Herbalife Nutrition Ltd (Herbalife) recently concluded a long running Foreign Corrupt Practices Act (FCPA) enforcement action with both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Herbalife settled with the DOJ via a Deferred Prosecution Agreement (DPA) and Information and with the SEC via a Cease and Desist Order (Order). The documents all help to more fully fill out the picture of the corruption at the organization which went for some 10 years between at least 2006 and 2016 and was originally disclosed in the Indictments of Jerry Li and Mary Yang in November 2019. The SEC also brought civil charges against Li at the time of his Indictment, via a Civil Complaint.
All in all, these documents provide a sordid tale of a company which did not give one whit about compliance, doing business ethically or even in a non-criminal manner. As for the reason, it was quite simple. According to the Information, by 2016, the Chinese business unit brought in some 20% of the company’s worldwide sales or approximately $860 million. Over the next few blogs posts, I will be exploring the Herbalife enforcement action in depth, data mining it for lessons learned and seeing what, if anything, it might say about where FCPA enforcement might be headed if there is a second term to the Trump Administration.
According to the DOJ Press Release, the company “agreed to pay total penalties of more than $122 million to resolve the government’s investigation into violations of the Foreign Corrupt Practices Act (FCPA). The resolution arises out of Herbalife’s scheme to falsify books and records and provide corrupt payments and benefits to Chinese government officials for the purpose of obtaining, retaining, and increasing Herbalife’s business in China. This includes a criminal penalty of over $55 million and approximately $67 million to be paid to the U.S. Securities and Exchange Commission (SEC) in a related matter.”
Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division, said in the Press Release, “By engaging in a decade-long scheme to falsify its books and records to conceal corrupt and other improper payments to Chinese officials and state-owned entities, Herbalife misrepresented important information made available to investors.” He went on to note, “The integrity of our financial markets depends on the timely and accurate disclosure of material information about companies’ operations. Today’s resolution reflects the department’s ongoing commitment to combating international corruption and ensuring that investors can trust the accuracy of the financial statements of publicly traded companies.”
According to Acting US Attorney Audrey Strauss of the Southern District of New York, “As admitted in the deferred prosecution agreement entered into today, Herbalife approved the extensive and systematic corrupt payments to Chinese government officials over a 10-year period to promote and expand Herbalife’s business in China. Moreover, in an effort to conceal this widespread corruption scheme, Herbalife maintained false accounting records to mischaracterize these improper payments as permissible business expenses. In addition to admitting its criminal conduct, Herbalife has agreed to pay combined penalties of more than $123 million. This case signifies this Office’s commitment to ensuring that companies operating in the United States do not gain an unfair advantage through corruption and illegal bribes of foreign officials.”
There is no doubt Herbalife was engaged in a fraud on the market and US investors as the company falsified its Sarbanes-Oxley (SOX) sub-certifications in connection with the company’s quarterly and annual filings from at least 2008 until 2017. Furthermore, knowledge of the company’s illegal action went right up to the top of the organization, including senior management.
The bribery scheme itself was incredibly straight-forward. According to the DOJ Press Release, “between 2007 and 2016, Herbalife knowingly and willfully conspired with others in a scheme to falsify its books and records and provide corrupt payments and benefits to Chinese government officials. Herbalife carried out the scheme for the purpose of obtaining, retaining, and increasing Herbalife’s business in China by, among other things, (1) obtaining and retaining certain direct selling licenses for its wholly-owned subsidiaries in China (Herbalife China); (2) improperly influencing certain Chinese governmental investigations into Herbalife China’s compliance with Chinese laws; and (3) improperly influencing certain Chinese state-owned and state-controlled media for the purpose of removing negative media reports about Herbalife China.”
Many of the numbers cited in the Information and Order are eye-popping. Per the Order, “Between 2012 and 2016, Herbalife reimbursed External Affairs employees for over $7.2 million in questionable External Affairs meal and gift expenditures in connection with Chinese officials and media, including state-owned media officials. Herbalife obtained approximately $58.7 million in benefit based on the conduct described above.” When a Board member questioned this amount of spend, he was informed by the Head of Internal Audit “that “the findings are the typical issues in these audits” and are within “tolerance.””
Most interestingly, Herbalife was not required to sustain a monitor. You must give credit to Herbalife’s FCPA counsel for getting them one heck of deal. The most important thing in any negotiation with the DOJ is credibility. One can only surmise that Herbalife’s FCPA counsel brought credibility through its interactions with the DOJ to bring the company the superior result it achieved.
Hedge fund guru Bill Ackman made a notoriously famous short selling bet against Herbalife. He accused the company of being a pyramid scheme. Herbalife fought back ferociously saying it was a legal multi-level marketing company. Pyramid schemes are illegal, while legal multi-level marketing is, well, legal. Ackman also said that Herbalife was the most well-run pyramid scheme in the world, implying that the fraud they perpetrated was far-reaching and extremely deceptive. It turns out Ackerman was right that an illegal scheme was underlying Herbalife, but that illegal scheme was an entire business unit based on bribery and corruption in China.
Tomorrow, the bribery schemes and numbers.
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