’s briefing in the Jackson and Ruehlen case involving alleged payments to Nigerian customs officials, the SEC argued that the name, titles and exact positions of foreign officials allegedly bribed need not be known in order to state a claim under the FCPAs anti-bribery provisions.

As highlighted in this previous post, in ruling on Jackson and Ruehlen’s motion to dismiss, Judge Keith Ellison (S.D.Tex.) noted in a footnote as follows.

“[T]he Court must disagree with Judge Hughes’s oral statements in a recent criminal FCPA prosecution. [U.S. v. O'Shea] (“You can’t convict a man promising to pay unless you have a particular promise to a particular person for a particular benefit. If you call up the Basurtos and say, look, I’m going to send you 50 grand, bribe somebody, that does not meet the statute.”). This Court holds that asking a third-party to bribe a government official, in order to induce that official to act in one of the proscribed ways detailed in [the FCPA], would meet the statute. The government does not have to “connect the payment to a particular official.”

Case Study

This post earlier this week regarding Wal-Mart noted that savvy investors should have recognized the NY Times induced “FCPA dip” of the company’s stock as a buying opportunity because the market often overreacts to FCPA issues.

In this post earlier this week regarding Ralph Lauren Corp.’s (RLC) FCPA enforcement action, it was noted that the RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny. Thus, the first instance of public scrutiny appears to have been announcement of the enforcement action on Monday morning. RLC’s stock dipped approximately 2% on the news and closed at $165.93. The “FCPA dip” lasted only a day, as Tuesday the stock rebounded and then some and closed yesterday at $175.38.

Reading Stack

Miller & Chevalier’s seasonal FCPA alerts are always information reads. The firm recently released its FCPA Spring Review 2013.

Is sex as a “thing of value”? See here from Wendy Wysong (Clifford Chance) – with a particular focus on Asia.

Should you be looking for further citations that more FCPA enforcement is good for FCPA Inc., see this recent article in Lawyers Weekly, an Australian publication. The article begins as follows. “A crackdown on foreign bribery has created “a mountain of work” for lawyers, a Jones Day partner has said ahead of a major international anti-corruption conference.”

*****

A good weekend to all.

Ralph Lauren Resolves FCPA Enforcement Action Via Double NPAs Based On Subsidiary Conduct In Argentina

Tuesday, April 23rd, 2013

Yesterday, the DOJ and SEC announced (here) and (here) a Foreign Corrupt Practices Act enforcement action against apparel company Ralph Lauren Corporation (“RLC”). The conduct at issue focused on Argentina custom issues and the actions were resolved via a DOJ NPA (here) and an SEC NPA (here).

Although the DOJ frequently uses NPAs and DPAs in the FCPA context, this is only the second instance the SEC has used an alternative resolution vehicle to resolve an FCPA enforcement action. As noted in this previous post, in May 2011 the SEC used a DPA to resolve an FCPA enforcement action against Tenaris. For more on the SEC’s use of alternative resolution vehicles, see prior posts here and here.

RLC agreed to pay $1.6 million to resolve its FCPA scrutiny – $882,000 pursuant to the DOJ NPA and $700,000 pursuant to the SEC NPA ($593,000 in disgorgement and $141,845 in prejudgment interest).

The gist of the enforcement action is as follows.

RLC has approximately 95 foreign subsidiaries. One subsidiary, PRL S.R.L, an indirectly wholly-owned subsidiary of RLC headquartered and incorporated in Argentina, had a General Manager who conspired with a customs clearance agency to make improper payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.”

There is no allegation or suggestion that RLC was aware of, or participated in, the alleged conduct. The resolution documents merely say that “in the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”

The simplistic inference would seem to be that General Manager A would not have engaged in the improper conduct had RLC had an anti-corruption program and provided anti-corruption training. However, this notion would seem to be undermined by reference to RLC’s worldwide FCPA compliance review which ”identified no further violations.”

DOJ NPA

The NPA states that the DOJ “will not criminally prosecute RLC … related to violations of the anti-bribery provisions of the FCPA … arising from and related to improper payments in Argentina …”.

