On April 22, 2013, the Securities and Exchange Commission (SEC) announced its first-ever non-prosecution agreement (NPA) in a matter involving potential violations of the Foreign Corrupt Practices Act (FCPA). The SEC heralded this NPA—which it entered into with Ralph Lauren Corporation (Ralph Lauren)—as an example of the “substantial and tangible” benefits that companies may earn through the SEC Enforcement Division’s Cooperation Initiative (Cooperation Initiative).1 However, exactly when a company may be able to secure an NPA from the SEC and exactly what benefits accrue from such a resolution remain to be seen.
Background on the SEC’s Use of Non-Prosecution and Deferred-Prosecution Agreements
Over three years ago, the SEC’s Enforcement Division announced its Cooperation Initiative, which expanded the range of options available in resolving enforcement matters.2 Historically, the Enforcement Division could, on one end of the spectrum, close an investigation by declining to initiate an enforcement action. On the other end of the spectrum, the Enforcement Division could institute an enforcement action and seek relief, including monetary sanctions. The Cooperation Initiative authorized the Staff of the Enforcement Division to use new tools such as NPAs and deferred-prosecution agreements (DPAs) to encourage greater cooperation in reporting securities law violations and assisting in investigations. Under these agreements—which were modeled after those long used by the Department of Justice (DOJ)—the SEC agrees not to pursue an enforcement action in exchange for compliance with express undertakings.
Yet while the DOJ has entered into dozens of NPAs and DPAs to resolve criminal investigations in recent years, the SEC has rarely used these agreements. The SEC entered its first NPA on December 20, 2010, with children’s clothing manufacturer Carter’s, Inc. to settle allegations of accounting fraud.3 A few months later, on May 17, 2011, the SEC entered into its first DPA with Tenaris S.A. (Tenaris), a global manufacturer and supplier in the oil and gas industry, to settle FCPA allegations. Tenaris, which also entered into a related NPA with the DOJ, secured a DPA with the SEC as a result of the company’s voluntary self-reporting, worldwide internal investigation, enhancement of compliance measures, and high-level of cooperation.4 Since May 2011, the SEC has entered into two additional NPAs (unrelated to the FCPA) and has not entered into any other DPAs.5
Ralph Lauren Corporation Enters Into NPAs with the SEC and DOJ
Ralph Lauren resolved parallel FCPA investigations actions through an NPA with the SEC and a separate NPA with the DOJ.6 The FCPA investigations stemmed from bribes allegedly paid by one of Ralph Lauren’s foreign subsidiaries to government officials in Argentina.7 According to the SEC’s NPA, between 2005 and 2009 the General Manager and other employees of the foreign subsidiary (RLC Argentina) approved approximately US$568,000 in payments to a customs broker to bribe Argentine customs officials in order to secure the importation of Ralph Lauren products into Argentina.8 The customs broker allegedly submitted invoices with charges for “loading and delivery expenses” and “stamp tax/label tax” that were used to disguise bribe payments.9 Moreover, RLC Argentina allegedly gave gif ts wor th thousands of dollars to three government officials in order obtain improper benefits in the customs process.10
In 2010 Ralph Lauren implemented a new worldwide FCPA policy. After reviewing this policy, RLC Argentina employees raised concerns about the company’s customs broker. As a result, Ralph Lauren initiated an internal investigation of the allegations, and within two weeks of uncovering the improper payments and gifts in Argentina, self-reported its preliminary findings to the SEC and Justice Department.11
The SEC decided not to charge Ralph Lauren with FCPA violations, citing “the company’s prompt reporting of the violations on its own initiative, the completeness of the information provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation.”12 The SEC also credited Ralph Lauren’s extensive remedial measures, which included: “(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.”13 Furthermore, the SEC acknowledged that Ralph Lauren is in the process of ceasing all operations in Argentina,14 though it is unclear to what extent the withdrawal from Argentina related to FCPA concerns.
As part of its NPA with the SEC, Ralph Lauren agreed to pay US$593,000 in disgorgement and US$141,846 in prejudgment interest. To resolve the DOJ’s related criminal investigation, Ralph Lauren agreed to pay an US$882,000 penalty.15 Ralph Lauren also agreed to provide the DOJ with periodic reports on its ongoing compliance efforts, without requiring an independent compliance monitor.16
Following the announcement of Ralph Lauren’s settlements with U.S. authorities, Argentine tax authorities repor tedly asked the SEC to supply information, including the names of Argentine government of ficials supposedly involved in the bribery scheme, to assist a newly launched criminal investigation in Argentina.17
In many ways, the Ralph Lauren case is a typical one under the FCPA: It shows the U.S. government’s continued interest in FCPA violations in Latin America. And it highlights the risks associated with the use of customs brokers to interact with government officials.
The Ralph Lauren case also follows the path set by the SEC’s Cooperation Initiative. Robert Khuzami, thendirector of the SEC’s Division of Enforcement, said that the SEC intended to increase its use of both NPAs and DPAs to “dovetail more nicely” with the DOJ’s practice of using such agreements.18 According to Khuzami, “more uniformity of use” of these agreements will result in more “consistency and clarity for the regulated community.”19
Yet the Ralph Lauren NPA only goes so far in providing this desired “consistency and clarity.” For example, the NPA does not provide explicit guidance regarding what conduct will lead the SEC to resolve an action with an NPA. Notably, the publicly disclosed facts in the Ralph Lauren and Tenaris matters appear similar in many respects: (1) both companies self-disclosed alleged misconduct that was discovered as a result of internal investigations; (2) the alleged violations in each case were limited to one country; and (3) both companies also implemented remedial measures on an international scale. One possible distinction that may explain the different dispositions is that the potential violations in Ralph Lauren were discovered through the implementation of a new anti-bribery policy, whereas Tenaris discovered the potential violations in response to allegations of bribery by a third party.
Moreover, the SEC’s NPA does not address whether Ralph Lauren’s agreed-upon disgorgement reflects a discount for the company’s cooperation. While the NPA required disgorgement of US$593,000, which is the same amount as the total of the improper payments made and gifts given, the agreement does not specify the amount of ill-gotten gains that resulted from the bribes.
Finally, Ralph Lauren needs to provide full cooperation “during the period of cooperation” and to continue to cooperate for an indeterminate length of time. This cooperation includes ongoing obligations to produce non-privileged documents as requested, use its best efforts to make current and former officers and directors available for testimony (even from overseas), and enter into tolling agreements. Ralph Lauren’s NPA requires many of the same terms of cooperation as a DPA would, but without the time limits used in DPAs. Accordingly, resolution through an NPA may just be, as the saying goes, “the emperor’s new clothes.”