On February 1, the SEC agreed to a $3.7 million settlement with a Germany-based software company regarding allegations that it violated the FCPA regarding the payment and offer of bribes to senior Panamanian government officials. The settlement, stemming from the actions of the company’s former executive Vincente Garcia who pleaded guilty last August to one count of conspiracy to violate the FCPA, found that the company lacked appropriate internal controls to detect the illegal activity. According to the SEC, Garcia arranged the sale of heavily discounted software licenses and used the savings to create a “slush fund.” The money in this fund was then used to pay bribes and kickbacks.
On February 3, the SEC named Jane Jarcho Deputy Director of its Office of Compliance Inspections and Examinations (OCIE). Jarcho will continue to serve as the National Director of the OCIE’s Investment Adviser/Investment Company examination program, a role she assumed in 2013. As the head of the Investment Adviser/Investment Company examination program, Jarcho increased company examinations more than 27% and “targeted areas such as cybersecurity, never before examined investment advisers and investment companies, alternative mutual funds, fixed incomes, and retirement accounts.” Jarcho’s SEC career began in 1990 in the Division of Enforcement, where she held various positions, including Branch Chief, Senior Trial Counsel, and Assistant Regional Director. In 2008, Jarcho joined the OCIE; prior to being named National Director of the office, she served as Associate Director of the Investment Adviser/Investment Company examination program.
On February 4, the SEC settled FCPA allegations with a California-based pharmaceutical company with a cease and desist order finding that the company violated the FCPA’s anti-bribery, books and records, and internal controls provisions related to activities in China. The SEC found that from at least 2007 to 2012, employees of the company’s subsidiaries gave money and gifts to Chinese officials (including employees of state-owned hospitals) in order to boost sales. The SEC further found that the company failed to devise and implement a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program.
On January 20, the SEC announced a settlement with a residential and commercial loan servicer for allegedly misstating its financial results for the last three quarters of 2013 and the first quarter of 2014, the consequence of “an internal accounting controls failure that caused the company to rely on a valuation methodology that did not conform to U.S. Generally Accepted Accounting Principles (GAAP).” According to the SEC, the servicer relied on a related party’s improper valuation of mortgage servicing rights that had been acquired from the servicer itself. In addition, the servicer falsely represented in its Form 10-K that it had policies, procedures, and practices to ensure that its Executive Chairman was recused from approving related party transactions when, in fact, it had no such written policies or procedures: “[A]lthough the Executive Chairman had a practice of recusing himself from negotiations and certain approvals of related party transactions, that practice was inconsistent and ad hoc.” Without admitting or denying the SEC’s findings, the servicer agreed to pay a $2 million civil money penalty to settle the charges.
On January 13, the SEC announced that it approved interim final rules to implement certain sections of the Fixing America’s Surface Transportation Act (“FAST Act,”), revising Forms S-1 and F-1 for emerging growth companies and smaller reporting companies. Specifically, the rules amend Forms S-1 and F-1 to allow emerging growth companies to omit financial information for certain historical time periods prior to the offering, provided registration statements include all required financial information at the time of the offering. Additionally, under the revised Form S-1, smaller reporting companies, excluding blank check companies, shell companies, or issuers for offerings of penny stocks, will be allowed to use incorporation by reference for future federal securities laws filings after the registration statement becomes effective. These eligible smaller reporting companies will be required to be current by having filed: (i) an annual report for its most recent fiscal year; and (ii) “all required Exchange Act reports and materials during the 12 months immediately preceding filing of the Form S-1.” These rules will become effective when published in the Federal Register.