The NPA next states as follows. “The DOJ enters into this Non-Prosecution Agreement based, in part, on the following factors:

(a) the Company’s timely, voluntary, and complete disclosure of the conduct;

(b) the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment;

(c) the Company’s early and extensive remedial efforts already undertaken – including conducting extensive FCPA training for employees world-wide, enhancing the Company’s existing FCPA policy, implementing an enhanced gift policy as well as other enhanced compliance, control and anti-corruption policies and procedures, enhancing its due diligence protocol for third-party agents, terminating culpable employees and a third-party agent, instituting a whistleblower hotline, and hiring a designated corporate compliance attorney – and to be undertaken, including enhancements to its compliance program as described in [the compliance features of the NPA); and

(d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures, as described in [the compliance features of the NPA).

In the NPA, which has a term of two years, RLC admitted, accepted and acknowledged responsibility for the conduct set forth in the statement of facts contained in the NPA, and further agreed to a "muzzle" clause in connection with the conduct at issue (see here for the prior post describing such a clause).

The conduct at issue focused on PRL S.R.L "an indirect wholly-owned subsidiary of RLC headquartered and incorporated in Argentina." According to the NPA, "PRL S.R.L. marketed and sold RLC merchandise, including merchandise that was shipped from outside Argentina." According to RLC's most recent annual report PRL S.R.L. is one RLC's approximate 95 subsidiaries.

More specifically, the conduct at issue focused on "General Manager A" described as a "dual U.S. and Argentine citizen ... hired by RLC to manage the business of PRL S.R.L. from 2003 until 2009" and "Agent 1" described as a "customs clearance agency that was retained by PRL S.R.L. to assist with customs clearance issues in Argentina."

According to the NPA, from 2004 to 2009 "PRL S.R.L. and its employees, including General Manager A, together with Agent 1 and others, conspired to make unlawful payments to foreign officials to use the officials' influence with foreign government agencies and instrumentalities in order to assist PRL S.R.L. in obtaining and retaining business for and with, and directing business to PRL S.R.L."

According to the NPA, the improper payments were "to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection." The NPA states that "these payments were not for routine government action."

According to the NPA, the improper payments were "disguised" by "having Agent 1 include the payments in Agent 1's invoice as 'Loading and Delivery Expenses' and 'stamp tax/label tax." The NPA states that "General Manager A and others at PRL S.R.L. knew of the true purpose of these expenses and nonetheless approved reimbursement to Agent 1."

The NPA next states as follows.

"In the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L."

The approximate three-page NPA concludes as follows. "In total, General Manager A and PRL S.R.L. paid roughly $580,000 to Agent 1 for the purpose of paying bribes to customs officials in order to obtain improper customs clearance of merchandise."

Pursuant to the NPA and based on the above statement of facts, RLC agreed to pay a penalty of $882,000. There is no indication in the NPA as to how this figure was calculated or what it is based on.

SEC NPA

The SEC's NPA is based on the core set of conduct set forth in the DOJ's NPA.

The short 2.5 page document does however contain the following additional paragraph.

"In addition to paying bribes to Argentina customs officials, RLC Argentina's general manager directly provided or authorized several gifts to be made to Argentine government officials to improperly secure the importation of RLC's products into Argentina. The gifts provided to three different government officials between approximately 2005 through approximately 2009 included perfume, dresses and handbags value at between $400 and$14,000 each."

[As to this "statement of fact," I noted in"Grading the FCPA Guidance" that one of the utilities of the FCPA Guidance issued in November 2012 would be to serve as a useful measuring stick for future FCPA enforcement activity. As noted in this prior post, this is yet again another FCPA enforcement action based, in part, on such items as perfume, dresses and handbags - in the RLC action - allegedly paid by one employee at one of RLC's approximate 95 subsidiaries.]

Under the heading “RLC’s Inadequate Internal Controls and Inaccurate Books and Records,” the NPA states as follows.

“As evidenced by the improper payments to Argentine customs officials and gifts to other government officials, the failure to ensure that proper and effective due diligence was conducted on the customs broker and Customs Broker A, and the failure of the review process for authorization or approval of reimbursement payments to Customs Broker A to detect a single improper payment, between 2005 and 2009, RLC failed to devise and maintain a system of internal controls at RLC Argentina sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; (iii) transactions were recorded as necessary to maintain accountability for assets; and (iv) that access to assets was permitted only in accordance with management’s general or specific authorization. RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.

