In a move that highlights both the increased focus on holding individuals accountable and the credit that can be earned through cooperation, the U.S. Securities and Exchange Commission (“SEC”) announced last week that, for the first time, it entered into a deferred prosecution agreement (“DPA”) with an individual allegedly involved in a Foreign Corrupt Practices Act (“FCPA”) case. On February 16, 2016, the SEC announced a DPA with Yu Kai Yuan, a former employee of software company PTC Inc.’s Chinese subsidiaries. The SEC agreed to defer civil FCPA charges against Yu for three years in recognition of his cooperation during the SEC’s investigation. PTC also reached a settlement with the SEC, in which the company agreed to disgorge $11.8 million. Prior to the Yu DPA, the SEC had entered into one DPA with an individual in November 2013, in a matter involving a hedge fund manager allegedly stealing investor assets. However, never before this time was a DPA with the SEC related to an FCPA case.
The alleged FCPA violations at issue involve travel and gifts totaling approximately US $1.5 million provided to employees of Chinese state-owned entities for the purpose of obtaining or retaining business from those entities. Specifically, the DPA states that two PTC subsidiaries provided non-business related travel as well as improper gifts and entertainment to the customer’s employees. The foreign sightseeing travel was allegedly provided by making payments to third party agents that were disguised as commission or contracting fees. The gifts and entertainment were allegedly provided directly by PTC’s sales staff. Yu, who served as a sales executive at PTC China for fifteen years, offered to accept full responsibility for his conduct and agreed not to contest or contradict the SEC’s factual statements without admitting or denying the allegations. The DPA and related documents provide no further information regarding Yu’s specific actions.
By entering into a DPA with Yu, the SEC has signaled it is scrutinizing individual conduct, not just corporate conduct, in FCPA cases. This is consistent with recent government emphasis on individual enforcement actions and prosecutions articulated in the September 2015 Memorandum by Department of Justice Deputy Attorney General Sally Yates (“Yates Memo”). Although the SEC has not issued a similar statement or set of guiding principles regarding individual prosecutions, recent comments by SEC officials are in line with the approach set forth in the Yates Memo. As Andrew Ceresney, Director of the SEC’s Division of Enforcement, stated at the American Conference Institute’s 32nd FCPA Conference “holding individuals accountable for their wrongdoing is critical to effective deterrence and, therefore, the Division considers individual liability in every case.”
One of the key steps outlined in the Yates Memo states that in order to be “eligible for any cooperation credit” corporations must provide “all relevant facts about the individuals involved in corporate misconduct.” This puts corporations at risk of enhanced penalties if they choose not to cooperate at all or ineligible for cooperation credit if the government determines that the cooperation did not go far enough. Besides an increased risk for corporations, cooperation credit also becomes a critical matter for individuals who find themselves in the midst of investigations or enforcement activity – as the Yu DPA shows. For the resolution of FCPA matters, the SEC places a high premium on cooperation, along with self-reporting and remedial efforts. In 2010, the regulator announced a new cooperation program for individuals, which introduced the use of DPAs and non-prosecution agreements. Since then, the SEC established a wide range of tools to facilitate and reward cooperation, and developed comprehensive factors to determine the scope of cooperation credit.