Once upon a time there was a law enforcement system in this country where companies that committed crimes or engaged in other wrongdoing were prosecuted criminally and/or civilly and where companies that did not commit crimes or did not engage in other wrongdoing were not prosecuted. That system has to a large extent been abandoned by the DOJ years ago – particularly in the FCPA context – and now that system appears to be crumbling at the SEC as well.
In December 2010, the SEC entered into its first non-prosecution agreement - albeit not in the FCPA context (see here for the prior post) and yesterday the SEC announced its first deferred prosecution agreement - of any kind - against Tenaris to resolve an FCPA enforcement action.
As has generally happened with the DOJ’s enforcement of the FCPA, the SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.
This is a troubling development on many fronts and it gives the public little confidence that our laws are enforced in a consistent and transparent manner or that regulators and companies are being held accountable.
With that introduction, let's take a look at the Tenaris enforcement action.
Tenaris (here) "is a leading supplier of tubes and related services for the world’s energy industry and certain other industrial applications." Tenaris is headquartered in Luxembourg and its American Depository Receipts ("ADRs") are listed on the New York Stock Exchange. In FCPA-speak, that makes Tenaris an "issuer."
The enforcement action involved both a DOJ and SEC component. Total settlement amount was $8.9 million ($3.5 million criminal penalty via a DOJ non prosecution agreement; $5.4 million in disgorgement and prejudgment interest via a SEC deferred prosecution agreement ... its feels odd just writing that).
Both enforcement actions involve commission payments to an Uzbekistan agent to receive confidential bidding documents in connection with tenders conducted by alleged Uzbekistan state-owned or state-controlled companies. The enforcement actions state that Tenaris employees "were aware or substantially certain that all or a portion" of the commission payments would be offered by the Agent to employees at the SOEs and that certain of the payments were paid via a wire transfer through a New York bank account.
The NPA (here - dated March 14, 2011) begins as follows.
The DOJ "will not criminally prosecute" Tenaris and its subsidiaries and affiliates for any crimes "related to Tenaris's knowing violations of the anti-bribery and books and records provisions of the FCPA ... arising from and related to the making of improper payments by employees and agents of Tenaris to officials of OJSC O'ztashqineftgaz ("OAO"), an Uzbekistan state-controlled oil and gas production company, and the accounting and record-keeping associated with these improper payments."
The NPA has a term of two years and Tenaris admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Tenaris agreed "not to make any public statement contradicting" the described conduct.
According to the NPA, Tenaris has more than 24,000 employees around the world and it conducts operations in 12 countries and its customers include the world's leading oil and gas companies. The NPA states that Tenaris's operations included supplying steel pipe and related servics in the Caspian Sea region, including Uzbekistan. This region accounted for approximately 1% of Tenaris's total global sales and services from 2003 to 2008. Tenaris's Caspian Sea business was run from offices in Azerbaijan and Kazakhstan.
According to the NPA, "Tenaris obtained oilfeld services business in the Caspian Sea region in part by bidding on contracts solicited by state-owned companies or governmental agencies to provide pipeline used in the development and production of oil and natural gas. Tenaris often used agents to assist in biddig on government contracts in the Caspian Sea region."
The conduct at issue focused on OAO contracts between 2006 and 2007. According to the NPA, OAO "was a wholly owned subsidiary of Uzbekneftegaz, the state holding company of Uzbekistan's oil and gas industry" and during the relevant time period "Uzbekneftegaz and OAO were wholly owned by the Government Uzbekistan." The NPA then states, "OAO was an agency and instrumentality of the Government of Uzbekistan and its employees were foreign officials within the meaning of the FCPA."
According to its website (here) the current ownership of OAO is as follows: "government’s share – 51%; foreign investors’ share – 37.27%; free market trade share – 11.73%."
According to the NPA, in December 2006, Tenaris "was introduced to a potential agent ("OAO Agent") to help Tenaris bid on additional contracts with OAO" and "as an incentive to retain the OAO Agent, the OAO Agent offered Tenaris access to confidential bidding information of competitors obtained from officials in OAO's tender department, who would allow Tenaris to submit revised bids after reviewing the confidential information." The NPA states that "Tenaris would use the confidential competitor bid information to submit revised bids in order to increase the likelihood of Tenaris being awarded the underlying contract."
According to the NPA, Tenaris "agreed to pay the OAO Agent a fee of 3.5% for these services" and that Employees A, B, C, and D (non-U.S. citizens but "employees and agents" of Tenaris) "were aware or substantially certain that all or a portion of such money would be offered by the OAO Agent to one or more OAO employees."
The NPA then lists approximately $19.4 million in contracts Tenaris obtained using this system and states that certain of the commission payments to the OAO Agent were paid via wire transfer through a New York bank account.
Under the heading "Additional Improper Conduct to Avoid Detection," the NPA states that in November 2007 the above referenced employees learned of complaints from company competitors as to the bidding process on certain of the contracts and that an investigation by Uzbekekspertiza JSC (a Uzbekistani government agency) might commence. According to the NPA, "in an effort to avert the potential investigation of the bidding process, the OAO Agent recommended to Tenaris that the OAO Agent make an improper payment to Uzbekekspertiza officials to refrain from recommending the investigation against Tenaris or re-opening the bidding process to Tenaris's competitors" and that the employees "agreed to pay the recommended payment" to the officials to avert the investigation. However, the NPA states as follows: "the investigation did not uncover evidence that any such payment was made."
