We say this assuming he has not been banned from the securities industry. A preliminary Google search says he has not, but how can that possibly be right?

Oh, it can be right.  It’s worth noting that a grand jury indicted Dykstra in the U.S. District Court for the Central District of California on charges that really aren’t related to securities.  It was a bankruptcy case, and Dykstra was accused and convicted of looting his California house, lying about who stripped the house, and selling baseball memorabilia and laundering the proceeds from those sales.

But to be barred from the securities industry, you usually have to have committed some bad conduct – not necessarily criminal conduct – related to securities.  Section 15(b)(4) of the Exchange Act gives you a lot of options.  You can lie in a filing with the SEC, violate one of the federal securities laws, aid and abet such a violation . . . the list really does go on.  You can also be convicted of, say, mail fraud, wire fraud, larceny, fraudulent concealment, or a number of other theft-based felonies that are not connected to securities.  It may happen that a federal court bars a defendant from the securities industry solely on that basis, but I don’t think I’ve seen it before.  Typically, the SEC gets involved, and uses its administrative process to effectuate the bar.  Here’s an example from today, and here’s one from last week.  FINRA can also suspend broker-dealers from membership with FINRA, which essentially means suspension from the securities industry.

From what I can tell, neither the SEC nor FINRA has gotten around to barring Dykstra.  And it looks like he was never a FINRA member anyway, so kicking him out of there may not have been on the table from their perspective.  So sign Lenny up; he’s ready to play.

At least two people want to restore the SEC’s place in the accounting fraud universe.  Fortunately, they’re in a position to matter.  One is Mary Jo White, who according to the Wall Street Journal wants to turn the agency’s attention back to what she sees as its core mission of policing corporate disclosures.

The other is Craig Lewis, whose Division of Economic and Risk Analysis has developed an “accounting quality model” that could help the SEC “assess the degree to which registrants’ financial statements appear anomalous.”  As Lewis said in a speech last December, when companies use “earnings management” to adjust those financial statements, the trick is to distinguish between merely aggressive accounting practices that fall within GAAP, and fraudulent accounting practices that violate GAAP.  Mistaking one for the other can be very costly, not only for the company wrongly tagged as cooking the books, but also for enforcement staff who waste resources investigating lawful behavior.

Lewis’s hope is that the accounting quality model will limit those false positives.  As he also said last December, “[A]t the highest level of generality it is a model that allows us to discern whether a registrant’s financial statements stick out from the pack, while taking into account the contemporaneous attributes of that pack.”  But Lewis also noted several examples that could indicate specific types of earnings management:

• An accounting policy that results in relatively high reported book earnings, even though firms simultaneously select alternative tax treatments that minimize taxable income;
• A high proportion of transactions structured as “off-balance sheet.”  (Though the vast majority of firms use off-balance sheet financing for legitimate business purposes, many of the largest accounting scandals, Lewis said, used off-balance sheet activities to hide poor financial performance.);
• The frequency and types of conflicts with independent auditors, as measured by changes in auditors or delays in the release of financial statements or earnings.

In these instances, Lewis said, the metrics associated with the accounting policies can be consistently estimated from filings data and compared to peers.  The hope is that the SEC will be able to see what companies are saying about their finances, and also what massive amounts of data say they probably ought to be saying about their finances.  This tool could be a remarkably effective boon for the SEC’s enforcement staff.  Accounting matters are very hard to untangle, and a data-mined head start could put the Commission on the trail of good cases before they blow up into disasters.

Us:       Did your guy sell those shares on the basis of material, nonpublic information?

Him:   No way.  In fact, he had a 10b5-1 plan in place, and all of his sales were in accordance with that plan.

Us:       Um, was that plan written down anywhere?

Him:   No, it wasn’t written down, but it doesn’t have to be.  If you look at the trading records,  you’ll see the trades followed a regular pattern.

Us:       Hmmm.  We’ve actually reviewed those records.  It looks like the plan was to sell all his shares as quickly as possible so he could get out before the share price cratered, as he knew was going to happen.

Him:

We recommended that the Commission bring an enforcement action against this person for insider trading, which it did.  We settled the matter soon afterward.  But let me tell you, if this defendant’s trading had followed a regular pattern, we wouldn’t have touched that case with a ten-foot pole.  Even if we suspected that he was selling only to avoid suffering from the imminent death of the company whose shares he owned, an actual 10b5-1 plan would have protected him.  We would not have wanted to attack sales that were obviously covered by such a plan, because the court would have rightly handed us our heads.

