GE Agrees to Pay $23.4 Million to SEC to Settle FCPA Charges
On July 27, 2010, the General Electric Company agreed to disgorge $18,397,949 in allegedly wrongful profits, plus $4,080,665 in pre-judgment interest and pay a civil penalty in the amount of $1 million, a total of over $23.4 million, to the Securities and Exchange Commission for alleged violations of the FCPA by its subsidiaries in connection with the United Nations Oil for Food Program. Without admitting or denying the allegations, GE and its subsidiaries, Ionics, Inc. (now GE Ionics, Inc.), and Amersham plc. (now GE Healthcare Ltd.), also consented to the entry of a permanent injunction against further violations of Sections 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934.
In the complaint1 filed in the United States District Court for the District of Columbia, the SEC charged GE and its subsidiaries with violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act ("FCPA"). The charges arose from transactions between 2000 and 2003 in which these GE subsidiaries are alleged to have paid kickbacks to the Iraqi Ministry of Health and Ministry of Oil in order to obtain contracts under the Oil for Food Program.
Marquette-Hellige GmbH and OEC-Medical Systems (Europa) AG Transactions
The complaint alleges that Marquette, a German company and a third-tier subsidiary of GE since 1998, had paid kickbacks in goods and services, valued at $1.2 million, to the Iraqi Ministry of Health in order to obtain contracts that generated $8.8 million in profits. Marquette's Iraqi agent is alleged to have offered an additional kickback of $250,000. The payments and the subsequent offer are alleged to have been made with the knowledge and approval of Marquette officers.
OEC-Medical, a Swiss company and a second-tier GE subsidiary, was also alleged to have paid a similar in-kind kickback, valued at approximately $870,000, to the Iraqi Ministry of Health to obtain a contract that resulted in a profit of $2.1 million. The complaint did not allege that the Marquette or OEC-Medical kickbacks were substantive violations of the FCPA's anti-bribery provisions,2 or that anyone at GE, the parent company, was aware of the subsidiaries' conduct.
Nycomed Imaging A.S. and Ionics Italba S.r.L. Transactions
Nycomed, a Norwegian subsidiary of Amersham plc., and currently a subsidiary of GE known as GE Healthcare AS, is alleged to have paid $750,000 in cash kickbacks from 2000 to 2002 to obtain similar contracts from the Iraqi Ministry of Health that resulted in profits of approximately $5 million. At the time, Amersham had American Depository Receipts ("ADRs") listed on the New York Stock Exchange. GE acquired Amersham in April 2004.
The SEC also alleged that Ionics Italba, an Italian subsidiary of Ionics, Inc., a US publicly listed company acquired by GE in 2005, had also made payments totaling $795,000 to the Iraqi Oil Ministry from 2000 and 2002. The contracts that Ionics Italba obtained are alleged to have earned $2.3 million in profits.
According to a GE press announcement,3 the Department of Justice has closed its investigation of these matters without bringing any charges. This is the first instance in which the Department has not initiated a corresponding criminal action under the Oil for Food program. Although it has in the past proceeded against companies for other violations in connection with the payment of kickbacks under the program, the Department has not brought FCPA anti-bribery charges based upon these kickbacks, presumably in recognition of the need to prove that a corrupt offer or payment of something of value was made to a government official.
Issues Raised by the SEC's Enforcement Action
The SEC complaint highlights several issues with respect to (1) successor liability, in particular, the compound liability under the FCPA's accounting provisions when one public company acquires another; (2) the basis on which the Commission continues to seek disgorgement for FCPA accounting violations, including the questionable causal relationship between accounting violations and profit; and (3) the perception of fairness in imposing full penalties on a company which, while technically liable as a successor entity, was not alleged to have authorized, directed or controlled any of the alleged underlying kickbacks.
It is generally accepted that an issuer will have civil successor liability for an acquired company's pre-acquisition violations of the FCPA's anti-bribery provisions or for an acquired public company's pre-acquisition violations of the Act's accounting provisions.4 In the GE case, although the SEC's complaint describes in detail the alleged kickbacks made to the Iraqi Ministries of Health and Oil by various subsidiaries, none of the alleged activity appears to have been in violation of the FCPA's anti-bribery provisions which prohibit corrupt payments to government officials, and thus could not provide the basis for any 30A charge by the Commission.
