How To Disclose A Possible FCPA Violation

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discloseThe internet is filled with articles written by lawyers, consultants and government officials on when a company should disclose a potential FCPA violation or a government FCPA investigation.  It is not an easy question and lawyers often disagree on when a matter is “material” for a publicly-traded company.

The disclosure has major ramifications for a company.  I am amazed at how quickly the plaintiff’s bar reacts to an FCPA violation disclosure (as well as other disclosures).  Within weeks of a disclosure, I have seen as many as 23 separate shareholder derivative lawsuits filed by plaintiff’s firms against the company, its board and senior management.

Collateral litigation is a fact of life for companies disclosing FCPA violations, and depending on the merits, such cases, if they survive a motion to dismiss, invariably cost the company millions of dollars.  In some cases, the cost of the collateral litigation can exceed the costs of any fines or penalties paid to the government.

Assuming that a company has decided to disclose a possible FCPA violation or a government FCPA investigation, the question becomes how to make such a disclosure.  Some companies disclose an investigation in their quarterly reports, or even annual reports.  A few companies have made disclosures separately in a major event type of disclosure.  Whenever such a disclosure is made, the question is how to make it.

The disclosure itself can be comprehensive, bare bones of something in between.  The important point is that the disclosure should not omit any important or material facts.  Nor should the disclosure fail to pass the test for completeness, meaning that a partial statement of a set of facts is risky and will only fan the flames of shareholder derivative litigation.

When crafting such a statement, I stick to the Jack Webb (of Dragnet fame) standard – “Just the facts Mam,” or “How is that Mam?”).  A disclosure statement should be based on stated facts and omit any terms which reflect an opinion, judgment or characterization of the events.  Another way to describe this approach is – for each sentence there should be a citation to an available document, event, or statement.  That is a good rule by which to restrict the substance of the statement to the facts.disclose2

Some basic points to remember include:

  1. Nature of potential FCPA violations: A company’s description of the potential FCPA violations should be limited to a general description of the possible violations.  Whether the violations involve bribes through gifts, meals, travel and entertainment expenses, or for foreign government contracts is not relevant nor should it be part of any specific disclosure.  In addition, the disclosure should never include any judgment as to the occurrence of an actual violation.  That issue is always up to subsequent judgment and may result in inconsistent statements in such disclosures.
  2. Scope of Internal Investigation: In describing an investigation, there are two practical issues which frequently come up:  How to describe the focus and scope of the investigation and what geographic areas to identify, if any, as part of the internal investigation?The focus of the investigation should be generally described as “improper payments” relating to certain company “practices” in a specific country or region, depending on the facts of the internal investigation.  Sometimes an internal investigation reveals different means by which bribery schemes are carried out.  As a result, the company should retain flexibility when describing the nature and scope of the investigation.  It does not pay to disclose a specific category of potential violations and then subsequently expand the description to include other kinds of potential violations.  Similarly, the geographic focus of a potential violation should be done only when the company is sure that the investigation will be limited to that area or country, or the company may end up amending its disclosure to reflect a change in geographic focus.  It is important to remember that there are also differences between an “investigation” and a company “spot checking” or conducting audits of its compliance in various areas outside a geographic area where an ongoing investigation is occurring.  It is important to remember this distinction when crafting a statement.

ccoandia3. Possible impact to company: By definition, the pending internal investigation is material.  That does not mean the results of the investigation – the amount of any eventual fine or penalty will be material (unless it turns out to be nothing or very low in comparison to company expectations).  The company has to be careful to preserve the accuracy of its disclosure by mentioning that the investigation may result in fines, penalties, disgorgement, and other possible sanctions such as debarment or suspension.  However, the company should never characterize its statement on this issue as “large,” “small” or “non-material” unless it knows with certainty that the consequences of such an investigation will not result in any “material” harm to the company.  That is a bold prediction to make and one that could come back to haunt a company in any collateral litigation (or possibly with the government).

Topics:  Anti-Corruption, Compliance, Derivative Suit, Disclosure, FCPA, FCPA Guidance, Investigations, Materiality, Shareholders, Voluntary Disclosure

Published In: General Business Updates, Finance & Banking Updates, International Trade Updates, Securities Updates

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.

© Michael Volkov, The Volkov Group Law Firm | Attorney Advertising

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