Between 2005 and 2009, certain RLC Argentina employees and agents paid bribes which were inaccurately recorded in RLC Argentina’s books, records and accounts, which were consolidated into the books and records of RLC.”

Under the heading “RLC’s Self Report,” the NPA states as follows.

“In or about February 201 0, RLC’ s Board of Directors adopted a new FCPA policy and shortly thereafter the policy was disseminated through RLC’s intranet site. In approximately Spring or Summer 2010 RLC Argentina employees reviewed the FCPA policy and raised concerns about the company’s customs broker in Argentina. As a result, RLC conducted an internal investigation of the allegations and discovered the improper payments to the customs officials and gifts to Argentine government officials. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the Department of Justice.”

Under the heading “Remedial Measures and Cooperation,” the NPA states as follows.

“Upon discovering the bribes, RLC took steps to end the misconduct, including terminating its customs broker. RLC also thoroughly reviewed its pre-existing compliance program and undertook steps to further update and enhance its compliance program, and successfully implemented those new enhancements. These steps included, in part, adoption of: (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees. RLC also ceased retail operations in Argentina and is in the process of formally winding down all operations there.

RLC provided extensive, thorough, real-time cooperation with the staff of the Division and the Department of Justice, including: voluntary and complete production of documents and disclosure of information to the staff, including the facts described above; voluntarily providing accurate translations of documents; voluntarily making witnesses available for interviews; and conducting a risk assessment of certain other world-wide operations of the company. The worldwide review included its operations in Italy, Hong Kong and Japan, and identified no further violations. In fact, the revised compliance policies appear to be working, as the world-wide review identified one instance of a bribe solicitation being rejected by the company’s employees after adoption of the company’s revised FCPA policy in 2010.”

Without admitting or denying liability, RLC agreed to enter into the NPA. At the same time, the NPA states as follows. “This agreement should not … be deemed exoneration of RLC or to be construed as a finding by the Commission that no violations of the federal securities laws have occurred.” At the same time, the NPA states that the “facts set forth are made pursuant to settlement negotiations and are not binding against RLC or its directors, officers or employees, or any other person or entity in any other legal proceeding.”

Like the DOJ NPA, the SEC NPA also contains a “muzzle” clause.

The SEC’s release (here) states as follows.

“The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation. Ralph Lauren Corporation’s cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.”

Of course, these are not distinguishing factors.

Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively the same thing. In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.

The SEC release further states as follows.

“According to the NPA, Ralph Lauren Corporation’s cooperation included:

Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
Voluntarily and expeditiously producing documents.
Providing English language translations of documents to the staff.
Summarizing witness interviews that the company’s investigators conducted overseas.
Making overseas witnesses available for staff interviews and bringing witnesses to the U.S

“The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.”

Thomas Hanusik (Crowell & Moring - and a former DOJ and SEC enforcement official) represented RLC.

*****

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have led to a world-wide risk assessment by RLC? (See here for the prior post on the “Where Else” question).

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have lead to RLC having a reporting obligation to the DOJ and SEC during the two-year term of the NPA? (See here for the prior post “A Government Mandated Transfer of Shareholder Wealth to FCPA Inc.?)

*****

It is tempting, based on the SEC’s statements that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA.

However, that would appear to be wrong conclusion. As noted here and here, when RLC made the decision in August 2012 to suspend and wind-down its Argentine operations, the decision appeared to be based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world. As noted in the above-linked CNN article, the economic measures caused tourism in Argentina to drop. Indeed, RLC was one of several luxury brands – such as Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

*****

The RLC enforcement action is just the latest to involve customs and related issues in Argentina.

See here for the Ball Corp. enforcement action, here for the Helmerich & Payne enforcement action, here for the BJ Services enforcement action.

*****

The RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny. Subject to materiality thresholds (which are rarely triggered in cases of FCPA scrutiny), there is no disclosure obligation, yet most issuers choose to disclose FCPA scrutiny. Thus, yesterday appeared to be the first instance of public disclosure of RLC’s scrutiny. The company’s stock closed at $165.93, down 1.9%.

Wal-Mart One Year Later

Monday, April 22nd, 2013

One year ago, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle.”

The conduct at issue in the Times article related to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggested that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico.

