The FCPA's New Frontier

China-based entities have previously been involved in FCPA enforcement actions.

For example, in March 2010, DaimlerChrysler China Ltd. was charged in connection with the Daimler enforcement action and agreed to a deferred prosecution agreement. (See here). In May 2005, DPC (Tianjin) Co. Ltd., a Chinese subsidiary of U.S. based Diagnostic Products Corporation ("DPC"), was charged in connection with the DPC enforcement action. (See here).

However, to my knowledge, a China-based issuer has never been the focus of an FCPA inquiry.

I've noted for a few years now that it is only a matter of time. See here - "Why Compliance with the U.S. Foreign Corrupt Practices Act Matters in China" and here "Welcome to the Club".

The time has come.

Last week, as first reported by Joe Palazzolo (Wall Street Journal - Corruption Currents), Rino International Corp., a Dalian, China-based issuer (here), disclosed in an SEC filing (here) as follows:

"The Company has been notified by the Staff of the Securities and Exchange Commission (the “SEC”) that it is conducting a formal investigation relating to the Company’s financial reporting and compliance with the Foreign Corrupt Practices Act for the period January 1, 2008 through the present. The Company is cooperating with the SEC’s investigation. It is not possible to predict the outcome of the investigation, including whether or when any proceedings might be initiated, when these matters may be resolved or what if any penalties or other remedies may be imposed."

The same day, Rino announced (here) that its shares have been delisted from the NASDAQ exchange.

The SEC's inquiry and Rino's delisting appear to be a result of a scathing November research report by Muddy Waters LLC Research Report on the company (see here).

Whether the SEC's FCPA inquiry is focused on books and records and internal controls issues, or anti-bribery issues as well, with more China-based companies listing shares on U.S. exchanges, and thus becoming subject to the FCPA, the Rino inquiry may represent a new frontier of FCPA enforcement.

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Understanding Issuers

The FCPA (both the antibribery provisions and the books and records and internal control provisions) apply to issuers.

That was easy.

What is not so easy is figuring out just which companies are issuers. The FCPA defines an issuer as when a company "has a class of securities registered" with the SEC pursuant to the securities laws or when a company is "required to file reports" with the SEC pursuant to the securities laws.

These terms can be confusing, particularly when talking about non-U.S. based companies.

In connection with both the BAE and Technip matters, there was some mention of a potential SEC angle despite the fact that neither company currently has shares traded on a U.S. exchange.

Miller & Chevalier's release in connection with the BAE matter (here) states:

"The U.S. pleadings detail significant issues with BAE’s compliance program and internal controls, yet the pleadings did not allege substantive violations of the FCPA’s accounting provisions, and the Securities and Exchange Commission (“SEC”) has yet to bring an action against BAE. The absence of SEC charges may reflect a lack of SEC jurisdiction because BAE was not subject to the registration and reporting requirements of the Securities and Exchange Act during the relevant time period, which is required for FCPA accounting provision jurisdiction. According to press accounts, however, the SEC may have investigated BAE in connection with the al-Yamamah arms sale. The status of this possible investigation remains unclear."

Technip's release (here) speaks of both the DOJ and SEC involvement in resolution of that matter.

Enter James Tillen (here), one of the co-authors of the Miller & Chevalier piece, to help explain SEC jurisdiction in these two similar, yet different matters.

Here is what he had to say.

"We specifically note in the Client Alert that the absence of an SEC resolution was likely due to the fact that the SEC did not have jurisdiction: 'The absence of SEC charges may reflect a lack of SEC jurisdiction because BAE was not subject to the registration and reporting requirements of the Securities and Exchange Act during the relevant time period, which is required for FCPA accounting provision jurisdiction.' Press accounts reported that the SEC was investigating at some point so it was worth raising the question of why no SEC resolution (especially since the DOJ effectively brought an internal controls case).

I looked quite closely at the issue of whether BAE was an issuer and concluded the following:

The definition of issuer includes any entity “which has a class of securities registered pursuant to” Section 12(g) of the Securities Exchange Act of 1934 or “which is required to file reports under” Section 15(d) of the Securities Exchange Act. 15 U.S.C. §§ 78dd-1(a), 78c(a)(8), 781, 78o(d). During the relevant time period, BAE Systems plc’s ADRs were sold in the United States Over The Counter (“OTC”), and not on any national securities exchanges, such as the NYSE, which require registration with the SEC. In fact, BAE has filed for an exemption from registration under Section 12(g) of the Exchange Act since at least 2002. See List of Foreign Issuers That Have Submitted Information Under the Exemption Relating to Certain Foreign Securities, SEC Release No. 34-45855 (May 1, 2002) (BAE listed as British Aerospace plc), SEC Release No. 34-49846 (June 10, 2004), and SEC Release No. 34-51893 (June 28, 2005). Pursuant to this exemption, BAE must provide information to the SEC on a yearly basis by completing Form F-6. See Rule 12g3-2. However, BAE is exempt from the annual and other periodic reports under Section 15(d) of the Act. See 17 C.F.R. § 240.15d-3. Based on these considerations, it would appear that BAE is not subject to the registration and reporting requirements of the Securities Exchange Act and therefore not an “issuer” for purposes of FCPA jurisdiction."

In contrast, Tillen stated that Technip "had American Depository Shares listed on NYSE from at least 2001 until 2007. Thereafter, it delisted (see here and here) and now only trades on the OTC (over-the-counter) market. When it was listed, Technip was an 'issuer' for purposes of the FCPA."

*****

Thanks for the explanation James.

As my mentor was fond of saying ... "at least now I am confused on a higher level."

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Welcome to the Club

Initial Public Offerings (IPO's) were back in the news this week. Leading the way was Shanda Games Ltd. By raising $1.04 billion, Shanda's IPO was the largest since April 2008.

Shanda is a Beijing, China based online computer game company and its listing is the latest example of a foreign issuer (frequently a Chinese company) electing to trade its shares (or a portion of its shares) on a U.S. Exchange.

By becoming an "issuer" Shanda becomes subject to the FCPA.

Presumably, Shanda had experienced securities counsel advising it on its listing and the consequences that flow from such a listing. If not, and if you are listening, welcome to the club Shanda.

Your potential FCPA exposure is not just limited to the books and records and internal control provisions. The FCPA's anti-bribery provisions also apply to you.

Don't take my word for it, listen to the Department of Justice.

In 2006, the Department of Justice announced an FCPA enforcement action against Statoil ASA, a Norwegian company, for making improper payments to Iranian foreign officials - the first time DOJ brought criminal FCPA charges against a non-U.S. company. (See here for the deferred prosecution agreement).

The U.S. prosecuting a Norwegian company for making improper payments to Iranian foreign officials ... how did that happen?

Statoil had shares traded on a U.S. exchange and was thus an "issuer" subject to the FCPA.

In announcing the settlement, the DOJ had this to say - “Although Statoil is a foreign issuer, the Foreign Corrupt Practices Act applies to foreign and domestic public companies alike, where the company’s stock trades on American exchanges" (see here).

And this - “This prosecution demonstrates the Justice Department’s commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope.”

The Statoil FCPA enforcement action is certainly not the only FCPA enforcement action against a foreign issuer. In fact, the largest FCPA enforcement action ever was settled in December 2008 involving Siemens AG, a German company (see here and here).

Despite these, and other, enforcement actions, there is still a common misperception that the FCPA is "the law that applies to only U.S. companies."

With the IPO market showing signs of life again, with foreign companies (like Shanda) increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase.

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