On January 13, the SEC filed a complaint against 11 former executives and board members of an Alabama-based federal savings bank and its holding company for allegedly participating in various schemes to mislead investors and bank regulators by concealing loan losses, and for violating reporting, internal controls, books-and-records, and proxy solicitation provisions. According to the SEC, the bank’s officers and directors extended, renewed, and rolled over loans, and/or used straw borrowers to “avoid properly classifying the loans as impaired and increasing the Allowance for Loan and Lease Losses (‘ALLL’).” The SEC’s complaint further alleges that in 2009 and 2010, the bank misstated its reported income by approximately 99% and 54%, respectively. The SEC is charging the defendants with, among other things, various counts of fraud, aiding and abetting fraud, circumvention of internal controls and falsified books and records, and false statements to accounts in violation of the Securities Act and the Exchange Act. Nine out of the 11 named defendants agreed to settle the charges against them, with penalties ranging from $100,000 to $250,000, and the remaining two defendants are contesting the charges in federal district court in Tallahassee, Florida.
On January 11, the SEC’s Office of Compliance Inspections and Examinations issued its Examination Priorities for 2016. The examination priorities, which address issues across a variety of financial institutions, include (i) protecting retail investors, including those planning for retirement, by undertaking examinations to review exchange-traded funds (ETFs) and ETF practices, variable annuity recommendations and disclosure, and potential conflicts and risks involving advisers to public pension funds; (ii) evaluating market-wide risks by, among other thing, continuing to focus on cybersecurity controls at broker-dealers and investment advisers; and (iii) using enhanced data analytics to assess anti-money laundering compliance, detect microcap fraud, and complete reviews of excessive trading. Additional areas of examination priority for 2016 include (i) municipal advisors; (ii) private placements; (iii) investment advisers and investment companies that have not yet been examined; (iv) private fund advisers; and (v) transfer agents.
On January 5, FINRA released a letter regarding its regulatory and examination priorities for 2016. The letter focuses on the following three broad issues within the securities industry: (i) culture, conflicts of interest and ethics; (ii) supervision, risk management and controls; and (iii) liquidity. Regarding FINRA’s assessment of firm culture, the letter notes that FINRA “will focus on the frameworks that firms use to develop, communicate, and evaluate conformance to their culture,” assessing five specific indicators of a firm’s culture, including (among others) whether policy or control breaches are tolerated. In connection with supervision and risk management, FINRA will focus its examination efforts on the following four areas that continue to affect firms’ business conduct and market integrity: (i) management of conflicts of interest; (ii) technology; (iii) outsourcing; and (iv) anti-money laundering. Finally, in connection with liquidity, FINRA plans to review firms’ contingency funding plans as they relate to their business models, noting that the framework for FINRA’s reviews will be driven by the effective practices contained in Regulatory Notice 15-33. Additional areas of regulatory and examination focus for FINRA in 2016 will include but are not limited to: (i) protecting seniors and vulnerable investors from fraud, sales practice abuse, and financial exploitation; (ii) private placements and Regulation A+ public offerings; (iii) financial and operational controls concerning exchange-traded funds and fixed-income prime brokerage; and (iv) market integrity.
On December 16, the U.S. District Court for the Northern District of California sentenced a former regional director of a Pennsylvania-based software and technology company for his involvement in a conspiracy to bribe Panamanian government officials to obtain technology contracts. U.S. District Judge Charles R. Breyer sentenced Vicente Eduardo Garcia to 22 months in prison for his role in the bribery scheme. In August 2015, Garcia pleaded guilty to conspiracy to violate the FCPA, admitting that in 2009 he and others conspired to bribe two Panamanian government officials directly and a third official through an agent in order to obtain a contract to provide a Panamanian state agency with a technology upgrade package. Garcia and his co-conspirators used sham contracts and false invoices to conceal the bribes, and Garcia personally received over $85,000 for arranging the bribes. Garcia previously settled with the SEC and agreed to pay disgorgement of $85,965 plus prejudgment interest.
In a quarterly securities filing made on December 9, a Massachusetts-based manufacturer of airport security equipment, disclosed that the SEC and DOJ have made separate proposals to end their FCPA investigations into the company that would include payments totaling approximately $15 million. The company had previously announced in a September 2015 press release that it had offered the SEC $1.6 million to settle the SEC’s FCPA investigation of the company. The company’s 10-Q disclosed that the SEC rejected that offer. The company stated that it remains in discussion with the SEC and DOJ about settlement and is also discussing a settlement with the Danish government concerning a resolution of these matters.