The April 2012 NY Times article resulted in intense world-wide media scrutiny of Wal-Mart. However, it was known months before the NY Times article that Wal-Mart was under FCPA scrutiny. (See here for the December 2011 post highlighting Wal-Mart’s FCPA disclosure). Thus, this week is a false one year anniversary of Wal-Mart’s FCPA scrutiny, but a meaningful anniversary nevertheless.

A year ago this week, in response to the NY Times article, Wal-Mart’s stock dropped approximately 8%. However, savvy investors should have recognized the NY Times induced dip as a buying opportunity because the market often overreacts (perhaps because of the plethora of suspect FCPA enforcement information in the public domain). For instance, the last trading day before the NY Times April article, Wal-Mart stock closed at $62.45. Last Friday, Wal-Mart stock closed at $78.29.

A December 2012 front-page NY Times article (see here for the prior post) added additional details to the previous April 2012, but did not change much from an FCPA perspective.

In the year since the original NY Times article, Wal-Mart’s FCPA scrutiny has followed a fairly typical pattern. Wal-Mart’s internal review has expanded beyond Mexico, civil shareholder suits and derivative claims have been filed, Wal-Mart has engaged in various remedial measures, and the company’s pre-enforcement action professional fees and expenses has skyrocketed (see this prior post for my calculation of $604,000 per work day).

The conduct described in the NY Times articles was unremarkable from a Foreign Corrupt Practices Act perspective – a view I have consistently held since last April (see here for a prior post and here for my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”

The unremarkable portion of the NY Times articles is that foreign subsidiary of a major multi-national company operating in an FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits. Even according to the NY Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments.

Payments in connection with foreign licenses, permits and the like have been the basis for many FCPA enforcement actions prior to Wal-Mart’s FCPA scrutiny and will likely be the basis for many FCPA enforcement actions in the future.

Indeed, a November 2012 NY Times article (here) by David Barstow (the same author as the April 2012 and December 2012 articles) rightly noted that Wal-Mart’s investigation “was uncovering the kinds of problems and oversights that plague many global corporations.” It was perhaps the most insightful thing the NY Times has said about Wal-Mart’s FCPA scrutiny, yet the November 2012 article received scant attention compared to the other two articles.

It is also interesting to ponder the salient question of whether the payments at issue in Wal-Mart, which are outside the context of procurement, actually violate the FCPA (and here, as in many cases, there is an important distinction between the law Congress passed and DOJ/SEC enforcement theories). For instance, as noted in this prior post and in my above Wal-Mart Scrutiny article, the government has an overall losing record in non-procurement type cases when actually put to its burden of proof. However, as we all know, this will matter very little when it comes to any resolution of Wal-Mart’s scrutiny.

For all of the above reasons, I do not believe that Wal-Mart’s scrutiny “will test FCPA enforcement in new ways” as suggested by this post on the FCPA Blog. Nor should it.

FCPA enforcement ought not be influenced merely by the fact that a talented journalist at a leading newspaper has devoted time and effort to cover an instance of FCPA scrutiny. If Barstow and the NY Times would have focused on BizJet, the reaction likely would have been, and with good reason, more negative. But then again, there probably would not have been any reaction at all because BizJet is obviously no Wal-Mart. Insert many other recent FCPA enforcement actions [here], if Barstow and the NY Times would have focused on [that] instance of FCPA scrutiny, the story would have largely read the same.

Nor do I believe that Wal-Mart’s FCPA scrutiny will likely end up in the Top 5 FCPA enforcement actions of all time in terms of settlement amount. The reason? All of the cases in the Top 5 are procurement cases, not cases focused on licenses, permits and the like.

If Wal-Mart does indeed crack the Top 5 (and with the seeming escalation of FCPA fine and penalty amounts, it is likely only a matter of time when a license, permit case does crack the Top 5), it will likely be for reasons unrelated to substantive FCPA issues, but rather an increase in the company’s culpability score under the advisory Sentencing Guidelines based on its alleged handling of the potential FCPA issues in 2005.

