Enforcement action by criminal and supervisory authorities is settled regularly. In light of these developments, companies are advised to take appropriate measures. We provide a brief overview of the most important settlements every month. This month, we briefly discuss recent settlements with two companies in the US. The first settlement concerns the rating agency Standard & Poor, which allegedly violated federal securities laws in connection with commercial mortgage-backed securities issues. The other settlement involved violations of the Foreign Corrupt Practices Act. Self-reporting played a role in both cases, and in the second case swift disciplinary action resulted in some leniency towards the company.
Standard & Poor
Standard & Poor (S&P) reached a settlement with the US Securities and Exchange Commission (SEC) on 21 January 2015 in connection with alleged federal securities law violations. S&P agreed to pay USD 58 million. It also settled parallel cases with the Attorney General’s Office in New York and Massachusetts and agreed to pay USD 19 million. As part of the settlement, S&P agreed to take a one-year timeout from rating commercial mortgage-backed securities.
From February 2011 to July 2011 S&P had allegedly:
- made false and misleading statements in connection with its rating of certain commercial mortgage-backed securities (CMBS)
- relaxed its criteria for rating eight CMBS without disclosing this to investors
- misled investors by secretly using more aggressive assumptions in its calculations than those disclosed to the public.
According to the SEC, S&P had prioritised its own financial interests over the interests of investors. The SEC issued three orders. In one of the orders, S&P made certain admissions, but in the other two orders S&P neither admitted nor denied the SEC’s findings. In addition to the one year time-out resulting from its admissions, S&P also agreed to a wide range of measures to enhance its in-house compliance. The SEC took into account that S&P had self-reported its misconduct to the SEC and had cooperated with the investigation. This enabled the SEC to resolve the investigation more quickly and led to a reduced fine for S&P.
This is the first time that the SEC has taken enforcement action against one of the Big Three credit-rating agencies.
On 3 February 2015 S&P, together with its parent corporation McGraw Hill Financial Inc., reached another settlement of USD 1.375 billion with the U.S. Department of Justice (DOJ). According to the DOJ, S&P had engaged in a scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities and Collateralized Debt Obligations. We will discuss this topic further in the next edition of In context.
On 22 January 2015, the SEC charged a former officer of engineering and construction company PBSJ Corporation with violations of the Foreign Corrupt Practices Act (FCPA). Allegedly, he had offered and authorised bribes and employment to foreign officials to secure Qatari government contracts. The officer neither admitted nor denied the allegations and agreed to pay a penalty of USD 50,000.
As part of the settlement, the SEC also entered into a deferred prosecution agreement with the company. Under this agreement, the charges are deferred for two years, and the company makes certain undertakings and agrees to immediately pay USD 3.4 million in financial remedies.
According to the SEC, the company ignored multiple red flags that should have enabled other officers and employees to uncover the bribery scheme at an earlier stage. The SEC did take into consideration that on discovering the potential FCPA violations, the company had self-reported these and had substantially cooperated with the SEC investigation. The company had also taken quick action to end the misconduct; voluntarily made witnesses available for interviews; and provided factual chronologies, timelines, internal summaries, and full forensic images.