- SEC Flexes FCPA Muscle: Is Change Afoot in the Enforcement Playing Field?
- August 31, 2009 | Authors: Howard C. Vick; Charles Wm. McIntyre; Timothy E. Flanigan
- Law Firms: McGuireWoods LLP - Richmond Office ; McGuireWoods LLP - Washington Office ; McGuireWoods LLP - Richmond Office
For the last several years, the “big dog” in the Foreign Corrupt Practices Act (FCPA) hunt has been the Department of Justice (DOJ), which has made anticorruption enforcement a key initiative and turned "FCPA" into a household term among white collar practitioners, corporate counsel and compliance professionals around the world. The Securities and Exchange Commission (SEC) has not lacked for involvement or enforcement power during the recent FCPA surge, but has been a much less visible counterpart to the DOJ. That appears to be changing.
On July 31, 2009, the SEC filed a settled enforcement against Nature’s Sunshine Products, Inc. (NSP), its CEO and former CFO, in the Central District of Utah where the company is headquartered. The charges relate to cash payments made in 2000 and 2001 by a Brazilian subsidiary of NSP, a manufacturer of nutritional and personal care products. According to the SEC, the payments made to Brazilian customs officials facilitated the import of unregistered products into Brazil, and involved falsification of NSP’s books and records to conceal the payments.
What’s notable about the settlement – which was consented to without admission or denial of the allegations of the complaint and involves a civil penalty of $600,000 against NSP, and of $25,000 each against the CEO and former CFO – is the theory by which the SEC pursued the individuals involved.
The complaint alleges that the CEO (who at the time of the payments was COO and a member of the board) and former CFO violated the books and records and internal controls provisions of the FCPA solely in their capacities as “control persons.” Nowhere does the complaint allege that either of them engaged in any affirmative act related to the improper payments, nor even that they had any awareness of the payments. Rather, it asserts that they are liable because, in their roles as corporate officers, they were charged with supervision of senior management and policies regarding NSP’s international operations. This included direct or indirect oversight of key management personnel charged with making and keeping accurate books and records, and devising and maintaining an adequate system of internal controls. By failing to do so, as evidenced by the payments themselves and associated falsification of records, they bore ultimate responsibility for the failures and affirmative misdeeds of personnel below them in the organization.
This appears to be the first time that the SEC has charged an individual under Section 20(a) of the Exchange Act in the FCPA context. Section 20(a) is not a new tool, and is commonly used in private securities litigation. However, its use to pursue individuals in Nature’s Sunshine breaks new ground.
While the DOJ has aggressively expanded its reach under the FCPA in the last several years, particularly against non-U.S. defendants, the focus has primarily been on corporate defendants or individuals directly linked to the improper inducements involved in the case. The control person theory of liability forwarded by the SEC in Nature’s Sunshine is an entirely different animal, and substantially raises the stakes for officers and directors who are now faced with the prospect of regulatory and law enforcement scrutiny of their leadership, even in situations where they lack knowledge of or involvement in activities several layers of management below them.
Commentators have described the Nature’s Sunshine settlement as posing a “new and disturbing liability threat to corporate officials,” who in the near future may be facing off with an increasingly robust SEC investigative force. Some have even stated that this case “raises the disturbing spectre of strict liability for executives.”
Fast on the heels of the Nature’s Sunshine settlement came an Aug. 5, 2009, speech by the new director of the SEC’s Division of Enforcement, Robert Khuzami, indicating that the SEC intends to make its presence in the FCPA enforcement environment much more pronounced. Khuzami, addressing the New York City Bar, spoke of a “reinvigoration of our core mission of investor protection,” and the embrace of new enforcement principles including to:
- "[F]ocus on cases involving the greatest and most immediate harm and on cases that send an outsized message of deterrence”;
- Move swiftly to avoid “[l]ong gaps between conduct and atonement”; and
- Build “strong cases so that defendants settle quickly on the Commission’s terms or face a trial unit armed with compelling evidence.”
As part of this initiative, Khuzami announced the creation of five “specialized units dedicated to particular highly specialized and complex areas of securities law.” Among these is an FCPA unit that “will focus on new and proactive approaches to identifying violations . . . including being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations.”
For individuals with an office in the executive suite or a seat around the board table, Khuzami’s statements and their proximity in time to the Nature’s Sunshine settlement should send the clear message that FCPA enforcement is entering a new phase where the government is willing to use new pressure points to achieve its enforcement priorities quickly and under a banner headline.