Indeed, the remarkable aspects of the NY Times investigation is the alleged conduct (or lack thereof) of Wal-Mart and its top executives upon learning of problematic conduct in its Mexican subsidiary in 2005. Even in 2005 and continuing today, most business leaders, audit committees, and boards tend to overreact to FCPA issues and often reflexibly launch broad internal investigations. But, according to the NY Times, that is not what Wal-Mart did. Another remarkable aspect of the NY Times investigation is how Eduardo Castro-Wright (at the critical time period the CEO of Wal-Mart Mexico) was allegedy known by others at Wal-Mart to be involved in the Mexican payments, but was nevertheless continuously thereafter promoted by Wal-Mart.

Corporate governance, or lack thereof, is what made the NY Times April 2012 remarkable. This is the reason why Wal-Mart generated all the buzz it did a year ago this week and I’ve consistently held the view that the Wal-Mart story is a corporate governance sandwich with the FCPA as a mere condiment.

But even here, the seldom-discussed November 2012 NY Times article, adds additional relevant details. It suggests that Wal-Mart’s December 2011 FCPA disclosure was motivated by Wal-Mart’s desire to pro-actively understand its FCPA risk (notwithstanding whatever may have occurred within the company in 2005 upon learning of potentially problematic payments in Mexico). According to the article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action). According to the NY Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit.

Parker Drilling Resolves FCPA Enforcement Action Involving Conduct In Nigeria

Wednesday, April 17th, 2013

It’s been quite a week on the FCPA enforcement front.

On Monday, the DOJ announced (here) criminal obstruction of justice charges against “Frederic Cilins a French citizen [for] attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”

Yesterday, it was reported (here) that former Siemens executive Uriel Sharef had, as expected, settled the SEC enforcement action against him by agreeing, without admitting or denying the SEC’s allegations, to pay a $275,000 penalty. (See here for the prior post discussing the DOJ’s and SEC’s December 2011 charges against Sharef and others).

Yesterday, the DOJ announced (here) that criminal charges “have been unsealed against one current and one former executive of the U.S. subsidiary of a French power and transportation company for their alleged participation in a scheme to pay bribes to foreign government officials.” The individuals are:

Frederic Pierucci (“a current company executive who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary) “who was charged in an indictment unsealed in the District of Connecticut with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive charges of violating the FCPA and money laundering.” According to the DOJ, Pierucci, a French national, was arrested Sunday night at John F. Kennedy International Airport.

David Rothschild (“a former vice president of sales for the Connecticut-based U.S. subsidiary”) who pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA. The charges against Rothschild and his guilty plea were recently unsealed.

Future posts will explore in more detail each of the above developments.

Today’s post is about yesterday’s other FCPA development - the announcement of the long-expected enforcement action against Parker Drilling (a Houston-based oil drilling services company) for conduct in Nigeria.

As indicated in this DOJ release, the Parker Drilling action “stemmed from the DOJ’s Panalpina-related investigations.”

As detailed in this prior post, in November 2010, the DOJ and SEC announced coordinated FCPA enforcement actions against Swiss-based freight forwarder Panalpina and six oil and gas companies that utilized its services in connection with business in Nigeria. The November 2010 enforcement action resulted in approximately $237 million in combined DOJ/SEC settlement amounts. (For additional reading on these actions, please visit the CustomsGate tab under the search feature of this site or see here where all the prior actions are linked). As noted in this prior statistical post, Panalpina-related enforcement actions are one, of just a few unique events, that have given rise to the majority of FCPA enforcements since 2007, and Panalpina-related enforcement actions significantly contributed to the “spike” in FCPA enforcement actions in 2010.

Total fines and penalties in the Parker Drilling enforcement action were approximately $15.9 million (approximately $11.8 million in the DOJ enforcement action and approximately $4.1 million in the SEC enforcement action).

This post summarizes the DOJ’s and SEC’s allegations and resolution documents.

DOJ

The DOJ enforcement action involved a criminal information (here) against Parker Drilling resolved through a deferred prosecution agreement (here)

Criminal Information

Parker Drilling operated oil-drilling rigs in Nigeria owned by Parker Drilling (Nigeria Limited), a Nigerian entity and wholly-owned subsidiary of Parker Drilling Offshore International, Inc., (a Cayman Islands corporation wholly-owned by Parker Drilling). According to the information, “Parker Drilling ceased drilling operations in Nigeria in 2006″ and the conduct at issues focused on two issues or events that occurred between 8 to 12 years ago.

