The SEC announced yesterday (April 22) that it entered into a Non-Prosecution Agreement (“NPA”) with Ralph Lauren Corp. (“Ralph Lauren”) in connection with alleged violations of the Foreign Corrupt Practices Act (the “FCPA”) by a subsidiary in Argentina (“Ralph Lauren-Argentina”). This is the first time that the SEC has entered into an NPA in an FCPA matter.
Despite announcing a much-publicized cooperation initiative in January 2010 that empowered the SEC to resolve matters through tools such as NPAs and Deferred Prosecution Agreements (“DPAs”) that have long been used by the Department of Justice (“DOJ”), the SEC has been slow to put them to use. For example, in 2012 alone, the DOJ entered into a total of eight NPAs or DPAs relating to the FCPA. Before yesterday, with respect to FCPA matters, the SEC had never used an NPA, and had used only one DPA (with Tenaris, S.A. in May 2011).
The SEC’s decision to enter into an NPA with Ralph Lauren could be a sign of things to come in light of the recent confirmation of Mary Jo White as Chairman and the appointments of George Canellos and Andrew Ceresney as Co-Directors of the Division of Enforcement.
NPAs are written agreements, entered into under limited and appropriate circumstances, in which the SEC agrees not to pursue an enforcement action against a cooperator if the individual or entity agrees, among other things, to cooperate fully and truthfully and to comply with express undertakings. If the individual or entity violates the NPA, the SEC may then take enforcement action.
The SEC has provided minimal guidance about the facts and circumstances that might warrant an NPA. While the SEC’s Enforcement Manual provides general “touchstones” for evaluating cooperation— including the nature and value of the cooperation provided, the importance of the underlying matter, and the interest in holding the entity/individual accountable—it gives short shrift to any practical details on how the SEC will evaluate whether to enter into an NPA. Although the SEC and the DOJ issued a 120-page “resource guide” to the FCPA in November 2012, it did not provide any new information in this regard. Fortunately, the SEC’s NPA with Ralph Lauren provides some valuable insight.
Ralph Lauren’s Bribery in Argentina and Remedial Measures
From 2005 through 2008, Ralph Lauren-Argentina (a Ralph Lauren subsidiary) allegedly paid approximately $568,000 to a customs broker who funneled money to Argentine customs officials to avoid customs requirements. Those payments were disguised as legitimate reimbursement expenses, such as “Loading and Delivery Expenses” and “Stamp Tax/Label Tax.” During that same period, Ralph Lauren- Argentina also allegedly provided gifts—including perfume, dresses, and handbags valued at between $400 and $14,000 each—to several Argentine officials.
Ralph Lauren uncovered these payments and gifts after employees in Argentina raised concerns about the customs broker shortly after Ralph Lauren had implemented a new FCPA policy in 2012. But for Ralph Lauren’s efforts to improve its FCPA compliance, these alleged payments may have never been discovered. Ralph Lauren subsequently conducted an internal investigation, and then self-reported its preliminary findings to the DOJ and the SEC “within two weeks of uncovering the payments and gifts[.]” The NPA highlights the extensive remedial measures and cooperation efforts that Ralph Lauren undertook, including:
- Terminating its customs broker in Argentina;
- Ceasing retail operations in Argentina and winding down all operations there;
- Strengthening its FCPA compliance by, among other things, adopting a revised FCPA policy and translating it into eight foreign languages, following enhanced due diligence procedures for third parties, providing in-person anti-corruption training for certain employees, and conducting a risk assessment for its operations in Italy, Hong Kong, and Japan;
- Voluntarily and expeditiously producing documents and information to the DOJ and the SEC, including accurate translations of documents and summaries of witness interviews; and
- Voluntarily making witnesses available for interviews in the U.S.
Kara Brockmeyer, the SEC’s FCPA Unit Chief, commented that “[t]his NPA shows the benefit of implementing an effective compliance program. Ralph Lauren Corporation discovered this problem after it put in place an enhanced compliance program and began training its employees. That level of selfpolicing along with its self-reporting and cooperation led to this resolution.” George Canellos, the co- Director of the SEC’s Division of Enforcement, expressed a similar sentiment, stating that "[t]he NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC."
Under the NPA, Ralph Lauren agreed to pay approximately $700,000 in disgorgement and prejudgment interest and to continue cooperating with the SEC; in a parallel NPA with the DOJ, Ralph Lauren agreed to pay an $882,000 penalty.
Practical Takeaways From Ralph Lauren’s NPA
Ralph Lauren’s NPA and the SEC’s corresponding press release underscore the important role that (1) prompt self-reporting, (2) meaningful remedial measures, and (3) substantial cooperation played in the SEC’s analysis. Although the SEC commended Ralph Lauren’s decision to self-report its preliminary findings within two weeks of discovery, self-reporting too quickly can be dangerous, particularly where the relevant facts may not have been fully developed. As such, counsel should carefully weigh the pros and cons of self-reporting on such an expedited basis.
The SEC also focused on Ralph Lauren’s decision to cease doing business in Argentina, a drastic remedy that many companies may not be able (or willing) to follow. It is also unclear if Ralph Lauren’s decision to withdraw from Argentina was solely motivated by these events, or rather, as seems more likely, resulted from a combination of business strategy and local economic/currency reasons. Indeed, the long-term costs associated with withdrawing from a lucrative market could readily outweigh the benefits of an NPA. Therefore, it seems very unlikely that the SEC would require similar concessions in exchange for an NPA.
Finally, there are several similarities between Ralph Lauren’s NPA and the SEC’s first-ever DPA with Tenaris in May 2011. First, both Ralph Lauren and Tenaris self-reported the alleged misconduct. Second, Ralph Lauren and Tenaris each discovered the alleged improper payments while trying to strengthen their FCPA compliance processes and controls (Ralph Lauren had recently introduced a new FCPA policy and Tenaris was conducting an internal review of its operations and controls). Finally, the alleged FCPA violations in both cases were limited to one country (Argentina for Ralph Lauren and Uzbekistan for Tenaris), and took place over a relatively short time period (four years for Ralph Lauren and two years for Tenaris). Counsel should focus on these overlapping areas in making arguments to the SEC for an NPA or DPA.
Time will tell whether Ralph Lauren’s NPA signals a new avenue in the SEC’s FCPA enforcement program or is merely an isolated departure from its usual enforcement tools. In any event, counsel should not hesitate to advocate for NPAs when the facts and circumstances warrant such a resolution based on the limited SEC precedent and fairness considerations.