SEC ups efforts to fight bribery by U.S. firmsReprints
The U.S. Securities and Exchange Commission's aggressive pursuit of even modest infractions of the Foreign Corrupt Practices Act can result in uninsurable legal costs in the millions of dollars.
Experts say the activity stems from the so-called “broken windows” enforcement policy that SEC Chairwoman Mary Jo White articulated in October 2013, in which she said the agency would pursue even the “smallest infractions” of U.S. securities laws, including the FCPA.
Ms. White said minor violations a company fails to address “feed bigger ones and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidance.”
Observers warn, however, that even minor cases can be onerous in costs.
Both the U.S. Department of Justice and the SEC enforce the law, but Justice's jurisdiction is limited to the FCPA's bribery provision, while the SEC's portfolio includes inadequate internal controls and compliance requirements, although its authority includes only publicly held companies.
Experts say, unlike the SEC, the Justice Department can put miscreants in prison, but no publicly held company welcomes being in the SEC's bad graces.
According to a calculation by Alex J. Brackett, a partner at McGuireWoods L.L.P. in Richmond, Virginia, the eight FCPA cases settled in 2014 had an average resolution cost of $156 million, but the nine cases settled so far this year had an average cost of just under $9.7 million per settlement. Three of the eight cases settled in 2014 involved total settlement payments of more than $100 million, according to Mr. Brackett.
Observers point in particular to Houston-based Hyperdynamics Corp., an oil and gas exploration firm that agreed in September to pay $75,000 to settle SEC charges that it had failed to accurately record $130,000 in payments by its Republic of Guinea subsidiary for public relations and lobbying services in 2008 and 2009, according to the SEC.
The company, however, incurred $12.8 million in legal and other professional fees associated with the investigations as of Sept. 30, according to an SEC filing. It has neither admitted nor denied the SEC's findings.
Mr. Brackett said the SEC has not said why the average is down, and it could be because the smaller cases in the pipeline merited smaller penalties, “but it certainly aligns with their very public statements about broken windows.”
“You can see these cases as a way of continuing to signal to the market what they would really like to see” in compliance programs, Mr. Brackett said.
“These cases can have a very, very significant ripple effect throughout industries” globally, said Paul Alfieri, a partner at Reed Smith L.L.P. in New York.
The problem with pursuing high-level major bribery cases is “it tends to leave people with the impression” that the SEC is going after only the “big guys,” said Michael T. Gass, practice group leader at Choate Hall & Stewart L.L.P. in Boston. The broken windows stance “sends a signal to everybody that there's no de minimis requirement.”
“There seems to be a difference in rhetoric versus application,” however, said Brenda Shelly, New York-based directors and officers product leader at Marsh L.L.C.'s FINRO practice.
“I think the initial intent of the program was to shed a bright light in all areas, no matter how small, including the FCPA,” but “I'm not sure it has consistently played out that way,” Ms. Shelly said. At the same time, “they have limited resources.”
“They pursue the cases that are brought to them,” said Ross A. Albert, a former SEC official and now a partner at Morris, Manning & Martin L.L.P. in Atlanta.
“Sometimes public announcements about priorities have more to do with trying to get a deterrent effect even beyond bringing actions,” he said. “I think they've always pursued cases they thought they could make, regardless of size.”
In September, for instance, Tokyo-based Hitachi Ltd. agreed to pay $19 million to settle charges it inaccurately recorded improper payments to South Africa's ruling political party in connection with contracts to build two multimillion-dollar power plants, according to the SEC.
In a speech last week, Andrew Ceresney, the SEC's enforcement division director, discussed the commission's efforts to enforce the FCPA “to the fullest extent of the statute,” which he said precludes paying “anything of value” as a bribe. Previous SEC FCPA cases, he said, have included providing no-show jobs to the spouse of a foreign official and paying for the honeymoon of a foreign official's daughter.
Insurance coverage is limited, said Ms. Shelly. Directors and officers liability policies “typically don't cover fines and penalties that will indemnify an individual director or officer” for the period before they are named as an SEC target.
Once they are named, the policy will respond, but there is typically no coverage for the corporate entity unless there is a simultaneous securities claim, she said.
“Generally, there is limited coverage for investigations under D&O policies, but derivative actions and securities litigation filed as a result of an FCPA investigation would be covered,” said Robbyn Reichman, managing director of Aon Risk Solutions' legal and claims practice group.
Experts say to avoid problems, companies should be sure to have robust compliance and training programs.
“The compliance program needs to be independent and adequately resourced,” said Mary E. Mulligan, a partner at Friedman Kaplan Seiler & Adelman L.L.P. in New York.
There also should be approval procedures in place on how to interact with government officials and third parties, she said.
“If you have a rigorous compliance program in place that is truly intended to prevent violations, the SEC will typically go much easier on you,” Mr. Gass said.