- SEC Announces First Non-Prosecution Agreement Involving FCPA Violations
- April 29, 2013 | Author: Mary P. Hansen
- Law Firm: Drinker Biddle & Reath LLP - Philadelphia Office
On April 22, 2013, the Securities and Exchange Commission (SEC) announced it had entered into a Non-Prosecution Agreement (NPA) with Ralph Lauren Corporation under which the company agreed to disgorge approximately $700,000 in connection with certain unlawful payments made by a foreign subsidiary to government officials in Argentina from 2005 to 2009. This is the first time the SEC has used a NPA for violations of the Foreign Corrupt Practices Act (FCPA).
According to the NPA, Ralph Lauren Corporation's Argentine subsidiary paid “bribes,” i.e., payments in violation of the FCPA, to government and customs officials to improperly secure the importation of Ralph Lauren Corporation's products in Argentina. The purpose of the unlawful payments, made through a “customs broker,” was to obtain entry of Ralph Lauren Corporation's products into the country without certain paperwork and to avoid certain inspections by customs officials. The unlawful payments to Argentine officials totaled $593,000 during a four-year period.
The NPA further notes that the unlawful payments occurred during a period when Ralph Lauren Corporation lacked meaningful anti-corruption compliance and control mechanisms over its Argentine subsidiary. The company discovered the misconduct in 2010 as a result of measures it adopted to improve its worldwide internal controls and compliance efforts, including implementation of a FCPA compliance training program in Argentina. The NPA notes that the SEC determined not to charge Ralph Lauren Corporation with violations of the (FCPA) in light of several factors including: (1) the company's prompt reporting of the violations on its own initiative, (2) the completeness of the information it provided, and (3) the company’s extensive, thorough, and real-time cooperation with the SEC's investigation. According to the SEC, Ralph Lauren Corporation's cooperation saved the Commission “substantial time and resources.”
In parallel criminal proceedings, the Justice Department also entered into a Non-Prosecution Agreement with Ralph Lauren Corporation under which the company will pay an $882,000 penalty.
NPAs are part of the Enforcement Division’s Cooperation Initiative announced in 2010. Prior to 2010, the SEC did not have the ability to enter into NPAs or Deferred Prosecution Agreements (DPAs). The purpose of the Cooperation Initiative was to give the Commission the flexibility to incentivize and reward cooperation while at the same time ensuring that cooperators are held accountable for their misconduct. Since 2010 and prior to this instance, the Commission has entered into three NPAs and two DPAs It is likely that the SEC will continue to use DPAs and NPAs particularly in connection with FCPA matters given the factual complexity of the cases and the difficulty in discovering violations, which almost always occur outside the U.S.
The Ralph Lauren NPA provides useful guidance as to what the SEC will consider in assessing corporate cooperation by detailing the significant actions that Ralph Lauren Cooperation took in connection with the parallel investigations. According to the NPA, Ralph Lauren Corporation:
- reported preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts:
- voluntarily and expeditiously produced documents;
- provided English language translations of documents to the staff;
- summarized witness interviews that the company's investigators conducted overseas; and
- made overseas witnesses available for staff interviews in the U.S.
The NPA also notes that Ralph Lauren Corporation entered into tolling agreements during the staff’s investigation. The statute of limitations with respect to the 2005 conduct, the earliest conduct charged, would have likely run in 2010, just as the company reported the violations to the SEC.
The Ralph Lauren NPA provides several other takeaways. First, the Ralph Lauren Corporation agreed to enter into the NPA “without admitting or denying liability.” While the NPA also contains the standard provision prohibiting the Ralph Lauren Corporation from “denying, directly or indirectly, the factual basis of any aspect of the” NPA, the inclusion of the “without admitting or denying language” seems to run counter to the policy announced by the Enforcement Division in January 2012 to eliminate the use of “neither admit nor deny” language from settlement documents involving parallel (i) criminal convictions or (ii) NPAs or DPAs This may suggest that the “without admitting or denying liability” language remains negotiable.
Second, under the agreement, the Company must seek the staff’s prior approval of the contents of any press release concerning the NPA. Third, while the SEC emphasizes the Ralph Lauren Corporation’s enhanced compliance program and successful implementation of the enhancements, it also highlights that the Ralph Lauren Corporation has ceased retail operations in Argentina and is in the process of winding down all operations there. It is possible Ralph Lauren Corporation’s decision to close operations in Argentina was a significant factor in the SEC’s decision to use a NPA in this circumstance. Fourth, notably, the NPA does not require the Ralph Lauren Corporation to retain an independent consultant to review its policies and procedures and to prepare a report to the staff regarding any findings. The financial burden of independent consultant “reviews” is often significant. The staff’s willingness to forego such an undertaking demonstrates the value of taking quick and full remedial action during an investigation.
Fifth, the NPA also refers to “gifts” such as perfume, dresses and handbags valued at between $400 and $14,000, which were provided to three different government officials during the relevant time. This underscores the importance of having policies and procedures that extend beyond prohibiting monetary payments to government officials. Finally, the NPA requires that the Ralph Lauren Corporation “to pay disgorgement obtained or retained as a result of the violations discovered during the investigation.” In its press release, the SEC notes that Ralph Lauren Corporation will “disgorge” $700,000 in illicit profits and interest. The disgorgement, however, appears to be the total amount of unlawful payments plus interest made rather than any profit earned as a result of the unlawful payments. Disgorgement is frequently difficult to calculate, especially in FCPA cases. It appears that rather than tracing the unlawful payments to profits, the SEC was satisfied to use the amount of unlawful payments as a proxy for disgorgement. Moreover, the low monetary value of the unlawful payments may have also contributed to the SEC’s decision to enter into a NPA in this instance.
 The agreement with the Justice Department stands as yet another example of DOJ’s position that senior management be intricately involved in anti-corruption compliance efforts. More specifically, the agreement requires that Ralph Lauren’s “directors and senior management provide strong, explicit, and visible support and commitment to its corporate policy against violations of the anti-corruption laws and its compliance code.” Further, the agreement requires that the company “assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of the Company’s anti-corruption compliance code, policies and procedures.”
 In December 2010, the SEC entered into a NPA with Carters Inc. in connection with a financial fraud perpetrated by a former Executive Vice President of Carters. The NPA focused on the isolated nature of the misconduct, Carters’ prompt self-reporting, extensive cooperation and remedial actions. In December 2011, the SEC entered into DPAs with Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae) in connection with certain misleading statements claiming that the companies had minimal holdings of higher-risk mortgage loans including subprime loans. The NPA focused on Freddie Mac’s and Fannie’s Mae’s cooperation in connection with the SEC’s litigation against former senior executives.
 In May 2011, the SEC entered into a DPA with Tenaris S.A. in connection with FCPA violations. The DPA required Tenaris to disgorge approximately $5.4 million. The DPA focused on Tenaris’ early self-reporting, extensive cooperation and remedial actions. In July 2012, the SEC entered into a DPA with Amish Helping Fund in connection with certain misrepresentations and omissions in offering documents. Again, the DPA focused on Amish Helping Fund’s immediate and complete cooperation, its willingness to offer investors a right of rescission and its remedial efforts.
 The Amish Helping Fund DPA entered into on July 18, 2012, does not contain the “without admitting or denying” or “neither admitting nor denying” language.