Foreign Issuer and Its Subsidiaries Hit with Substantial Penalties Following Voluntary Disclosure and "Extraordinary" Cooperation in Foreign Bribery Case

International Alert

On July 6, 2004, to resolve an investigation involving both civil and criminal violations of the anti-bribery and accounting provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”), ABB, Ltd., a Swiss-based foreign issuer (“ABB”), agreed to a settlement requiring it to disgorge $5.9 million in allegedly ill-gotten earnings and pay a $10.5 million civil penalty to the Securities and Exchange Commission (“SEC”). At the same time, two of ABB’s subsidiaries, ABB Vetco Gray, Inc. (U.S.), and ABB Vetco Gray (U.K.) Ltd., each agreed to plead guilty to a related two-count felony information, and were each assessed $5.25 million criminal fines. The SEC’s $10.5 million civil fine against the parent was deemed satisfied by the subsidiaries’ payment of the criminal fines.

These amounts represent an unprecedented sanction in a case involving voluntarily disclosure of misconduct to the SEC and the U.S. Department of Justice (“DOJ”), particularly as ABB was acknowledged to have fully cooperated in the ensuing investigation, and its subsidiaries were cited for their “extraordinary disclosure and coordination of the joint investigation.” The fines are also the largest levied to date against foreign persons under the FCPA.

In addition to the fines assessed, the subsidiaries entered into a continuing cooperation agreement and agreed to waive the attorney/client privilege for counsel’s interviews of employees related to the offenses at issue. ABB separately agreed to retain an independent consultant to review the company’s FCPA compliance policies and procedures. This latter provision mirrors similar requirements in the resolutions of recent investigations against Schering-Plough and Syncor.

Alleged Pattern of Foreign Bribery

ABB is a global provider of power and automation technology. According to the SEC’s complaint, ABB’s U.S. and foreign-based subsidiaries made illicit payments totaling over $1.1 million to government officials in Nigeria, Angola, and Kazakhstan between 1998 and 2003 to influence acts and decisions by these officials related to ABB’s subsidiaries’ acquisition and retention of business. According to the SEC complaint, at least $865,726 of the payments were made after ABB became a reporting company in the U.S. in April 2001, and were made with the knowledge and approval of management-level personnel of the relevant subsidiaries.

The profits ABB will disgorge in the SEC settlement represent actual profits from business allegedly obtained or retained through illicit payments in Nigeria, Angola, and Kazakhstan. These included oil and gas projects in Nigeria obtained by ABB’s subsidiaries by giving cash and gifts (directly and through intermediaries) to officials of the Nigerian National Petroleum Investment Management Service (NAPIMS); similar projects in Angola obtained by providing gratuities to Angolan government engineers responsible for making technical evaluations, and then covering up for those gratuities with elaborate accounting schemes (despite the warning of in-house counsel that such payments would amount to a “red flag” and potential FCPA violation); and payments made through subsidiaries to government officials in Kazakhstan for sham consulting services.

The criminal information filed against the Vetco Gray subsidiaries was limited to a pattern of violations in Nigeria between 1998 and 2001. The agreed-to statements of facts in support of the subsidiaries’ pleas detail payments of bribes to NAPIMS and other Government officials in exchange for projects, competitors’ confidential business information, and to secure favorable consideration for Vetco Gray bids. These bribes took the form of sham consulting contracts, cash payments, in-kind gifts of automobiles, electric generators, country club memberships, limousine service, housing and household maintenance expenses, payment of cell phone bills, and shopping excursions for officials during their U.S. visits. Jurisdiction over the UK subsidiary was based on section 78dd-3 of the FCPA, which covers acts taken with U.S. territory.

Voluntary Disclosure Fails to Avoid Significant Penalties, But Provides Measure of Assurance in M&A Context

These settlements are another in a growing line of FCPA matters arising in the mergers and acquisitions context, following on the recent Lockheed-Titan negotiations (where the acquisition was canceled due to Titan’s inability to dispose of FCPA allegations resulting from pre-merger due diligence and subsequent disclosure to the U.S. government) and the Syncor case. ABB’s voluntary disclosure in late 2003 reportedly derived from due diligence performed by the companies in advance of an agreement between ABB and a consortium to sell the subsidiaries involved. Resolution of the potential liability and completion of internal due diligence were reportedly conditions of the Purchase and Sale Agreement, announced in January 2004, and were expressly acknowledged in the plea agreements entered into by ABB’s subsidiaries.

The penalties against the companies are significant, despite the voluntary disclosure and evident cooperation with the U.S. government investigation. The calculations in the DOJ plea agreements suggest that the fines are in the middle of the potential penalty range, suggesting that failure to cooperate could have resulted in still higher penalties.

Under the plea agreement, DOJ agreed not to file criminal charges after the acquisition for any prior payments or accounting irregularities that were disclosed to the U.S. government as a result of the joint internal investigation. The agreement does not foreclose future criminal charges for misconduct not disclosed, or against individuals associated with bad acts, but does protect the acquiring entity against liability for the acts covered in the plea agreements.

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