Law.com / The National Law Journal (see here) recently ran an interesting Q&A with the former Assistant Chief of the DOJ Fraud Section regarding the recent Nature's Sunshine Products Inc. ("NSP") enforcement action (see here for my prior post). While the NSP enforcement action may well be the first FCPA enforcement action in which the SEC charged a corporate executive with an FCPA violation under a Section 20(a) "control person" theory of liability, the SEC has previously charged corporate executives under other indirect theories including aiding and abetting a company's FCPA violations by invoking Section 20(e).
For instance, in 2007, the SEC charged Monty Fu (the founder and, at various times, the Chief Executive Officer and Chairman of the Board of Syncor International Corporation) with aiding and abetting Syncor's FCPA books and records and internal control violations.
The evidence against Fu?
As alleged in the SEC complaint (see here), "...Fu had the authority to maintain compliance with existing internal controls, and to implement additional internal controls designed to comply with the FCPA's books and records and internal controls provisions, YET FAILED TO DO SO." (see para. 2, emphasis added).
In charging Fu both with direct violations of the FCPA's books and records and internal control provisions (albeit by alleging in the alternative that Fu knew or was reckless in not knowing that the problematic payments were improperly recorded on the company's books and records) and with aiding and abetting Syncor's violations, the SEC alleged that Fu "knowingly failed to implement a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded in Syncor's books and records" in accordance with the FCPA (see para 22). As a result, the SEC charged that Fu "knowingly provided substantial assistance to Syncor" in connection with its violations (see para's 28 and 33).
Whether the SEC invokes section 20(a) or 20(e), the FCPA enforcement trend is clearly greater scrutiny of corporate executives and a greater SEC expectation that corporate executives play a meaningful role in ensuring enterprise-wide FCPA compliance.
In other words, if you are an executive of an issuer and you don't know what the acronym FCPA stands for, you better get educated.
Showing posts with label Control Person. Show all posts
Showing posts with label Control Person. Show all posts
Tuesday, August 25, 2009
Saturday, August 1, 2009
Gray Sky Over Nature's Sunshine As It Settles FCPA Enforcement Action
Companies have varying degrees of FCPA risks. Generally, at the high-end of the spectrum is a resource extraction company operating in a third-world country with an unstable government. At the low-end of the spectrum, it would seem, is a Utah-based company which got its start as a small family business selling encapsulated cayenne and other herbs to health food stores.
Yet, as evidenced by the SEC's recent FCPA enforcement action against Nature's Sunshine Products, Inc. ("NSP"), even a company with a relatively low FCPA risk profile can run afoul of the FCPA.
As described in the SEC's Litigation Release (see here) NSP, without admitting or denying the allegations in an SEC civil complaint, agreed to pay a $600,000 civil penalty to resolve allegations that it violated (among other securities laws - see below) the FCPA's anti-bribery, books and records, and internal control provisions.
According to the SEC complaint (see here), Brazil was NSP's largest foreign market, but in approximately 2000, the Brazilian governmental agency responsible for regulating nutritional products reclassified certain of NSP's products as medicines, thus requiring a registration process prior to import and sale of the products in Brazil. As alleged in the SEC complaint, NSP's wholly-owned subsidiary in Brazil ("NSP Brazil") circumvented the registration process by making approximately $1 million in cash payments to customs brokers, some of which was later used to pay Brazilian customs officials so that they would allow NSP Brazil to import unregistered product into Brazil. According to the SEC, these payments were booked by NSP Brazil as "importation advances," but without supporting documentation. Thereafter, as alleged by the SEC, NSP Brazil purchased fictitious supporting documentation for the payments.
As suggested above, in addition to the FCPA charges, the SEC complaint also charges other securities laws violations not typically found in an FCPA enforcement action such as fraud in connection with the purchase and sale of securities and false filings with the SEC. These other charges appear to be based on the allegation that NSP, in a prior Form 10-K filing with the SEC, stated that NSP Brazil experienced a significant decline in sales "due to import regulations imposed by the Brazilian government" but which failed to disclose any material information related to the above-mentioned cash payments.