The SEC has sought disgorgement in a range of prosecutions of securities law violations, including those under the FCPA.5 In theory, disgorgement is not a penalty, but an equitable remedy by which the unjustly enriched are divested of their ill-gotten gains.6 Implicit in this concept is the requirement that there be some causal connection between unlawful conduct and the unjust enrichment.7 Although the SEC's complaint in the GE case alleges with particularity a connection between the kickbacks to Iraqi government ministries and various contracts that were thereby obtained, none of this conduct appears to be in violation of the anti-bribery provisions of the FCPA. Rather, the complaint charges violations of the FCPA's accounting provisions, including those requiring adequate internal controls, and implies that these violations were the causal links to the improper gains by GE's former and present subsidiaries.8 Here, it is difficult to see the causal connection between the false accounting and any charged conduct. The accounting entries relating to Iraqi transactions may, as alleged by the Commission, have been false, but the question remains [in this and in other Oil for Food cases] whether the recordation of a transaction may be considered the proximate cause of profit.
While the Commission's Litigation Release9 noted that it had "considered remedial acts promptly undertaken by GE and the company's cooperation with the Commission staff," the disgorgement sought appears to be the entire profit from the transactions. The civil penalty of $1,000,000 sought by the complaint is pursuant to 15 U.S.C. § 78u(d)(3), however, the computation under § 78u(d)(3)(B), which provides for computation of penalties for various "tiers" of conduct, is not specified. If the civil monetary penalty against GE was computed using the enhancements under the second or third tiers of § 78u(d)(3)(B), which apply only if there was a gain to a defendant as a result of a violation,10 a question may be raised as to whether the SEC's computation of civil penalties in Oil for Food FCPA accounting provision cases implicates the same causality concerns as in its application of the disgorgement principle.
1 SEC v. General Electric Co., No. 1:10-cv-01258 (D.D.C. 2010), available at http://sec.gov/litigation/complaints/2010/comp21602.pdf.
2 Kickbacks to Iraqi government agencies in connection with the Oil for Food Program, whether in cash or in kind, would not fall within the scope of the FCPA's anti-bribery provisions, which prohibit corrupt payments to government officials, not payments to governments or government agencies. Such kickbacks possibly could be prosecuted by the Department of Justice [although not by the SEC] under 18 USC § 1952 (Interstate Travel in Aid of Racketeering), or under the Mail or Wire Fraud statutes, 18 USC §§ 1341 or 1343, assuming that the requisite elements of those offenses were satisfied.
3 Press Release, GE Announces Settlement of Oil-for-Food Matter (July 27, 2010), available at http://www.genewscenter.com/Press-Releases/GE-Announces-Settlement-of-Oil-for-Food-Matter-29b8.aspx.
4 Criminal successor liability for FCPA accounting provision violations would require proof that the acquired issuer's violation had been willful, meaning that it had had knowledge that the consolidated financial reporting of a subsidiary was false. With respect to the anti-bribery provisions, the Department would be required to prove that the acquired entity had authorized, directed or controlled the criminal activity of its subsidiary.
5 See, e.g., SEC v. AGCO Corp., No. 1:09-cv-1865-RMU (D.D.C. 2009); SEC v. Titan Corp., No. 05-0411 (D.D.C. 2005); SEC v. ABB Ltd., No. 1:04-cv-01141 (D.D.C. 2004).
6 See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474 (2d Cir. 1996); SEC v. First City Financial Corp., Ltd., 890 F.2d 1215, 1230-31 (D.C. Cir. 1989).
7 See, e.g., First City, 890 F.2d at 1231 (only "property causally related to the wrongdoing" may be subject to disgorgement); SEC v. MacDonald, 699 F.2d 47, 54 (1st Cir. 1983) (en banc) (disgorgement applicable only to gains that are "causally related to the fraud"); SEC v. Bilzerian, 814 F.Supp 116, 121 (D.D.C. 1993) (holding that the amount sought to be disgorged "must proceed directly and proximately from the violation claimed and [must] not be attributable to some supervening cause") (emphasis in original).
8 If the SEC had alleged a violation of the FCPA's anti-bribery provisions -- assuming some evidence of the bribery of government officials in order to obtain business -- the causal connection between the bribery and subsequent profits would be more apparent.
9 SEC Litigation Release No. 21602 and Accounting and Auditing Enforcement Release No. 3159 (July 27, 2010), available at http://sec.gov/litigation/litreleases/2010/lr21602.htm.
10 Upon a proper showing, a court may, under the first tier of (3)(B), impose a civil monetary penalty on a corporation ranging from $50,000 to the gross amount of the pecuniary gain as a result of the violation. Under the second tier, the maximum penalty for a corporation is $250,000 or the gross amount of the gain as a result of the violation, provided the violation involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement. The third tier computation of a monetary penalty is either $500,000 or the gross pecuniary gain as a result of the violation if the violation directly or indirectly resulted in substantial losses or created a significant risk of losses to other persons. The SEC's complaint does not specify which tier was used to compute GE's civil monetary penalty.