Risk & Compliance

Flurry of SEC Cases Disclosed

With its fiscal year-end looming, the SEC disclosed charges and settlements against seven different organizations in two days.
Vincent RyanSeptember 27, 2019

As the U.S. government heads toward its September 30 fiscal year-end, the Securities and Exchange Commission has announced a flurry of lawsuit settlements and charges against seven different organizations in two days. Three of the cases involved wrongdoing in China, and two of them involved violations of the Foreign Corrupt Practices Act (FCPA).

Among the companies charged were Herbalife Nutrition; FCA US, a division of Fiat Chrysler; Quad/Graphics; and EpiPen maker Mylan. Here’s a summary of four of the cases.

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Cleaning Up

Westport Fuels Systems, a Vancouver, Canada, clean fuel technology company, and its former chief executive officer, Nancy Gougarty, agreed to pay more than $4.1 million to resolve charges that they violated the Foreign Corrupt Practices Act (FCPA) by paying bribes to a foreign government official in China.

Beginning no later than 2016, Westport, acting through Gougarty and others, engaged in a scheme to bribe a Chinese government official to obtain business and a cash dividend payment. It transferred shares of stock in Westport’s Chinese joint venture to a Chinese private equity fund in which the government official held a financial interest. The SEC said Westport concealed the identity of the Chinese private equity fund in its public filings, as well as in its books and records, by falsely identifying a different entity as the counterparty to the transaction. Gougarty caused Westport’s violations by circumventing Westport’s internal accounting controls and signing a false certification concerning the sufficiency of those controls, the SEC said.

Counting Cars

Michigan-based automaker FCA US LLC, and its parent company, Fiat Chrysler Automobiles N.V., were charged for misleading investors about the number of new vehicles sold each month to customers in the United States. FCA US and Fiat Chrysler Automobiles agreed to pay $40 million to settle the charges.

Between 2012 and 2016, FCA US-issued monthly press releases falsely reporting new vehicle sales and falsely touting a “streak” of uninterrupted monthly year-over-year sales growth, when in fact, the growth streak had been broken in September 2013, the SEC said. FCA US and Fiat Chrysler Automobiles included the press releases in their SEC filings.  The SEC found that FCA US inflated new vehicle sales results by paying dealers to report fake vehicle sales and maintaining a database of actual but unreported sales, which employees often referred to as a “cookie jar.”  In months when the growth streak would have ended or when FCA US fell short of other targets, FCA US dipped into the “cookie jar” and reported old sales as if they had just occurred.

Misleading Model

Herbalife Nutrition — a direct selling company with operations in over 90 countries — has agreed to pay $20 million to settle charges that it made false and misleading statements about its China business model in numerous U.S. regulatory filings over a six-year period.

Herbalife Nutrition paid $20 million for misleading investors.

Herbalife told investors that while direct selling was permitted in China, multi-level marketing was not, and that as a result, Herbalife’s business model in China differed from that used in other countries. Herbalife’s representations were untrue because it employed a very similar compensation model in China to the one it employed in every other country.

Herbalife purported to pay its service providers based on hours worked. However, to calculate service providers’ eligible compensation, Herbalife first calculated individual compensation using its worldwide system, which is based on downline purchases. Herbalife then made certain immaterial adjustments, and ultimately paid the service providers compensation in amounts almost the same as the amounts calculated using the worldwide system. The SEC found that Herbalife’s public statements concerning service provider compensation were false and misleading and deprived investors of the information they needed to fully evaluate the risk of investing in Herbalife stock.

Printer Promises

Quad/Graphics, a Wisconsin-based digital and print marketing provider, agreed to pay nearly $10 million to resolve charges that it violated the FCPA by engaging in multiple bribery schemes in Peru and China.

From at least 2011 to January 2016, Quad/Graphics’ Peruvian subsidiary, Quad/Graphics Peru S.A., repeatedly paid or promised bribes to Peruvian government officials to win sales contracts and avoid penalties, and improperly attempted to influence the judicial outcome of a dispute with the Peruvian tax authority. Quad/Graphics Peru S.A. also created false records to conceal transactions with a state-controlled Cuban telecommunications company, which were subject to U.S. sanctions and export controls laws. In addition, the order said that from 2010 to 2015, Quad/Graphics’ China-based subsidiary, Quad/Tech Shanghai Trading, used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.

Quad/Graphics agreed to pay $6.9 million in disgorgement, $959,160 in prejudgment interest, and a $2 million civil penalty.

Photo by Mark Boster/Los Angeles Times via Getty Images