Rule 10b5-1 plans work like this: if, before becoming aware of material, nonpublic information, a corporate insider (1) enters into a binding contract to trade the securities; (2) instructs another person to trade the securities for the insider’s account; or (3) adopts a written plan for trading the securities, the trades are deemed not to be “on the basis of” that material, nonpublic information.  The rule goes on in greater detail, but the gist is that the trader must not have discretion to adjust the trades once the information becomes known.  If the plan is to sell 100 shares per month, the insider can’t change that number to 10,000 when the draft of a horrendous quarterly earnings report is circulated to senior management but not yet to investors.  But Rule 10b5-1 plans that are strictly followed are extremely strong defenses against insider trading charges.

Which is why it surprised me on Tuesday to see the results from Broc Romanek’s survey on Rule 10b5-1 plan practices.  None of the 35 companies responding to the survey require corporate insiders to sell shares pursuant to a 10b5-1 plan, and 68% of those companies do not explicitly encourage their use.  I don’t get this.  It seems like such low-hanging corporate governance fruit to me to ask that senior executives cabin their trading in a way to minimize potential liability for themselves and their companies.  Bruce Carton wrote a good piece in Compliance Week two years ago discussing the benefits of having a strong insider trading compliance program.  They included:

• Avoiding control person liability for companies whose executives are found liable for insider trading;
• Protecting employees who don’t understand the intricacies of insider trading law, which are complex; and
• Avoiding reputational damage and legal fees from disruptive investigations.

A Rule 10b5-1 plan, faithfully followed and not gamed for the insider’s benefit, is one relatively easy way to avoid those things.  I’m surprised that more companies are apparently not taking advantage of them.

In an emergency action filed on an ex parte basis in the U.S. District Court for the Northern District of Illinois late yesterday, the SEC alleges what it thinks happened with respect to trading in Smithfield stock just before this deal was announced.  According to the Commission’s press release, Bangkok, Thailand-based

Badin Rungruangnavarat purchased thousands of out-of-the-money Smithfield call options and single-stock futures contracts from May 21 to May 28 in an account at Interactive Brokers LLC. [Badin] allegedly made these purchases based on material, nonpublic information about the potential acquisition, and among his possible sources is a Facebook friend who is an associate director at an investment bank to a different company that was exploring an acquisition of Smithfield. After profiting from his timely and aggressive trading, [Badin] sought to withdraw more than $3 million from his account on June 3.

According to the SEC’s complaint, Badin is 30 years old and works at a plastics company in Bangkok.  The SEC alleges in its complaint that he applied to open his account at Interactive Brokers on May 10^th.  The complaint also suggests that the source for the inside information, if any, may have been at a small Thai investment bank that was advising Charoen Pokphand Foods, a competing bidder for Smithfield.  The SEC’s staff likely asked Interactive Brokers to freeze Badin’s account on a temporary basis while they prepared a motion for an asset freeze and temporary restraining order, which the court granted late yesterday.  It will be interesting to see what Badin does to combat the asset freeze and the SEC’s claims.  At any rate, this is very quick work by the SEC’s staff to put this case together over last weekend.

Update:  Late on June 6th, the Wall Street Journal ran this correction: “Badin Rungruangnavarat should be referred to as Mr. Badin on second reference, according to custom for Thai names. Because of the way regulators referred to him in a press release and court filing, an earlier version of this article incorrectly referred to him as Mr. Rungruangnavarat.”  We made the same mistake, and have corrected this post the same way.

I suspect that’s going to change soon, for two reasons.

Mary Jo White

On May 16^th, the SEC’s new chair, Mary Jo White, told the House Financial Services Committee that the agency’s top priority is to increase the number of investment adviser examinations it handles every year.   As she testified, “Significant additional coverage is essential if investors are to be appropriately protected.”  Interestingly to me, she says the SEC does not especially care if that coverage comes from increased SEC staff or the responsibility is delegated to a self-regulatory organization – an expanded FINRA or a new SRO entirely.  Still, if Congress approves the SEC’s proposed $1.67 billion budget, part of that 27 percent funding increase would be used to hire 250 new staff to examine investment advisers.

