Why it matters: This month, we focus on two recent SEC resolutions that we found particularly interesting. The first involves hedge fund manager Och-Ziff, marking the first FCPA action against a hedge fund. In the second, involving Anheuser-Busch InBev, we saw, in an FCPA context, the SEC’s latest focus on punishing employers whose employee severance agreements serve to “chill” whistleblowers by imposing financial penalties for sharing information of corporate wrongdoing with the SEC. We also take a look at other recent SEC FCPA resolutions and matters that caught our eye. Read on for a recap.
Detailed discussion: In August and September 2016, the SEC announced numerous FCPA resolutions, recapped below. We begin by focusing on two in particular that were announced in late September that raised interesting issues for corporations operating abroad.
Och-Ziff: On September 29, 2016, the DOJ and the SEC announced significant criminal and civil resolutions in parallel investigations into violations of the FCPA by “alternative investment” hedge fund manager Och-Ziff Capital Management Group, LLC (Och-Ziff). Principal Deputy Assistant Attorney General David Bitkower was quoted as saying that “[t]his case marks the first time a hedge fund has been held to account for violating the Foreign Corrupt Practices Act.”
First, the criminal resolution: In its press release, the DOJ said that Och-Ziff and its wholly owned African subsidiary OZ Africa Management Group (OZ Africa) agreed to pay over $213 million in criminal penalties and plead guilty to violating the anti-bribery provisions of the FCPA (as well as falsifying books and records and failing to maintain sufficient internal controls) in connection with a “widespread scheme involving the bribery of officials in the Democratic Republic of Congo (DRC) and Libya” detailed in the press release. Och-Ziff also entered into a three-year deferred prosecution agreement (DPA) with the DOJ under which it agreed to “implement rigorous internal controls, retain a compliance monitor for a term of three years and cooperate fully with the department’s ongoing investigation, including its investigation of individuals.” The DOJ also said that, in connection with the DOJ’s investigation into Och-Ziff’s activities in the region, on August 16, 2016, Samuel Mebiame, the son of Gabon’s former prime minister, was arrested and charged with conspiracy to bribe officials in violation of the FCPA in three African countries to help win mining rights for an Och-Ziff joint venture.
In the civil resolution, the SEC said that Och-Ziff agreed to pay nearly $200 million to settle civil charges that it violated the anti-bribery, books and records and internal controls provisions of the FCPA in connection with its findings that Och-Ziff paid bribes in order to both “induce the Libyan Investment Authority sovereign wealth fund to invest in Och-Ziff managed funds” and to “secure mining rights and corruptly influence government officials in Libya, Chad, Niger, Guinea, and the Democratic Republic of the Congo.” In addition to the corporate civil penalty, the SEC said that Och-Ziff CEO Daniel S. Och agreed to separately pay approximately $2.2 million to settle charges that he “caused certain violations along with CFO Joel M. Frank, who also agreed to settle the charges” (the SEC said that a financial penalty will be assessed against Frank at a later date). The SEC said that Och and Frank consented to its order without admitting or denying the SEC’s findings.
Of particular interest here was the SEC’s affirmative statement in the press release that Och-Ziff’s misconduct was not voluntarily disclosed but rather “[t]he SEC detected the misconduct while proactively scrutinizing the way that financial services firms were obtaining investments from sovereign wealth funds overseas.”
Anheuser-Busch InBev: On September 28, 2016, the SEC announced that Anheuser-Busch InBev (ABInBev) agreed to pay approximately $6 million in disgorgement and civil penalties to settle charges that it violated the books and records provisions of the FCPA in India as well as “chilled” a whistleblower who reported the misconduct.
An SEC investigation found that ABInBev used third-party sales promoters to make improper payments to government officials in India to increase the sales and production of ABInBev products in that country, and failed to ensure that the transactions were properly recorded in the company’s books and records. The SEC further alleged that ABInBev disregarded the repeated complaints of its employees and had inadequate internal accounting controls to detect and prevent the improper payments.
What sets this garden-variety FCPA resolution apart from others is that part of the company’s wrongdoing specifically cited by the SEC centered on a provision in the separation (or severance) agreement used by the company “that stopped an employee from continuing to voluntarily communicate with the SEC about potential FCPA violations due to a substantial financial penalty that would be imposed for violating strict non-disclosure terms.” Thus, ABInBev’s separation agreement “exacerbated the problem by including language … that chilled an employee from communicating with the SEC,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit. As part of the resolution, in addition to agreeing to cooperate with the SEC and report on its FCPA compliance efforts for a period of two years, ABInBev is also obligated to make “reasonable efforts to notify certain former employees that Anheuser-Busch InBev does not prohibit employees from contacting the SEC about possible law violations.”
Severance, confidentiality and other employee agreements have been under scrutiny by the SEC of late to root out language that could be seen to chill departing employees/would-be whistleblowers in violation of Exchange Act Rule 21F-17. For example, in our September 2016 newsletter update on federal whistleblower programs, we reported on the August 10, 2016, announcement by the SEC that it had imposed a civil fine against building products distributor Blue Linx Holdings, Inc., for provisions in its severance agreements that required outgoing employees to waive their rights to any whistleblower awards or other monetary recovery, and even risk losing their severance payments or other post-employment benefits, in the event they filed a complaint or charges against the company with the SEC. Another example is the SEC’s June 23, 2016, resolution, also discussed in our September 2016 newsletter in the article “White Collar Enforcement Roundup—Summertime Blue[Sheet] Edition.”
