Penny stock companies have been much in the news recently. They can be tough entities for law enforcement to look into given that their officers and directors are often not inclined to cooperate with government investigations. They can also be full of criminal activity. At the same time, Foreign Corrupt Practices Act enforcement is often focused on foreign companies, sometimes with tenuous jurisdictional theories. But what if a foreign penny stock company decided to start paying bribes abroad? More specifically, let me pose this hypothetical: Copperco, a copper mining company based in Vancouver trades on the Pink Sheets, known these days as the OTC Markets, and corruptly pays bribes to Mexican government officials to obtain a contract from the Mexican government. The company’s stockholders are entirely U.S. citizens, but its headquarters and principal place of business remains on the other side of the border in Canada. Copperco didn’t make use of any U.S. territory in planning or paying the bribes in question.
That is to say, the company has pretty much followed the recipe for FCPA violations. But I think only pretty much.
The FCPA applies to issuers, domestic concerns, and foreign persons acting in the United States. What are those?
Roughly, a domestic concern is any business that has its principal place of business in the United States or that is organized under U.S. or state laws. U.S. citizens and residents also count, as do directors, employees, agents and shareholders of issuers and domestic concerns. Foreign Persons includes natural and legal persons that are not issuers or domestic concerns. Officers, directors, employees, agents, and stockholders of foreign persons are also subject to the FCPA if they violate the FCPA while in the United States.
“Issuers” are what I want to discuss. Section 3(a)(8) of the Exchange Act defines an issuer generally as “any person who issues or proposes to issue any security.” But for FCPA purposes, an issuer is a company that has issued securities registered in the U.S. or that is subject to the reporting provisions of the Exchange Act. The bribery provisions apply to any issuer that has a class of securities registered pursuant to Exchange Act Section 12 or is required to file reports under Section 15(d). This includes companies issuing American Depository Receipts (ADRs) that are traded on a U.S. exchange.
Copperco’s Liability under the FCPA
Is Copperco liable under the FCPA for its illicit payments to the Mexican government officials? I don’t think so. Copperco isn’t a domestic concern. It hasn’t acted within the United States. Is it an issuer? Under Section 3(a)(8) of the Exchange Act it is. But the FCPA defines “issuer” more narrowly. Most penny stock companies have minimal, almost non-existent filing obligations. They generally don’t trade on a U.S. exchange and do not make periodic filings with the SEC. This analysis conveniently ignores the Canadian Corruption of Foreign Public Officials Act, but I can’t see a jurisdictional hook for the SEC or Justice Department to bring an FCPA case against Copperco. Do you?