NASAA

Also, on May 20^th, the North American Securities Administrators Association issued a report detailing the “IA Switch” – the transfer of registration responsibility for advisers with under $100 million under management from the SEC to the states.  All told, more than 2,100 investment advisers that were previously registered with the SEC are now registered with the states.  Today, over 17,000 advisers with roughly $270 billion in assets under management are now under state authority, with state examinations to follow.  I hope they’re ready, and at least to read the big talk in this report they seem to be.  The various state securities chiefs quoted in the report are essentially saying, “Bring it on.”  Wisconsin Securities Administrator Patty Struck, for example, said, “For investors to have better protection, we knew the states would have to oversee more advisers.  Our objective was to take on more IAs so the SEC would find it more manageable.”

Of course, they’ll be praying to the god of poorly funded regulators when the next Madoff happens on their watch, but for now state oversight may be a partial solution.

Gabelli v. SEC

SEC critics breathed a sigh of relief in February when the Supreme Court held in Gabelli v. SEC that the five-year statute of limitations that applies to enforcement actions seeking civil penalties means what it says.  The SEC had argued successfully in the Second Circuit that the statute of limitations does not begin to run until the Commission discovered (or reasonably could have discovered) the wrongful acts at issue.  As the Supreme Court put it, though:

[T]he agency’s “central ‘mission’” is to investigate and root out violations of the securities laws and it “has many legal tools at hand to aid in that pursuit.”  Because it is always on the lookout for fraud, the agency does not need the benefit of the doubt afforded by the discovery rule.

Casual observers might think Gabelli would put an end to the SEC’s pursuit of old conduct.  Au contraire, mon frère.  Because while the Court shut one door, it left open another in the form of the fraudulent concealment doctrine.  That rule tolls the five-year statute when “the defendant takes steps beyond the challenged conduct itself to conceal that conduct.”  That is, if a defendant separately conceals the alleged violation, the SEC can argue that it has more time to file an enforcement action in federal court.

Total, S.A.

The fraudulent concealment doctrine seems almost tailor-made for FCPA violations, which forbids (1) bribery of foreign government officials but also (2) accounting tricks that conceal those bribes.  Witness Wednesday’s settled FCPA matters brought by the SEC and Justice Department against Total, S.A.  According to the SEC’s press release:

Total made more than $150 million in profits through the bribery scheme. Total attempted to cover up the true nature of the illegal payments by entering into sham consulting agreements with intermediaries of the Iranian official and mischaracterizing the bribes in its books and records as legitimate “business development expenses” related to the consulting agreements. Total had inadequate systems to properly review the consulting agreements and lacked sufficient internal controls to comply with federal laws prohibiting bribery.

It’s a big case, and with $398 million in total monetary sanctions, Total, S.A. will enter the pantheon of massive FCPA actions.  But wow, is it old.  This scheme started eighteen years ago.  It was complete nine years ago, in 2004.  It’s hard to tell what brought us to this point, whether the enforcement agencies entered into tolling agreements or sought to take advantage of the fraudulent concealment doctrine.  But it is not great for companies operating in global markets that conduct this old could be on the table from an FCPA enforcement perspective.  It’s not that great for the law enforcement agencies, either.  One of the constructive policies of the recently departed Rob Khuzami regime in the SEC’s Enforcement Division was a not-so-subtle pushing of the staff to bring cases faster, when facts were fresh.  The SEC and DOJ want to be seen as nimble, effective agencies, but actions as old as this one do not contribute to that image.  Unfortunately, the age of Total, S.A. is not quite an outlier, but it ought to be.

UPDATE: Thanks to Mike Koehler for help in re-thinking the last sentence of this post.

If conducted intelligently, a strong internal investigation can minimize damage from an ethical breakdown and convince regulators or prosecutors that corporate misconduct is under control.  But to make that happen, it is critical that conflicts of interest not undermine the work a bulletproof investigative report can do.  Two matters in 2013 have made the point plainly.

Le-Nature’s, Inc.

In March, the U.S. Court of Appeals for the Third Circuit affirmed the conviction of Le-Nature’s, Inc.’s former executive vice president, who had participated in a $660 million accounting fraud scheme.  The scheme was missed by an internal investigation that was hopelessly conflicted and had no real chance of identifying the financial irregularities that ultimately sank the company.

Here’s how the investigation played out, according to the Superior Court of Pennsylvania.  As part of standard quarterly audit procedures, the engagement partner at Le-Nature’s auditor solicited the concerns of three senior managers regarding the company’s financial activities, and asked whether they suspected fraudulent activity.  The CFO, chief administrative officer, and vice president of administration all expressed concerns about the accuracy of Le-Nature’s sales figures, and resigned shortly thereafter.  In their resignation letters, the officers said they suspected CEO Greg Podlucky’s potential misconduct with the company’s vendors, suppliers, and customers.  The CFO, John Higbee, noted in particular that Podlucky had denied him access to documentation supporting   Le-Nature’s general ledger details.  Higbee explained that by conducting business transactions “without any normal review by others, such as the CFO,” Podlucky had rendered it impossible for Higbee to discharge his responsibilities to Le-Nature’s.