As to books and records, the NPA states that "the books, records and accounts reflecting Tenaris's transactions ... were incorporated into Tenaris's consolidated year-end financial statements" and that "Tenaris knowingly failed to make and keep books, records, and accounts that accurately and fairly reflected Tenaris's transactions ... and the payments to the OAO Agent."
Based on the above conduct, Tenaris agreed to pay a $3.5 million criminal penalty. The NPA states as follows. "This substantially reduced monetary penalty reflects the DOJ's determination to meaningfully credit Tenaris for its extraordinary cooperation with the Department, including its timely and voluntary disclosure, its subsequent investigation, and the effective manner in which Tenaris conveyed information to the [DOJ and the SEC]."
Inquiring minds want to know - how much was the penalty "substantially reduced?"
According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.
(a) Tenaris's timely, voluntary, and complete disclosure of the conduct at issue;
(b) Tenaris's extensive, thorough, real-time cooperation with the DOJ and the SEC;
(c) subsequent to its voluntary disclosure of certain conduct unrelated to Uzbekistan, but prior to discovery of the unlawful conduct related to Uzbekistan, Tenaris's voluntary investigation of the Company's business operations throughout the world, specifically including the thorough and effective manner in which this investigation was carried out and information was disclosed to the DOJ and SEC;
(d) Tenaris's remedial efforts already undertaken and to be undertaken, including voluntary enhancements to its compliance program; and
(e) Tenaris's commitment to implement enchanced compliance measures described in the NPA.
Based on (c) above, inquiring minds want to know - what did Tenaris originally voluntarily disclose?
Under the heading, "Disclosure and Investigation of Improper Activity," the NPA states as follows.
"In or about March 2009, a third party disclosed to Tenaris information indicating that certain sales agency payments were made by Tenaris in relation to business in a country other than Uzbekistan. These payments appeared to be for an improper purpose. In response to this information, Tenaris's Audit Committee retained outside counsel to investigate the allegations. Thereafter, in a Form 20-F filed with the SEC on or about June 30, 2009, Tenaris disclosed information related to these allegations. Tenaris also made a prompt, full disclosure of the information to the [DOJ] and the [SEC] concerning the allegations. In or around July 2009, counsel for Tenaris met with the [DOJ and SEC] and disclosed preliminary findings of the internal investigation. Such disclosure was related to facts known to Tenaris at the time but was not related to transactions in Uzbekistan. Tenaris's counsel also informed the [DOJ and the SEC] that it would conduct a thorough, world-wide investigation of its business operations and internal controls and would report the findings to the [DOJ and SEC]. Tenaris's investigation plan included significant collection and review of a substantial quantity of electronic and paper records from the company and third parties from multiple locations around the world, translation of all relevant materials into English, subsequent interviews of relevant personnel including senior executives and third parties, and review and testing of internal controls and compliance procedures. In or around June 2010, Tenaris disclosed the factual findings from its internal investigation in a thorough, complete and useful manner to the [DOJ and SEC]. As a result of its internal investigation, Tenaris discovered facts and transactions in Uzbekistan that constitute the violations set forth above. Tenaris voluntaly engaged in certain remediation efforts to include termination and disciplinary measures of the persons involved. Tenaris also thoroughly reviewed its pre-existing compliance program and applicable internal controls, and undertook voluntary, affirmative steps to update and improve its compliance program and to implement enhanced compliance measures and controls. Tenaris also agreed to provide real and meaningful cooperation with the [DOJ and SEC] and any law enforcement agency in connection with this matter."
Again, inquiring minds want to know - what did Tenaris originally voluntarily disclose?
See here for the DOJ's release announcing the enforcement action.
The SEC DPA (here) is based on the same core conduct described above.
As to internal controls, the SEC DPA states as follows.
"... Tenaris's system of internal controls failed to detect or prevent payments to OAO officials in an effort to obtain and retain business in Uzbekistan, including a failure to ensure that proper and effective due diligence was conducted on the Agent for the OAO contracts, and that the review process for authorization or approval of payments to the Agent failed to detect or prevent the illegal payments to OAO officials. Tenaris's policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act ("FCPA") compliance in place at that time warranted further strengthening to ensure effective compliance with the related laws."
One of the undertakings Tenaris agreed to in the DPA was the following.
"To conduct effective training regarding anticorruption and compliance with the FCPA for (1) all current officers and managers, (2) all employees working in Finance, Accounting, Internal Audit, Sales, and Government Relations, (3) all other employees working in positions Tenaris deems to involve activities implicated by Tenaris's policies regarding anticorruption and compliance with the FCPA, on or before December 31, 2011, and (4) all such future employees within 90 days oftheir affiliation with Tenaris."
Under the terms of the two-year DPA, Tenaris, without admitting or denying the SEC's allegations (the same way defendants are ordinarly allowed to resolve SEC enforcement actions), agreed to pay $5.4 million in disgorgement and prejudgment interest.
Pursuant to the DPA, Tenaris agreed "not to contest or contradict the factual statements" supporting the Statement of Facts. As noted in this prior post when the SEC announced its intention to make use of NPAs and DPAs, "[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses" is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.
Like the SEC's prior NPA, the Tenaris DPA is very similar to DOJ DPAs and NPAs.
In a release (here) the SEC touted its first use of a DPA.
Robert Khuzami (Director of the SEC's Division of Enforcement) stated as follows. “The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”
Cheryl Scarboro (Chief of the SEC's FCPA Unit) stated as follows. “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”
Robert Giuffra, Jr. of Sullivan & Cromwell (here) represented Tenaris.