A plea agreement entered into last week with the U.S. Department of Justice Antitrust Division (DOJ) provides a sobering reminder of the serious consequence of obstruction of justice, and highlights the fact that such obstruction issues can arise even in connection with seemingly routine merger investigations if key documents intentionally are altered before being submitted to the government.
On May 3, 2012, an executive of a South Korean company agreed to plead guilty and to serve five months in U.S. prison for altering documents in connection with a proposed merger—first in documents submitted to the U.S. antitrust agencies as part of a required premerger Hart-Scott-Rodino filing, and later in documents submitted to the DOJ after the agency had opened a formal merger investigation. Criminal prosecution for obstruction of justice does occur from time to time in antitrust matters, but almost always in criminal price-fixing or bid rigging cases. Nevertheless, the DOJ will prosecute attempts to corrupt its investigative process in whatever context the attempt occurs.
The HSR Act requires that parties to certain transactions notify the FTC and DOJ and observe a waiting period (usually 30 days) before closing. This affords the agencies time to evaluate the likely competitive effects of a proposed transaction before consummation. If the reviewing agency believes that a transaction may violate the antitrust laws, it can seek an injunction in federal court to block the deal.
If an HSR notification is required, each party must complete a Notification and Report Form. Item 4(c) of the form requires parties to submit:
all studies, surveys, analyses and reports which were prepared by or for any officer(s) or director(s)…for the purpose of evaluating or analyzing the [transaction] with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.
These "4(c) documents" are an important part of the agencies' premerger review process because they provide the DOJ and the FTC with their first look at the parties' internal documents. More to the point, the documents may reflect the parties' motivation for the proposed transaction, as well as their thoughts about how the transaction might affect competition. The agencies use these documents, together with other information (such as interviews of customers), to assess whether the transaction warrants additional scrutiny through the issuance of a "Second Request," a broad request for documents, data, and information. A Second Request extends the waiting period, usually until 30 days after all parties have responded. This phase often extends the merger review process by 2-4 months or more, so merging parties always are keen to avoid a Second Request if possible.
Executive plea agreement
On May 3, the DOJ filed a two-count felony charge in federal district court against Kyoungwon Pyo, a senior vice president for corporate strategy of Hyosung Corporation, an affiliate of Nautilus Hyosung Holdings Inc. ("Nautilus"). According to the DOJ, in July and August 2008, Mr. Pyo altered, and directed subordinates to alter, existing 4(c) documents before they were submitted to the DOJ and the FTC as part of Nautilus' HSR filing in connection with its proposed acquisition of rival automated teller machine (ATM) manufacturer, Triton Systems of Delaware, Inc. According to the DOJ, Mr. Pyo did this with the intent to impair the documents' integrity and availability for use in an official government proceeding. The alterations allegedly "misrepresented and minimized the competitive impact of the proposed acquisition."
After receiving the parties' HSR filings (and apparently without knowledge that some 4(c) documents had been falsified), the DOJ initiated a civil merger investigation of the proposed acquisition. As part of this more in-depth scrutiny, the DOJ requested additional documents from Nautilus. According to the DOJ, in August and September 2008, Mr. Pyo falsified additional documents that Nautilus submitted to the agency. These alterations too allegedly misrepresented and minimized the competitive impact of Nautilus' proposed acquisition of Triton.
Mr. Pyo has agreed to plead guilty and to serve five months in prison for his conduct. His plea agreement is subject to court approval. Obstruction of justice carries a maximum penalty of 20 years in prison and a criminal fine of $250,000 for individuals. Thus, the five-month sentence (if accepted by the court) would fall well short of Mr. Pyo's worst-case criminal exposure.
Company plea agreement
Mr. Pyo's agreement to plead guilty follows his employer's earlier decision to do the same. In October 2011, Nautilus pleaded guilty to two counts of obstruction of justice and agreed to pay a $200,000 criminal fine for its role in the conduct ($100,000 for each count). The company's plea agreement referenced an unnamed "Executive A" as the employee who spearheaded the unlawful conduct.
Nautilus' criminal fine of $200,000 could have been much worse. Obstruction of justice for a corporation carries a maximum fine of $500,000 per count. According to the company's plea agreement, Nautilus voluntarily told the DOJ about the falsified documents in early 2009 and provided "substantial cooperation" to the agency's criminal investigation of the obstructive conduct. (The parties subsequently abandoned the transaction.) As part of its settlement, Nautilus agreed to provide continuing cooperation to the DOJ's ongoing investigation. The government, in turn, agreed not to bring criminal charges against all of Nautilus' current and former employees for the obstructive conduct save one: Mr. Pyo was "carved out" of the company's plea agreement. As suspected, Mr. Pyo is Executive A.
The DOJ's actions in this case may mark the first time that criminal charges have been brought against defendants for altering documents submitted with an HSR filing and during a merger investigation. The charges serve as a stark reminder that HSR filings and subsequent FTC and DOJ review and analysis of a proposed transaction constitutes an "official proceeding" for purposes of the criminal obstruction statutes. The DOJ will prosecute attempts to corrupt the government's investigative process essentially as a strict liability offense. The DOJ did not allege that the conduct adversely affected its substantive review of the transaction (before the parties abandoned the deal). Indeed, the DOJ initiated a more detailed competitive assessment of the proposed acquisition despite the falsified 4(c) documents submitted with the company's HSR filing. (Nautilus only later informed the agency that the documents were altered.) Companies must avoid such conduct, even by unauthorized employees, when submitting premerger filings and documents in response to government requests for information.