Suppose A is ordered to pay B $160. However, A claims an inability to pay that amount and based on this inability to pay B agrees to accept only $25. The following year, a year during which A publicly discloses evidence of financial health, A pays C $45. You might conclude that B was duped.
Convert the above numbers to millions, insert Innospec for A, insert the DOJ and SEC for B, and insert NewMarket (a competitor corporation) for C, and you now have a real scenario.
As highlighted in this prior post, in March 2010 Innospec agreed to resolve a DOJ and SEC enforcement action by paying $25.3 in combined fines and penalties after pleading guilty to FCPA and other offenses, based largely on conduct in Iraq and Indonesia.
The total amount of fines and penalties could have been much higher as the minimum U.S. Sentencing Guidelines amount was $101.5 million and the SEC ordered the company to pay approximately $60 million. However, Innospec received a pass on approximately $135 million in fines and penalties based on its claimed inability to pay.
The DOJ’s sentencing memorandum (here) stated as follows. “Innospec has represented that it is unable to pay, and, even with the use of a reasonable installment schedule, is not likely to be able to pay, a $101.5 million fine. Over the course of nearly a year, Innospec has provided the Department, the SEC [and other U.S. and non-U.S. authorities] with detailed presentations regarding its current financial condition and available assets. Those representations have been analyzed in detail by qualified accounting professionals within the SEC […]. Innospec has represented that, were the company to pay more than the amount agreed, the continued viability of the company would be threatened, as follows: (1) Innospec would breach the limits of its credit facilities; (2) Innospec would be unable to make up a deficit in funding its pension plan, resulting in an $85 million shortfall; (3) Innospec would be unable to remediate certain environmental damage caused by its manufacturing facility in the United Kingdom; (4) Innospec would be unable to invest sufficiently in research and development; and (5) Innospec would be forced to close facilities around the world, resulting in dozens of employees losing their jobs.”
The SEC’s release (here) stated, in pertinent part, as follows: “Innospec has consented to the entry of a court order […] ordering it to pay $60,071,613 in disgorgement, provided that the Commission waive all but $11,200,000 of disgorgement and permitting payment in four installments based upon Innospec’s sworn Statement of Financial Condition…”.
Since March 2010, I highlighted in a series of posts (here, here, and here) that despite receiving the above pass based on inability to pay Innospec has consistently reported positive financial results.
This previous post highlighted a civil case filed against Innospec by a competitor (NewMarket Corp.) alleging that Innospec’s conduct, as described in the DOJ and SEC enforcement actions, violated the Robinson-Patman Act and the Virginia Antitrust Act as well as the Virginia Business Conspiracy Act. According to news reports, NewMarket learned of Innospec’s actions after reading the documents released in connection with the March 2010 enforcement action in which, among other things, the DOJ and SEC alleged that Innospec’s bribe payments in Iraq ensured that a field test of a competitor’s fuel additive failed. NewMarket claimed that the competitor was a subsidiary company Ethyl Petroleum Additives Inc. which now goes by the name Afton Chemical Corp.
As reported earlier this week by Joe Palazzolo (Wall Street Journal Corruption Currents), Innospec recently announced a settlement of the civil action. In This 8-K filing the company stated as follows. ”NewMarket and the Company have agreed to settle these actions pursuant to the terms of a settlement agreement between them signed on September 13, 2011 which provides for mutual releases of the parties and dismissal of the actions with prejudice. Under the settlement agreement, the Company will pay NewMarket an aggregate amount of approximately $45 million, payable in a combination of cash, a promissory note and stock, of which $25 million is payable in cash by September 20, 2011, $15 million is payable in three equal annual installments under the promissory note (carrying simple interest at 1% per annum) the first installment of which is due on September 10, 2012, and approximately $5 million is payable in the form of 195,313 shares of the Company’s common stock by September 20, 2011.”
Innospec’s immediate $25 million cash payment to NewMarket, as well as its committment to pay an additional $15 million in installments, raises the question of whether the DOJ and SEC were duped by Innospec last year when the agencies gave the Innospec a pass on $135 million in fines and penalties based on the company’s claimed inability to pay.