First, the information, like the prior Panalpina-related enforcement actions, alleged conduct in connection with obtaining temporary importation permits (TIPs) in Nigeria for oil-drilling rigs. The information alleges that in 2001, Parker Drilling retained Panalpina to “obtain TIPs and TIP extensions on Parker Drilling’s behalf. According to the information, between 2001 and 2002:

“Panalpina obtained new TIPs for Parker Drilling’s rigs by submitting false paperwork on Parker Drilling’s behalf to avoid the time, cost, and risk associated with exporting the rigs and re-importing them into Nigerian waters (a process that Panalpina referred to as the ‘paper process’ or ‘recycling.’). Panalpina created and caused to be presented to Nigerian officials documents that reflected that the rigs had been physically exported and re-imported. In reality, the drilling rigs never left Nigerian waters.”

Second, and more significant in terms of the conduct alleged in the information, the DOJ alleges conduct in relation to the Nigerian ”Panel of Inquiry for the Investigation of All Cases of Temporary Import Permits Issued Between 1984 to Year 2000″ (the “TI Panel”). According to the information, the TI Panel was “presidentially appointed, operated under the auspices of the Nigerian President’s Office, and possessed the power to issue subpoenas and levy fines” in connection with certain duties and tariffs that the Nigerian Customs Service (“NCS”) collected or failed to collect between 1984 and 2000.

As to the TI Panel, the information alleges that beginning in 2002 the TI Panel began reviewing Parker Drilling. According to the information, thereafter Parker Drilling engaged Nigeria Outside Counsel (a Nigerian citizen based in Nigeria who advised Parker Drilling on customs and other matters in Nigeria) and a Nigeria Agent (a Nigerian and British citizen based in the U.K. to assist Parker Drilling in connection with customs matters in Nigeria) who represented Parker Drilling before the TI Panel.

The information alleges that in 2004 “the TI Panel concluded that Parker Drilling had violated [Nigerian law] with respect to several of its TIPS” and that the “TI Panel assessed a fine of $3.8 million against Parker Drilling.” The information then outlines a “bribery scheme,” that resulted in the TI Panel reducing Parking Drilling’s fine ”to just $750,000.”

In connection with this ”bribery scheme,” the information alleges conduct as to Employee A (a U.S. citizen based in Nigeria who, during the relevant time period, was the General Manager of Parker Drilling’s operations in Nigeria); Employee B (a U.S. citizen based in Nigeria who also was a General Manager of Parker Drilling’s Operations in Nigeria); Executive A (a U.S. citizen based in Houston who performed financial and compliance functions for Parker Drilling between 2002 through 2005); Executive B (a U.S. citizen based in Houston who performed a legal function for Parker Drilling); U.S. Outside Counsel (a U.S. citizen and partner in a U.S. law firm who served as Parker Drilling’s outside counsel who provided legal and business advice to Parker Drilling on customs and other issues in Nigeria).

Specifically, the information alleges that U.S Outside Counsel suggested that Parker Drilling retain the Nigeria Agent to resolve its Nigerian customs issues even though Nigeria Agent’s “resume, which U.S. Outside Counsel provided to Parker Drilling, did not reflect any past experience in Nigeria or handling customs issues.” According to the information, Parker Drilling “conducted no additional due diligence into Nigeria Agent’s qualifications.”

The information alleges that “with one exception, Parking Drilling paid Nigeria agent indirectly through the U.S.-based law firm” and that “Executives A and B paid and caused to be paid all of Nigeria Agent’s expenses without receiving any invoices particularly describing the expenditures’ purposes.” According to the information, many of expenses related to food, entertainment, social events and the like and the information alleges various meetings the Nigeria Agent had with various Nigerian foreign officials.

The information further alleges that Parker Drilling’s treasurer informed Executive B “that the lack of invoices could raise an issue in Parker Drilling’s ongoing Sarbanes Oxley audit.” Thereafter, the information alleges, the Nigeria Agent sent an invoice and that Executive B “accepted the invoice and retained it in Parker Drilling’s files, knowing that the invoice did not accurately reflect the true purpose of Parker’s Drillings” prior payments to the Nigeria Agent.

The information then states as follows. “All told, Parker Drilling transferred and caused to be transferred to Nigeria Agent approximately $1.25 million to address Parker Drilling’s TI Panel issues” and that “Nigeria Agent succeeded in reducing Parker Drilling’s TI Panel Fines.”

