We are the end of my multi-part exploration of the Herbalife Nutrition Ltd (Herbalife) 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. Today, I want to conclude with some final thoughts.
It was not clear whether the Board of Directors was in on the bribery scheme. I would say it does not appear so because at least two Board members asked questions about the gift, meals and entertainment spend coming out of the China business unit. From there either senior management intentionally misrepresented the situation in China or they were so incompetent as to almost defy belief in their responses to the Board. All of this can be summed in this selection from the Order.
“After receiving the March 2016 IA report, a member of Herbalife’s Board of Directors emailed the Audit Committee and IA Director asking whether the high spending by China EA was reasonable. Another Board member responded: “Please note I have questioned this every year I have been on the board, and the company has defended its position that these are reasonable within FCPA guidelines.” IA Director responded that “the findings are the typical issues in these audits” and are within “tolerance.”” [emphasis supplied]
Let me just opine that there has never been an audit in the history of the world ever where a company “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” and it was typical or within tolerance. But, more importantly, it points out that a Board must engage in substantive oversight and not simply take management at its collective word, whether fraudulent or incompetent. Did the Board of Directors open itself up to a Caremark claim? At this point we can only speculate but I am sure such a filing has been made and the Delaware courts will have more to say about the ineptness of the Herbalife Board.
As the superior HBO series Watchmen reminded us, who watches the watchers? Herbalife did have controls in place which should have, if not prevented illegal actions, acted as trip wire and detected it. For instance, as early 2007, a control was in place which restricted dinners with a single government official to a maximum of six times per year. The China business unit executive recognized this would be a problem for those in US who had to approve any exceptions. The Order stated, “Former MD told Senior Executive that this policy will put the onus on U.S. executives to approve any dinners in excess of six times per year”.
However, the corrupt US senior executives had an even better idea – lie on the expense reports. The Order stated, “Senior Executive told Former MD that “I am sure there are a lot of government officials, you can put different names down…but I didn’t tell you that.” After Former MD explained that “with the license process, you know, it is tough for me to use all the names,” Senior Executive responded, “How would anybody ever know?”” All of this led to fraudulent SOX 404 certifications in the China business unit which of course were rolled up into the US entity.
This is why multiple redundancies must be put in place. Another way to think of it is the Eyes of Dr. T. J Eckleberg From The Great Gatsby. There must always be a second set of eyes on my process to validate that process. If the entire organization is not corrupt, eventually someone will notice.
A Serious Matter Requires a Serious Legal Response
As I have said many times over this blog post series, Herbalife owes a huge debt to Pat Stokes and the team at Gibson, Dunn & Crutcher LLP. Jim McGrath said it best a long time ago when he continually reminded us that when a company is in a serious FCPA imbroglio, a serious legal response is required. In this case it meant bringing in one of the top FCPA defense practitioners around, doing an extensive investigation, engaging in extraordinary remediation during the pendency of the investigation and then negotiating a superior settlement.
But it is more than knowing the law. It is working with the client so that they understand the posture they find themselves. Clearly Herbalife put profits before all else; doing business ethically or even obeying the law. So, the first thing defense counsel must do is to disabuse any notion that this is not an extremely serious matter. Defense counsel then has to engage in the investigation, root cause analysis and remediate; all under the watchful eye of the DOJ and SEC. Defense counsel must establish and maintain a credible relationship with both the DOJ and SEC so they feel like they can trust what is being presented to them. As I said yesterday, 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. Now let me echo that in double stereo.
FCPA Enforcement Going Forward
If there was ever a case which seemed appropriate for a Corporate Monitorship, it was Herbalife. 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. The company did not even have a Chief Compliance Officer (CCO). Yet no monitor was required. There was no real analysis in the DPA as to why or how the company avoided the monitorship. Perhaps it was superior negotiating.
The company received a 25% discount of the minimum of the US Sentencing Guidelines for its investigation, remediate and cooperation. While others may decry it, there appears to be a greater emphasis by the DOJ/SEC for cooperation after either self-disclosure (although not present here) or subpoena from the government. All of this would seem to follow the direction the DOJ has been headed since the implementation of the FCPA Pilot Program in 2016, through the FCPA Corporate Enforcement Policy (and updates) in 2017 and the Evaluation of Corporate Compliance Programs and updates (since 2017).
There are now real incentives for companies to take advantage of these discounts and incentives the government is offering. Obviously the first is to step forward and self-disclose but even if that is not an option, then to extensively cooperate, investigate and remediate.
2020 has presented us with some of the most egregious, most instructive and most interesting FCPA enforcement actions in some time. I wonder what Q4 will bring?