Friday Roundup

A company in jeopardy of violating an existing SEC injunction, a leading supplier of communication devices to the federal government in the midst of an FCPA inquiry, an FCPA enforcement action nearing the finish line, Attorney General Eric Holder's announcement of the Kleptocracy Asset Recovery Initiative, more on multilateral development banks, and the U.K. Serious Fraud Office's annual report ... it's all here in the Friday roundup.

Diebold's Disclosure

Last month, Diebold, Inc., a Ohio based security services company, settled an SEC accounting fraud enforcement action by paying a $25 million civil penalty (see here). The SEC charged Diebold with, among other charges, violations of the FCPA's books and records and internal control provisions (i.e. Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934). However, you likely never heard about this because the enforcement action was what I call "a non-FCPA, FCPA enforcement action." In other words, the FCPA's books and records and internal control provisions are generic and are not just implicated by overseas business conduct. As part of the settlement, Diebold, as in common, consented to a final judgment permanently enjoining the company from future violations.

Diebold appears to be in jeopardy of violating that injunction.

Why?

Yesterday in an 8-K filing (see here) Diebold disclosed as follows:

Voluntary disclosure related to Foreign Corrupt Practices Act

"While conducting due diligence in connection with a potential acquisition in Russia, Diebold identified certain transactions and payments by its subsidiary in Russia (primarily during 2005 to 2008) that potentially implicate the Foreign Corrupt Practices Act (FCPA), particularly the books and records provisions of the FCPA. While the company's current assessment indicates that the transactions and payments in question do not materially impact or alter the company's financial statements, the company continues to collect information and is conducting an internal review of its global FCPA compliance. At this time, Diebold cannot predict the outcome or impact of this global review. In addition, the company has voluntarily self-reported its findings to the U.S. Department of Justice and the Securities and Exchange Commission and intends to fully cooperate with these agencies in their review."

The day of the disclosure, the company's shares lost approximately 5%.

Here is what Diebold had to say about the FCPA in its most recent 10-Q filing in May:

"We are subject to compliance with various laws and regulations, including the FCPA and similar worldwide anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our commitment to legal compliance and corporate ethics, we cannot assure you that our internal control policies and procedures always will protect us from reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business and operations." (emphasis added).

The Latest on Digi International

According to its website (here), Digi International Inc. is "the leading supplier of multifunction communication devices to the U.S. Federal Government."

It is also in the midst of an FCPA investigation, one which implicates its Chief Financial Officer who is no longer with the company.

Here is what the company disclosed in a recent 8-K filing (see here):

"As previously reported, after receiving allegations regarding possible violations of our gifts, travel and entertainment policy for activities in the Asia Pacific region by a few employees, we initiated an investigation of these policy and corresponding internal control issues, and any possible related violations of applicable law, including the Foreign Corrupt Practices Act (FCPA). We voluntarily disclosed the allegations to the United States Department of Justice (DOJ) and the United States Securities and Exchange Commission (SEC). The investigation has been under the direction of the Audit Committee, comprised solely of independent directors, utilizing outside counsel, and focused on the APAC region. For completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made. We believe the investigation is substantially complete, pending the input from the DOJ and SEC. We have been providing the DOJ and SEC with updates and our proposed remediation plan. We will continue to cooperate fully with the SEC and DOJ process, which could include additional investigative procedures. This investigation found violations of company policy and internal controls that primarily involved three individuals in Hong Kong and our Chief Financial Officer. All four individuals have either been terminated or resigned from the company. The investigation also identified certain books and records and related internal controls issues under the FCPA. The ultimate impact and outcome of the DOJ and SEC process is unknown at this time. The Company is unable to estimate the potential costs relating to this matter, including any penalties that might be assessed for any FCPA violations, and accordingly, no provision has been made in our consolidated financial statements other than with respect to expenses incurred prior to June 30, 2010. In the Digi International Reports Third Fiscal Quarter 2010 Results quarter and nine months ended June 30, 2010, we incurred additional general and administrative expense of $1.0 million related to the cost of the investigation. Based upon what we have learned from the investigation, we are strengthening our monitoring controls over foreign locations and other operational and regulatory compliance procedures, including third party assistance in implementation of our remediation plan. Based on the results of our investigation to date, we are not aware of any material impacts to our reported consolidated financial statements that would require restatement, and no issues were detected outside of the Asia Pacific region. We are also evaluating any impact of this matter on our Internal Controls over Financial Reporting. The timing and final outcome of the DOJ and SEC process cannot be predicted, and it may have a materially adverse impact on our business prospects and our consolidated financial condition, results of operations or cash flow."