Also charged in the SEC complaint were Douglas Faggioli, the current President and Chief Executive Officer of NSP and a member of its board of directors who during the relevant time period was NSP's Chief Operating Officer, and Craig Huff, NSP's former CFO. The complaint alleges that Faggioli and Huff, as "control persons" of NSP, violated the FCPA's books and records and internal control provisions. In language that is sure to induce a cold sweat for any executive, the SEC generally alleged that both Faggioli and Huff had "supervisory responsibilities" over NSP's senior management and policies, yet as "control persons," "failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP" and failed to devise and maintain an adequate system of internal accounting controls. Without admitting or denying the SEC's allegations, Faggioli and Huff each agreed to pay a $25,000 civil penalty.
According to an NSP press release (see here) no "current NSP officers, directors, or employees are alleged to have participated in or had knowledge of any of the improper conduct" alleged in the SEC complaint. The press release also notes that NSP voluntarily disclosed the conduct at issue to both the SEC and the DOJ and fully cooperated in the government's investigation. The press release also states that NSP "anticipates no action by the DOJ" as to the disclosed conduct.
The NSP FCPA enforcement action, and other such enforcement actions against traditionally low FCPA risk companies, should serve notice to all that no industry is immune from FCPA scrutiny.
Yet, as evidenced by the SEC's recent FCPA enforcement action against Nature's Sunshine Products, Inc. ("NSP"), even a company with a relatively low FCPA risk profile can run afoul of the FCPA.
As described in the SEC's Litigation Release (see here) NSP, without admitting or denying the allegations in an SEC civil complaint, agreed to pay a $600,000 civil penalty to resolve allegations that it violated (among other securities laws - see below) the FCPA's anti-bribery, books and records, and internal control provisions.
According to the SEC complaint (see here), Brazil was NSP's largest foreign market, but in approximately 2000, the Brazilian governmental agency responsible for regulating nutritional products reclassified certain of NSP's products as medicines, thus requiring a registration process prior to import and sale of the products in Brazil. As alleged in the SEC complaint, NSP's wholly-owned subsidiary in Brazil ("NSP Brazil") circumvented the registration process by making approximately $1 million in cash payments to customs brokers, some of which was later used to pay Brazilian customs officials so that they would allow NSP Brazil to import unregistered product into Brazil. According to the SEC, these payments were booked by NSP Brazil as "importation advances," but without supporting documentation. Thereafter, as alleged by the SEC, NSP Brazil purchased fictitious supporting documentation for the payments.
As suggested above, in addition to the FCPA charges, the SEC complaint also charges other securities laws violations not typically found in an FCPA enforcement action such as fraud in connection with the purchase and sale of securities and false filings with the SEC. These other charges appear to be based on the allegation that NSP, in a prior Form 10-K filing with the SEC, stated that NSP Brazil experienced a significant decline in sales "due to import regulations imposed by the Brazilian government" but which failed to disclose any material information related to the above-mentioned cash payments.
Also charged in the SEC complaint were Douglas Faggioli, the current President and Chief Executive Officer of NSP and a member of its board of directors who during the relevant time period was NSP's Chief Operating Officer, and Craig Huff, NSP's former CFO. The complaint alleges that Faggioli and Huff, as "control persons" of NSP, violated the FCPA's books and records and internal control provisions. In language that is sure to induce a cold sweat for any executive, the SEC generally alleged that both Faggioli and Huff had "supervisory responsibilities" over NSP's senior management and policies, yet as "control persons," "failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP" and failed to devise and maintain an adequate system of internal accounting controls. Without admitting or denying the SEC's allegations, Faggioli and Huff each agreed to pay a $25,000 civil penalty.
According to an NSP press release (see here) no "current NSP officers, directors, or employees are alleged to have participated in or had knowledge of any of the improper conduct" alleged in the SEC complaint. The press release also notes that NSP voluntarily disclosed the conduct at issue to both the SEC and the DOJ and fully cooperated in the government's investigation. The press release also states that NSP "anticipates no action by the DOJ" as to the disclosed conduct.
The NSP FCPA enforcement action, and other such enforcement actions against traditionally low FCPA risk companies, should serve notice to all that no industry is immune from FCPA scrutiny.
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