The auditor soon requested that Le-Nature’s hire “competent independent legal counsel to conduct a thorough and complete investigation of the allegation made by the” senior managers.  The company’s board of directors then appointed a special committee to do just that.  The special committee hired an outside law firm, which in turn hired a forensic accounting firm to assist in the investigation.

Three months later, the law firm provided a draft of its report to Podlucky, who was not a member of the special committee and whose conduct was the subject of the investigation.  The special committee had not received a copy of the draft report, but Podlucky immediately called a meeting of the board of directors to discuss it.  Podlucky also provided comments to the law firm on the draft report.  About ten days later, the law firm provided the draft report to the special committee.

The accounting firm and the law firm approved the report.  Unsurprisingly after the filter put on it by Podlucky, the report “found no evidence of fraud or malfeasance with respect to any of the transactions” subject to the investigation.  As the Pennsylvania Superior Court said, Podlucky and his senior managers used this stamp of approval to retain their positions at Le-Nature’s and to continue to “loot” the company, “incurring further corporate debt and wasting corporate funds on avoidable transactions.”

The internal investigation, ostensibly designed to root out an ongoing fraud, instead became a tool of the fraud.  Compromising the investigation’s independence led to hundreds of millions in losses at Le-Nature’s and criminal convictions of seven company executives and consultants.  The defendants were convicted in the U.S. District Court for the Western District of Pennsylvania for mail fraud and money laundering violations.

Chesapeake Energy Corp.

For now, the second instance is less dramatic.  In February, the audit committee of the board of directors of Chesapeake Energy Corporation concluded an internal investigation into (1) whether CEO Aubrey McClendon had engaged in misconduct by privately borrowing hundreds of millions of dollars from some of the company’s biggest financiers; and (2) potential antitrust violations during Chesapeake’s acquisition of drilling rights in a Michigan shale formation.  The investigation by the committee and another outside law firm lasted ten months and involved more than 50 interviews with executives from Chesapeake and other companies.  The probe found no intentional misconduct by McClendon.

Unfortunately for McClendon and Chesapeake, government regulators were not placated.  Michigan Attorney General Bill Schuette, who had begun an antitrust inquiry into Chesapeake, was especially unimpressed with the supposed independence of the internal investigation that had cleared McClendon.  Shortly after Chesapeake announced the results of its internal probe, his spokeswoman said: “The importance of independent – rather than internal – investigations cannot be emphasized enough in a case involving antitrust bid-rigging allegations.  Our thorough, independent investigation into these serious allegations will continue.”

Chesapeake’s internal investigation also did not deter the SEC.  Nine days after the supposed all-clear, the SEC escalated its investigation into the company, converting its informal inquiry into a formal investigation, complete with subpoena power.

“I’m now confused because the board just said everything was fine,” said Fadel Gheit, an oil analyst at Oppenheimer. “I really thought the board had an iron-clad, air-tight grip on the situation.  Unfortunately, the saga continues.”

It is unclear exactly what factors led the SEC to disregard the results of Chesapeake’s internal probe.  But the independence of the investigation certainly seemed compromised to the Michigan Attorney General’s Office.

The lessons from these two episodes should be clear.  When conducting internal investigations, outside counsel should bear in mind who is being represented.  In most instances, the client is the company and not the CEO or any particular member of senior management.  Remembering that should keep investigators’ eyes on the ball and lead to a result that will optimize results and minimize costs for the company.

Facts and Procedure

FINRA began investigating one of its member firms, Marquis Financial Services, Inc. and its employees, including Goldstein, in 2010 after receiving a referral about suspicious trading in penny stocks at Marquis.  During the investigation, FINRA learned that Goldstein had been operating an outside consulting business called Wall Street at Home.com, Inc., since at least 2005, but had failed to report that activity as FINRA Rule 3270 requires.

As Goldstein stipulated, Wall Street at Home is an indirect owner of Marquis: Wall Street at Home owns 100 percent of a holding company called Steven Gregory Securities, which in turn owns at least 95 percent of Marquis.  Goldstein also stipulated that he is the president of all three companies and the sole officer and voting stockholder of Wall Street at Home and that neither Steven Gregory Securities nor Wall Street at Home ever had any employees.

