On July 31, 2009, the SEC filed a settled enforcement proceeding against Nature’s Sunshine Products, Inc. (“NSP”), a publicly held manufacturer of nutritional and personal care products, its Chief Executive Officer, Douglas Faggioli and its former Chief Financial Officer, Craig D. Huff.31 The Complaint charged that NSP’s Brazilian subsidiary, Nature’s Sunshine Produtos Naturais Ltda. (“NSP Brazil”), made cash payments to customs officials in order to import unregistered goods into Brazil and then falsified its books and records to conceal the payments.32 NSP, Faggioli and Huff, without admitting or denying the charges, consented to the entry of final judgments enjoining them from engaging in similar conduct in the future. In addition, NSP agreed to pay a $600,000 civil penalty, while Faggioli and Huff agreed to each pay penalties of $25,000.
According to the SEC’s Complaint, in or about 1999-2000, the Brazilian government reclassified as “medicines” many of the products sold by NSP Brazil, and NSP was required to register these products in order to legally import and sell them in Brazil. In order to circumvent the new registration requirements, NSP Brazil made over $1 million in cash payments to customs brokers during 2000 and 2001, some of which were later paid to customs officials to allow for the importation of unregistered NSP products. These cash payments were later recorded in NSP’s books and records as “importation advances.”33
The Complaint alleged that NSP Brazil’s conduct violated the anti-bribery and accounting provisions of the FCPA, as well as the anti-fraud and reporting provisions of the Securities Exchange Act of 1934 (“Exchange Act”).34 The complaint further alleged that Faggioli and Huff, in their capacities as NSP “control persons,” also violated the books and records and internal controls provisions of securities laws.35 This case appears to be the first in which the SEC has applied Section 20(a) of the Exchange Act in the FCPA context and demonstrates the SEC’s continuing willingness to employ all means at its disposal in holding individuals liable for acts of a corporation. Notably, by alleging control person liability for the company’s internal controls violations, instead of alleging that the individual defendants violated directly Exchange Act Section 13(b)(5) (which requires proof of the defendant’s “knowing” failure to implement sufficient controls), it appears that the Commission may be seeking to lower the bar for internal control violations against individuals. If the SEC’s allegations here were to have been heard at trial, the defendants would have had the opportunity to present an affirmative “good faith” defense as defined in Section 20(a) (see FN 5). However, the SEC’s settlement does not allege that the individual defendants would not have had a good faith defense to the allegations, and makes only cursory allegations as to their role in implementing the company’s internal controls. In addition, the absence of any specific allegations as to how or why the company’s controls were, in fact, insufficient, may indicate that the Commission will consider an FCPA violation as evidence, per se, that a company failed to implement sufficient internal controls.
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