I've noted in a prior post (see here) that one factor companies need to be mindful of when analyzing the important voluntary disclosure decision is the high likelihood of the enforcement agencies asking the "where else" question (i.e. if conduct occurred in country x, convince us that the conduct also did not occur in countries y and z). Digi's disclosure highlights this issue when it states: "[f]or completeness purposes, the investigation reviewed certain other foreign regions where no allegations have been made."

Maxwell Technologies Inc. Nears Settlement

In a 8-K filing yesterday, Maxwell Technologies (here), a manufacturer of energy storage and power delivery products, stated as follows:

"As previously disclosed in its public filings, the company has engaged in settlement discussions with the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) with regard to the ongoing FCPA investigations involving Maxwell’s Swiss subsidiary, Maxwell S.A. The company has negotiated an agreement in principle with the SEC to resolve the ongoing FCPA investigation for a payment of approximately $6.35 million, with half to be paid upon signing and the remaining half on the one year anniversary of signing, as well as certain other non-financial settlement terms. The settlement with the SEC remains subject to final approval of the Commission. Settlement discussions with the DOJ are ongoing, and the company is awaiting a response to its offer to the DOJ to settle the ongoing investigation for $6.35 million. Prior discussions with the DOJ have indicated that they would accept a settlement offer of $8.0 million, but as indicated earlier, we are continuing our discussions with the DOJ and are awaiting a response to our most recent offer. The DOJ has also previously indicated that settlement terms could include a payment plan over a period of up to three years. The company anticipates that it will have to pay interest on any deferred amounts due in both the SEC and DOJ settlement agreements. In Q409, the company accrued $9.3 million for a potential settlement, and has accrued an additional $3.4 million in Q210 to reflect the full amount of its pending settlement offers to the SEC and DOJ. However, there can be no assurance that the settlement with the SEC will be approved or that the company will be able to settle with the DOJ for $6.35 million."

The day of the disclosure, the company's shares lost approximately 4%.

Kleptocracy Asset Recovery Initiative

In a recent speech (see here) before the African Union Summit in Uganda, Attorney General Eric Holder announced a new Kleptocracy Asset Recovery Initiative.

In the speech Holder said that "the United States will act in partnership and in common cause to help the African Union achieve its goals and fulfill its mission."

Among other things, Holder said that the U.S. "will strengthen current efforts to promote good governance and to combat and prevent the costs and consequences of public corruption."

He stated as follows:

"Today, when the World Bank estimates that more than one trillion dollars in bribes are paid each year out of a world economy of 30 trillion dollars, this problem cannot be ignored. And this practice must never be condoned. As many here have learned – often in painful and devastating ways – corruption imperils development, stability, competition, and economic investment. It also undermines the promise of democracy.

As my nation’s Attorney General, I have made combating corruption, generally and in the United States, a top priority. And, today, I’m pleased to announce that the U.S. Department of Justice is launching a new Kleptocracy Asset Recovery Initiative aimed at combating large-scale foreign official corruption and recovering public funds for their intended – and proper – use: for the people of our nations. We’re assembling a team of prosecutors who will focus exclusively on this work and build upon efforts already underway to deter corruption, hold offenders accountable, and protect public resources.

And although I look forward to everything this new initiative will accomplish, I also know that prosecution is not the only effective way to curb global corruption. We will continue to work with your governments to strengthen the entire judicial sector, a powerful institution in our democracy which depends on the integrity of our laws, our courts, and our judges. We must also work with business leaders to encourage, ensure, and enforce sound corporate governance. We should not, and must not settle for anything less."

For other speeches by Holder on this subject, see here.

More On Multilateral Development Banks

A prior post (see here) discussed how five multilateral development banks (MDB's) - the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group - signed an agreement to cross-debar firms and individuals found to have engaged in wrongdoing in MDB-financed development projects.

To learn more about sanctions investigations by the World Bank and other MDB's see this piece from Freshfields Bruckhaus Deringer LLP.

The SFO Annual Report

The U.K. Serious Fraud Office recently issued its annual report (see here).

Among the highlights noted by SFO Director Richard Alderman:

"In the first prosecution brought in the UK against a company for breaching UN sanctions, Mabey and Johnson Ltd admitted offences of overseas corruption and breaching UN sanctions. The company was ordered to pay a fine of £3.5 million and restitution of £3.1 million.

Currently one third of our work concerns overseas corruption. This will continue to be an important part of our work, with the introduction of the new law on bribery which we believe will place a greater emphasis on UK companies to maintain high levels of business ethics and integrity. It is also notable that the Act allows me as Director of the SFO to prosecute non-UK companies that carry on business in the UK if they use bribes in any country as a way of doing business."