On January 9, 2012, FINRA staff conducted an on-the-record interview of Goldstein pursuant to Rule 8210, during which FINRA staff asked Goldstein questions about his activities at Wall Street at Home, including the company’s ownership structure.  Goldstein declined to identify any minority shareholders or to acknowledge whether Wall Street at Home had any investment accounts.  Goldstein also declined to identify any customer for whom he provided consulting work or to specify an industry in which he had performed such work.  After the interview, FINRA sent Goldstein a written request for information and documents pursuant to Rule 8210, and again zoned in on the ownership of Wall Street at Home.  Goldstein refused to respond to the written requests, claiming FINRA had no authority to require an associated person to produce documents relating to a third party.

The FINRA staff did not love this response, and issued a notice of suspension to Goldstein on March 13, 2012.  A FINRA hearing panel suspended Goldstein on January 4, 2013, finding that he had failed to respond to FINRA’s requests as he was required to do under Rule 8210.

Goldstein’s Appeal

Goldstein appealed his suspension and moved to stay the imposition of any sanctions.  He argued that by asking for documents and information about an unrelated third party, FINRA engaged in an impermissible fishing expedition and violated his due process rights.  FINRA opposed Goldstein’s motion, arguing that its rules expressly require associated persons to disclose outside business activities “precisely for the purpose demonstrated here – to enable both member firms and FINRA to oversee and, if necessary, investigate associated persons’ activities away from member firms.”  FINRA added that, because of Wall Street at Home’s close connections to both Goldstein and Marquis, Wall Street at Home is not an unrelated third party.  “Indeed,” FINRA argued, “the business and financial affairs that Goldstein operates through Wall Street At Home have a direct relationship to Marquis Financial’s customers because they purchased minority interests in Wall Street At Home through Marquis Financial.”

The SEC’s Decision

As for Goldstein’s motion, the SEC was not impressed.  As the opinion noted, Rule 8210 expressly requires associated persons to provide information and testify “with respect to any matter involved in [a FINRA] investigation, complaint, examination, or proceeding.”  The rule also says flatly, “No member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule.”  Here, the SEC did not find FINRA to be seeking information from an unrelated third party but, rather, information about Goldstein himself.  Wall Street at Home was simply not an unrelated party, as it had close ties to both Goldstein and Marquis.  Goldstein also did not establish that FINRA’s requests raised “privacy and confidentiality issues,” as FINRA investigations are non-public and confidential.  The SEC also said Goldstein appeared unlikely to succeed on his due process claims because FINRA is not a state actor.  Under Exchange Act Section 15A(b)(8), FINRA is required only to “provide a fair procedure for the disciplining of members and persons associated with members.”

Again, if you’re a broker-dealer or registered representative, you can’t dance around your obligations to provide documents and testimony when FINRA asks for them.  Your securities business is under scrutiny.  Even your non-securities business is under scrutiny.  Answer the call or get into another line of work.

Apparently the memo came a bit too late for Vector Wealth Management.  On April 18^th, the SEC brought a settled enforcement action against the Minnesota-based investment advisor for alleged violations of the custody rule and for failing to properly supervise an employee who misappropriated client funds.

Facts

According to the administrative order, Vector discovered that one of its clerical employees, Charles Fee, misappropriated $33,147 of dividends owed to four clients over a period of about 2½ years.  A Vector principal had check-signing authority over particular investment pools but had delegated to the clerical employee the responsibility to prepare distribution checks.  Fee allegedly wrote checks to himself and – somehow . . . Jedi mind trick? – had the principal sign them.  Vector learned about the scheme while trying to reconcile an unrelated, potentially erroneous payment, and then quickly self-reported Fee’s conduct to the SEC’s staff.  The Commission charged Fee separately with violations of Section 10(b) of the Exchange Act.

Unfortunately, Vector had not prepared itself for such a scenario.  Before discovering the scheme, Vector had failed to adopt or implement procedures reasonably designed to prevent violations of the custody rule.  Specifically, the adviser had not ensured that investors in its pooled vehicles were receiving quarterly account statements or audited financial statements on an annual basis.  Vector also failed to conduct an annual compliance review of its advisory activities.

Custody Rule

Rule 206(4)-2 generally provides that it is “fraudulent, deceptive, or manipulative” for any registered investment adviser to have custody of client funds or securities unless, among other things, the adviser has a reasonable basis for believing that a qualified custodian is sending quarterly account statements to each of the clients for which it maintained funds or securities.  The rule is designed to protect advisory clients from the misuse or misappropriation of their funds and securities.  Vector failed to send any quarterly statements related to the investment pools at issue during the relevant period.