Since then, the SEC has made other announcements along these lines and it appears that severance and other employee agreements will remain in sharp focus at the agency. As Jane Norberg, Acting Chief of the SEC’s Office of the Whistleblower, said in the ABInBev press release, “[t]hreat of financial punishment for whistleblowing is unacceptable.… We will continue to take a hard look at these types of provisions and fact patterns.”
Other recent SEC FCPA enforcement actions/resolutions/declinations of note—China continues to be a hotbed of FCPA enforcement activity for the SEC, as the majority of the following matters illustrate:
- On September 30, 2016, the SEC announced that GlaxoSmithKline plc (GSK) agreed to pay $20 million to settle charges that it violated the books and records and internal controls provisions of the FCPA when its China-based subsidiaries engaged in “pay-to-prescribe” schemes to increase pharmaceutical sales. According to the findings in the SEC’s order, which were neither admitted nor denied by GSK, from 2010 through 2016 GSK’s China-based subsidiaries transferred money, gifts, and other “things of value” to Chinese state healthcare professionals, which led to millions of dollars in increased sales of GSK pharmaceutical products to China’s state health institutions. The SEC also found that these payments and gifts were improperly recorded in GSK’s books and records. The SEC acknowledged GSK’s cooperation and remedial efforts as factors that led to the settlement.
- On September 20, 2016, the SEC announced that Provo, Utah-based Nu Skin Enterprises, Inc. (Nu Skin US) agreed to pay over $765,000 in disgorgement and penalties to settle charges that it violated the internal controls and books and records provisions of the FCPA in connection with an approximately $154,000 payment its Chinese subsidiary made to a local charity to obtain the influence of a high-ranking Chinese Communist Party official in an ongoing provincial agency investigation. The SEC acknowledged Nu Skin US’s remedial efforts as a factor that led to the settlement.
- On September 13, 2016, the SEC announced that the former head of Harris Corporation’s (Harris) Carefx subsidiary in China agreed to pay the SEC a civil penalty of $46,000 to resolve FCPA violations. The SEC found that the employee helped bribe Chinese government officials with gifts totaling $1 million and then covered up the bribes in Harris’s books and records. The SEC said that Harris had become aware of the potential FCPA violations in 2012 (shortly after its 2011 acquisition of Carefx) and self-disclosed to the SEC. Upon receiving a “formal investigation order” from the SEC in 2013, Harris conducted an internal investigation which uncovered Zhang’s and other employees’ improper activities. In connection with the penalty against Zhang, Harris Corporation received a declination letter from the SEC (Harris Corporation had received a declination letter from the DOJ in November 2015).
- On September 8, 2016, Cisco Systems, Inc. (Cisco) disclosed in its Form 10-K that it had been informed by the SEC and DOJ that they were declining to bring enforcement actions against it in connection with possible FCPA violations in Russia and other Commonwealth of Independent States countries. Cisco said it previously disclosed in 2014 that, at the request of the agencies, it was conducting an internal investigation into FCPA violations involving the operations of the company and certain of its resellers in those jurisdictions. Cisco said that the DOJ and SEC informed it that they would not bring enforcement actions after Cisco “fully cooperated” with the agencies and shared with them the results of its internal investigation.
- On August 30, 2016, the SEC announced that AstraZeneca plc (AstraZeneca) agreed to pay approximately $5.5 million in disgorgement and civil penalties to resolve charges that it violated the books and records and internal controls provisions of the FCPA as a result of its wholly owned subsidiaries in China and Russia making improper payments to foreign officials. According to the findings in the SEC’s order, which were neither admitted nor denied by AstraZeneca, employees of AstraZeneca’s subsidiary in China made improper payments in the form of cash, gifts and other items to foreign official healthcare providers as incentives to purchase or prescribe AstraZeneca pharmaceuticals, and also made payments in cash to the local officials to get reductions or dismissals of proposed financial sanctions against the subsidiary. The investigation found that employees of AstraZeneca’s subsidiary in Russia also made improper payments in connection with pharmaceutical sales. The SEC’s order noted that, while AstraZeneca did not self-disclose its misconduct, it did “significantly” cooperate with the investigation and conduct remediation.
- On August 29, 2016, Reuters and the Financial Review (Australia) reported that the SEC appeared to have paid its first-ever FCPA-related award under its whistleblower program when it awarded $3.75 million to the BHP Billiton whistleblower. We covered the SEC enforcement action against BHP Billiton in connection with its investigation into bribes paid to Asian and African officials during the 2008 Beijing Olympics in our June 2015 newsletter under “Falling Short of the Gold: SEC Charges BHP Billiton with FCPA Violations Relating to its 2008 Summer Olympics Sponsorship Program.”
- On August 11, 2016, the SEC announced that Key Energy Services, Inc., agreed to pay $5 million in disgorgement to settle charges that it violated the internal controls and books and records provisions of the FCPA in connection with payments its Mexican subsidiary, Key Mexico, made to a contract employee at Petróleos Mexicanos (Pemex), Mexico’s state-owned oil company. An SEC investigation found that Key Mexico made payments to the Pemex employee to induce him to provide advice, assistance and inside information that was used by Key Energy and Key Mexico in negotiating contracts with Pemex. The SEC found that Key Mexico paid the Pemex employee through an entity that provided purported consulting services to Key Mexico, even though Key Energy had not authorized the relationship with the consulting firm and lacked supporting documentation regarding the purported consulting work performed.