Based on the above conduct, the information charges one count of violating the FCPA’s anti-bribery provisions. Although the above Panalpina-related allegations are incorporated by reference into the paragraphs charging the FCPA violation, the information specifically identifies only the TI Panel conduct and states as follows. “Parker Drilling made and cause to be made from the United States … a series of payments totaling approximately $1.25 million to Nigeria Agent, knowing that all or a portion of those payments would be given or used to procure goods and services that were to be given to a foreign government official in return for the diminution of a lawfully assessed fine.”

Deferred Prosecution Agreement

The above charge against Parker Drilling was resolved via a DPA in which Parker Drilling admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states as follows.

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) the Company’s cooperation, including conducting an extensive internal investigation and collecting, analyzing, and organizing voluminous evidence and information for the Department; (b) the Company has engaged in extensive remediation, including ending its business relationships with officers, employees or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts; (c) the Company has retained a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee, as well as staff to assist the Chief Compliance Officer and Counsel; (d) the Company has already significantly enhanced and is committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth [elsewhere in the DPA]; (e) the Company has implemented a compliance-awareness improvement initiative and program that includes issuance of periodic anti-bribery compliance alerts; (f) the Company has already implemented many of the elements described [elsewhere in the DPA]; and (g) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $14.7 million to $29.4 million. The DPA then states as follows.

“The Company agrees to pay a monetary penalty in the amount of $11,760,000, an approximately 20% reduction off the bottom of the fine range [...]. The Company and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the Company’s cooperation, extensive remediation, committment to continue to enhance its compliance program, and culpability relative to other companies examined in this investigation.”

During the period of the DPA, Parker Drilling will have annual reporting obligations to the DOJ concerning its remediation and implementation of various compliance measures. As is typical in FCPA DPAs, Parker Drilling also agreed to a ”muzzle clause” (see this prior post for more information).

SEC

In a related enforcement action based on the same core conduct, the SEC brought a civil complaint (here) against Parking Drilling.

The introductory paragraph of the complaint states as follows.

“This matter involves violations of the Foreign Corrupt Practices Act (“FCPA”) by Defendant Parker Drilling Company. In 2004, through its outside counsel, Parker Drilling retained a Nigerian agent to assist the company with customs disputes related to the importation of its drilling rigs into Nigeria. During the course of the agent’s work, two Parker Drilling executives knowingly paid the agent large sums of money through its outside counsel for, among other things, the “entertainment” of Nigerian foreign officials in an effort to obtain their influence in resolving the customs disputes.”

The SEC complaint also contains a paragraph with the same general Panalpina-related allegations as alleged in the DOJ’s criminal information.

Under the heading “Remedial Efforts” the complaint states as follows.

“Parker Drilling demonstrated significant cooperation and conducted an extensive internal investigation. Since the time of the conduct noted in this Complaint, Parker Drilling has made significant enhancements to its global anti-corruption compliance program, including: retaining a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee and full-time staff to assist him; enhancing anti-corruption due diligence requirements for relationships with third parties; increasing compliance monitoring and corporate auditing specifically tailored to anti-corruption; implementing a compliance awareness initiative that includes issuance of periodic anti-bribery compliance alerts; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

Based on the above conduct, the SEC charged an FCPA anti-bribery violation and an FCPA books and records and internal controls violation. Other than restating the language of the books and records and internal controls provisions, the SEC complaint does not contain any specific allegations concerning these charges.

As noted in this SEC release, Parker Drilling agreed to pay disgorgement of 3,050,00 plus pre-judgment interest of $1,040,818, and consented to the entry of a final judgment permanently enjoining it from future FCPA violations.

Mitchell Ettinger, Saul Pilchen and Stephanie Cherny (Skadden, Arps) represented Parker Drilling.

Parker Drilling in this release stated as follows.

“After an extensive investigation, with which we fully cooperated, we are pleased to have reached agreement with the DOJ and the SEC, and we will continue to maintain a vigorous FCPA compliance program, to emphasize the importance of compliance and ethical business conduct, and to enhance our compliance efforts.”

Parker Drilling had previously disclosed that the DOJ and SEC’s investigations concerned “certain of our operations relating to countries in which we currently operate or formerly operated, including Kazakhstan and Nigeria.”