The rule also required Vector to undergo a surprise examination by an independent public accountant at least once a year, but Vector failed to do so for the investments pools at issue.

Finally, Vector’s alleged failure to adopt policies and procedures reasonably designed to prevent violations of the custody rule violated Rule 206(4)-7.

Failure to Supervise

Section 203(e)(6) of the Advisers Act authorizes the Commission to impose sanctions on an investment adviser if it “has failed reasonably to supervise” those subject to its supervision.  Here, Vector allegedly failed to reasonably supervise its employee Charles Fee in a manner that would have prevented his misappropriation scheme.

For this string of violations, the SEC censured Vector and imposed a rigorous compliance regime, including the appointment of an independent compliance consultant and reporting obligations.

Our Take

Several lessons arise from this case.  First, advisers have to keep a close watch on all of their client assets.  This was not a huge amount of money, and Vector notified its clients of the scheme and repaid them with interest.  But the SEC cares very much about custody rule breakdowns like this, and will punish violators and their supervisors.  Second, advisers have to be aware of the conduct of their investment adviser representatives and their clerical employees, especially if they have access to client funds.  Advisers should consider whether their routine procedures for check writing and other instances where money could leave the building are sufficiently rigorous.  If a firm’s principal cannot figure out that checks are being written directly to lower-level staff, think about whether checks should be double-signed by firm management.  Finally, Vector avoided a civil penalty here based on its cooperation, but the independent compliance consultant will not be much fun to pay for.  Investment advisers should get a handle on their custody rule obligations or they will pay, one way or the other.

Companies received at least a bit of data on this score this morning, when the SEC and DOJ released non-prosecution agreements addressing potential FCPA violations by Ralph Lauren Corporation in Argentina.

Underlying Facts

From approximately 2005 through approximately 2009, Ralph Lauren Argentina’s general manager and others allegedly approved bribe payments to be made to Argentine customs officials through a third party customs broker to assist in improperly obtaining paperwork necessary for Ralph Lauren products to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited goods, and to avoid inspection of products by Argentine customs officials.  These alleged payments were not exactly for the purpose of obtaining or retaining business, as is required for violations of the FCPA’s anti-bribery provisions, but at $568,000, the payments were too high to fit well into the FCPA’s exception for facilitating payments.

In addition to the customs-related payments, allegedly the Argentina general manager directly provided or authorized that several gifts be made to Argentine government officials to secure the importation of Ralph Lauren products.  The gifts to three different officials included perfume, dresses and handbags valued at between $400 and $14,000 each.

The SEC’s non-prosecution agreement also found that Ralph Lauren Corp. failed to devise and maintain a system of internal controls sufficient to provide reasonable assurances that such payments could be caught and prevented.

Ralph Lauren Corp.’s Reaction

From the government’s perspective, the important part of all of this was how the payments were discovered and what Ralph Lauren did in reaction to them.  As part of a general tightening of its corporate compliance programs, in 2010 the company adopted a new FCPA policy.  Several months later, Argentina employees reviewed the policy and raised concerns about the company’s customs broker in Argentina.  An internal investigation discovered the payments and gifts to Argentine. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the DOJ.

Upon discovering the bribes, Ralph Lauren Corp. fired its customs broker.  It also thoroughly reviewed and enhanced its pre-existing compliance program with (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees.

As part of its “extensive, thorough, real-time cooperation” with the staff of the SEC and DOJ, the company also agreed to

• produce documents and disclose information to the government;
• provide accurate translations of documents;
• make witnesses available for interviews; and
• conduct a risk assessment of certain other world-wide operations.

My Take

Another thing Ralph Lauren Corp. chose to do was cease retail operations in Argentina.  The company can obviously make its own decisions, and perhaps it did not view the reward from doing business there as worth the corruption risk.  But I hope withdrawal from Argentina was not a condition of the non-prosecution agreements.  The agreements themselves don’t say that it was, but it would be an unfortunate result if companies heard the message that staying out of global markets was a prerequisite for compliance with the FCPA.

Separately, this matter is a significant data point for those counseling for early disclosure to the government.  The company was subject to financial sanctions – $700,000 to the SEC and an $882,000 criminal penalty to the Justice Department – but escaped other penalties.  The penalties might have been much worse if the company had waited until it was forced to respond on the government’s terms.