SEC Settles FCPA Books and Records and Internal Controls Action

by Dorsey & Whitney LLP

The SEC moved past virtual currencies for the moment, returning to a long established staple – the Foreign Corrupt Practices Act. The Commission filed a settled books and records action involving an Israeli based firm whose shares are traded on the Tel Aviv Stock exchange and NASDAQ. In the Matter of Elbit Imaging Ltd., Adm. Proc. File No. 3-18397 (March 9, 2018).

The action centers around Plaza Centers NV, an indirect, majority owned subsidiary of Elbit, incorporated in the Netherlands, and two transactions. Plaza’s shares are listed on the London, Warsaw and Tel Aviv Stock Exchanges. The firm is a Central and Eastern European developer of shopping and entertainment centers. Prior to 2014 Executive A, who passed away in 2016, was the CEO of Elbit and owned 50% of its equity. He also served as the Executive Director of Plaza and had a seat on the board of each firm.

One transaction involved the Casa Radio Project. In 2006 Plaza sought to be included in a real estate development in Bucharest, Romania called Casa Radio Project. Executive A directed Plaza to enter into a consultancy contract for assistance with the project in 2006. The consultant was to secure an invitation from the Romanian government to participate in the Casa Radio Project and facilitate the necessary government approvals. No due diligence was conducted with reference to the consultant before the contract was executed. The next year the Romanian government consented to the acquisition of 75% of the project by Plaza.

Four years later in 2011 Plaza entered into a second consultancy at the direction of Executive A. The purpose of the arrangement was to facilitate the acquisition of the remaining 15% of the Casa Radio Project and obtain the necessary approvals. No due diligence was done with respect to this consultant. Despite the fact that there is no evidence showing that either consultant rendered any services, between 2007 and 2012 Plaza paid the consultants about $14 million. The payments were recorded as legitimate business expenses.

A second transaction involved a Joint Venture and a Portfolio of 47 shopping center real estate assets in the United States. Elbit and Plaza held 45% of a Joint Venture that sought to market the Portfolio in October 2011.

In November Executive A directed Elbit and Plaza to enter into a sales agency contract with an off-shore entity to assist with selling the Portfolio. The sales agent was to create marketing materials, locate potential buyers and assist in negotiating the deal in return for a commission. As with the first transaction no due diligence was done on the agent. This arrangement did not concern the other Joint Venture members.

Following the execution of the sales agent contract the agent assigned it to another who had an arrangement to be paid a slightly smaller commission. The second sales agent was indirectly, beneficially owned by Executive A. He did not disclose this arrangement to either firm.

Subsequently, the Joint Venture hired a sales agent who was charged with essentially the same duties as those of the sales agent retained by Elbit and Plaza. When the portfolio was later sold Elbit and Plaza paid the sales agent they had retained about $13 million, nearly double the commission paid by the joint venture. There are no documents relating to any services rendered by the sales agent. Later the first agent paid the second.

In February 2014 Elbit completed a debt arrangement that is similar to a Chapter 11 reorganization. This resulted in a change in control and in the composition of the board of directors. Several months later Plaza completed the same type of arrangement.

When Elbit discovered evidence suggesting that there were improper payments an internal investigation was launched. Each firm self-reported in the U.S. and Romania. The firms fully cooperating with the staff and implemented extensive remedial measures. During a separate investigation into the Casa Radio Project a special committee recommended revisions to the accounting controls and bribery policies of each firm. The board of each firm fully implemented the changes. During the investigation counsel was directed to and did share its findings with the staff, was fully responsive to requests and provided translations of certain documents.

In determining to accept the settlement offer of Respondent the Commission considered the remedial acts of the firms and the fact that Elbit is in the process of selling its principal assets to service its debt obligations and does not develop current or new business. The Order alleges violas of Exchange Act sections 13(b)(2)(A) and 13(b)(2)(B).

To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm will also pay a penalty of $500,000.

Program: Insights Into SEC Enforcement, is roundtable discussion of the Former Directors of the SEC’s Division of Enforcement that will be held on April 3, 2018 beginning a 4:30 p.m. at Georgetown University Law School. The program will be followed by a reception. Registration is available here without charge. The program is sponsored by the SEC Historical Society, the Federal Bar Association, and the Association of SEC Alumni.

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.

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