On June 27, 2012, the SEC charged a New York data storage company with misleading investors about bribes it paid to obtain business with a subsidiary of a major investment bank. The SEC alleged in its complaint that the defendant company's co-founder and then CEO made materially misleading statements on earnings calls, failed to accurately record the expenses associated with the bribes on its books and records, and failed to devise or implement a system of effective internal accounting controls to detect or prevent the bribes, which violated state law and were inconsistent with the defendant's policies. Thus, the SEC charged, the defendant violated certain antifraud provisions of the federal securities laws and acted contrary to its own internal controls policies.
According to the SEC, the defendant's co-founder and then CEO ordered the bribes, which, commencing in October 2007, were paid to three executives of a subsidiary of the investment bank and their relatives. The SEC charges that lavish entertainment at casinos and payments in cash, traveler's checks, gift cards and grants of options and restricted stock, helped the defendant secure a multimillion dollar contract with the investment bank's subsidiary.
In its complaint, the SEC charges that defendant should have mentioned the bribes in earnings releases filed in its Forms 8-K in 2008 and 2009. The SEC said that "the CEO's misleading statements inflated the price of [the defendant's] stock, which declined by over 22% following its disclosure that the CEO had been involved in improper payments and had resigned." As a result, the SEC alleges the defendant violated Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended (Securities Act).
Additionally, the SEC alleges that the defendant failed to keep books, records and accounts that accurately and fairly reflected the transactions and dispositions of its assets, and failed to devise and maintain a system of internal accounting controls sufficient to ensure that transactions are (i) executed in accordance with management's general or specific authorization, and (ii) recorded to allow preparation of financial statements in conformity with GAAP. As a result, the SEC alleges the defendant violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended.
The defendant admitted to the bribery scheme and agreed to pay a $2.9 million penalty and to institute enhanced compliance measures to settle the SEC's civil lawsuit. The settlement is subject to court approval. The defendant will pay an additional $2.9 million as part of a deferred prosecution agreement with the Office of the United States Attorney for the Eastern District of New York, which filed a related criminal case.
SEC Press Release: