Even Domestic Bribery Falls within the SEC’s Jurisdiction

by Brooks Pierce
Contact

[author: David Smyth

Much ink has been spilled in recent years discussing the SEC’s and Justice Department’s focus on the Foreign Corrupt Practices Act, a law that prohibits paying bribes to foreign government officials. While the federal criminal code has provisions prohibiting bribery of domestic public officials, see 18 U.S.C. § 201, domestic bribery has rarely been a focus for the SEC. But if you’re a publicly traded company, you can’t forget the accounting provisions of the federal securities laws, because they will catch you.

FalconStor Software learned as much on June 27th when the SEC brought a settled action against it for the commercial bribery of, not public officials, but a subsidiary of J.P. Morgan Chase. FalconStor is a data storage company that sought to obtain and expand the services bought by the bank. According to the SEC’s complaint, FalconStor did not rely on the quality of its data storage solutions to win those contracts, but instead paid about $430,000 in bribes to three bank executives and their relatives. These included cash, FalconStor options and restricted stock, gift cards, golf club fees, and “lavish” entertainment, including gambling in Macau and Las Vegas casinos.

In a sense, no statutes explicitly give the SEC jurisdiction over this conduct, but public companies always have an obligation to tell investors the full story about their finances. If they’re paying bribes to maintain business with their customers, they may have to say as much. In this case, FalconStor had touted its relationship with JP Morgan in earnings calls and releases as proof of the strength of its products and its strides in moving to direct sales rather than relying on third-party distributors. They didn’t mention the bribes. In its settled complaint, the SEC charged that FalconStor should have brought those up in earnings releases filed on 8-Ks in 2008 and 2009. As it happened, “the CEO’s misleading statements inflated the price of FalconStor’s stock, which declined by over 22% following the Company’s disclosure that the CEO had been involved in improper payments and had resigned.” The omissions won FalconStor a claim under Sections 17(a)(2) and (3) of the Securities Act.

Another of the claims involved a statute that is part of the FCPA, but really has quite broad application.  Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act address corporate books and records and internal controls, and were enacted along with the anti-foreign bribery provisions of the FCPA in 1977. They do not require that only foreign bribes be recorded accurately; they apply to all sorts of corporate transactions. These subsections require issuers to (1) keep books and records that reflect their transactions and dispositions of their assets (Section 13(b)(2)(A)), and (2) maintain a system of internal accounting controls sufficient to ensure that transactions: (i) are executed in accordance with management’s authorization; and (ii) are recorded in a way to allow preparation of financial statements in conformity with GAAP (Section 13(b)(2)(B)).

The FalconStor case is not unusual in the SEC’s use of Section 13(b)(2) outside the foreign bribery context, but it is a useful reminder that these disclosure provisions can catch a lot of misconduct that issuers might not consider to be part of the SEC’s jurisdiction.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Brooks Pierce | Attorney Advertising

Written by:

Brooks Pierce
Contact
more
less

Brooks Pierce on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!