The Herbalife FCPA Enforcement Action: Part 3 – Penalty Calculation and No Monitor

Thomas Fox
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Compliance Evangelist

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.

With the lengthy and extensive bribery schemes laid out in some detail, which apparently went to the very top of the organization, we now consider how Herbalife was able obtain the truly superior result in its FCPA resolution. To recap, a fine and penalty of just over $133 million, three-year DPA and no monitorship. Before this case, if I had been asked who I thought one of the top FCPA defense counsels was for a very serious case, I would have said Pat Stokes from Gibson, Dunn & Crutcher LLP. Now let me echo that in double stereo. Stokes and his team obtained a truly superior result. Remember the bribery scheme was in play for at least ten years, from 2006 to 2016, and the recalcitrant China business unit executives were with the company until 2017.

According to the DPA, the company did not self-disclose. I still wonder if the short seller imbroglio involving Herbalife did not somehow lead to a government inquiry. Even with the lack of self-disclosure the company “received full credit for its cooperation with the United States’ independent investigation, which has included: making regular factual presentations to the United States and, after taking steps that the Company and its affiliates determined complied with applicable foreign data privacy, confidentiality, and discovery laws, voluntarily making employees available for interviews in the United States; producing documents and information located outside of the United States; providing translations of foreign language materials; proactively disclosing certain conduct of which the United States was previously unaware; and providing to the United States all relevant facts known to it”.

The company engaged in extensive remediation “including taking disciplinary actions against, and separating from, employees involved in the misconduct; enhancing its anti-corruption compliance program by, among other things, significantly increasing the personnel and resources devoted to compliance; bolstering the Company’s annual risk assessment process; strengthening accounting controls for various forms of expenditures; implementing additional testing, monitoring, and auditing procedures; and improving policies related to entertaining and giving gifts to foreign officials”.

Under the FCPA Corporate Enforcement Policy, “If a company did not voluntarily disclose its misconduct to the Department of Justice (the Department) in accordance with the standards set forth above, but later fully cooperated and timely and appropriately remediated in accordance with the standards set forth above, the company will receive, or the Department will recommend to a sentencing court, up to a 25% reduction off of the low end of the U.S.S.G. fine range.” All of this led to a 25% discount of the low end of the range from the US Sentencing Guidelines.

However, that is not the end of the story. Under the US Sentencing Guidelines, a company can receive a reduction of 2 points on the base multiple “If the organization fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct”; which Herbalife received. However, the company could have received up to a reduction of 5 points if it had self-disclosed so its failure to do so cost the company somewhere around an additional $25 million in fines and penalties.

Also, of note in this settlement is the lack of a mandated monitor. Once again, one can only state the Herbalife’s defense counsel did a superior job in convincing the DOJ that a monitor was not needed for the company to complete its compliance program obligations under its DPA. The criteria for a monitorship is set out in the Benczkowski Memo. There are two broad criteria for the evaluation of the need for a Monitor, “(1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation.”

These two criteria are to be further evaluated by the following:

  • whether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems;
  • whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management;
  • whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems; and
  • whether remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future.

Additional considerations include:

  1. Whether the changes in corporate culture and/or leadership are adequate to safeguard against a recurrence of misconduct.
  2. Whether adequate remedial measures were taken to address problem behavior by employees, management, or third-party agents, including, the termination of business relationships and practices that contributed to the misconduct.
  3. In assessing the adequacy of a business organization’s remediation efforts and the effectiveness and resources of its compliance program, Criminal Division attorneys should consider the unique risks and compliance challenges the company faces, including the particular region(s) and industry in which the company operates and the nature of the company’s clientele.

In reading through these criteria, it would seem that Herbalife executives both manipulated the company’s books and records and exploited a non-existent compliance program. Senior management was clearly involved. However, this appears to have been tempered by a truly superior remedial program including investments in a new compliance regime. While it is not clear how much of senior management is still around perhaps there has been “high turnover” both at the Board and senior management. Unfortunately, there is no analysis in the DPA of why a monitor was not required so at this point we can only speculate and tip our compliance hats to Stokes and his team.

I know I got carried away this week but I promise to try to finish up in tomorrow’s blog post.

[View source.]

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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