The company previously reported that the DOJ and SEC had “substantially” completed their investigations of potential bribery involving transactions by the company’s Danish subsidiary. The transactions at issue involved distributors paying the subsidiary more than was owed, and the subsidiary then allegedly transferring the excess money to third parties identified by the distributors. At the time of its 2011 disclosure of the potentially problematic transactions, the company stated that it had not ascertained the ultimate beneficiaries or purpose of the transfers.
On November 30, the SEC named Katherine Martin as Associate Director in its Office of International Affairs. In her new role, Martin will “oversee the development of the SEC’s policy on cross-border regulatory matters, including its participation in multilateral standard-setting bodies and its bilateral dialogues with foreign authorities.” Martin previously served at the SEC as Assistant Director in the Office of International Affairs, Senior Special Counsel in the Office of Clearance and Settlement in the Division of Trading and Markets, Assistant Chief Counsel in the Division of Economic and Risk Analysis, and a Senior Counsel in the Office of International Affairs. Prior to joining the SEC over a decade ago, Martin worked as an associate in private practice.
On November 16, the SEC’s Office of the Whistleblower (OWB) issued its 2015 annual report to Congress on its Whistleblower Program established pursuant to Dodd-Frank. According to the report, in Fiscal Year 2015, the OWB received more than 3,900 whistleblower tips – a 30% increase since 2012, which the SEC attributes to increased public awareness of the program due to Dodd Frank’s implementing rule awarding tipsters 10 to 30 percent of a securities violation when the penalty is greater than $1 million. Additional items to note from the report include: (i) the SEC brought its first enforcement action against a company for using language in confidentiality agreements that impeded a whistleblower from reporting possible securities law violations; (ii) the SEC received whistleblower submissions from all 50 states and the District of Columbia, along with tips from individuals in 95 countries outside of the U.S.; and (iii) the most common complaint categories reported were Corporate Disclosures and Financials, followed by Offering Fraud and Manipulation.
On November 9, an Atlanta-based claims management firm disclosed that it reported possible FCPA violations to DOJ and SEC. The company discovered the possible violations during an internal audit and has since launched an investigation, using outside counsel and external forensic accountants. The company stated that it intends to cooperate with the SEC and the DOJ in this matter, but the filing did not elaborate on the nature or location of the potential violations.
Developments in Uzbekistan Telecommunications FCPA Investigations: Dutch Telecommunications Company Makes Provision in Connection with Investigation; DOJ Names Russian Telecommunications Company in Civil Forfeiture Action
On November 3, a Dutch telecommunications company announced that, based on its assessment of ongoing FCPA investigations, it would make a provision in the amount of $900 million in its third quarter financial statements. The company previously disclosed that the SEC, the DOJ, and the Dutch Public Prosecution Service were conducting investigations related to its business in Uzbekistan and prior dealings with a Gibralter-registered company that negotiates mobile phone licenses on behalf of the Uzbek government.
On November 5, another company under investigation for its conduct in Uzbekistan disclosed that the DOJ referenced it in a civil forfeiture complaint. The DOJ’s complaint was directed at an unnamed Uzbek government official, but the complaint alleged that the company and certain other parties made corrupt payments to the unnamed official to gain access to the Uzbek telecommunications market.
On November 2, a pharmaceutical company disclosed that the DOJ requested documents and other information related to the company’s compliance with the FCPA. The SEC is also investigating the company’s compliance with the FCPA, a fact the company disclosed in May. The SEC’s subpoena sought information about the company’s grant-making activities worldwide, specifically naming Japan, Brazil, Turkey and Russia in its request, and also addressed non-FCPA items. The company said that it plans to cooperate with DOJ’s investigation.