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Tuesday
Apr302013

Disgorgement, an overlooked aspect of the Ralph Lauren settlement?

As part of its recent settlement with the SEC, Ralph Lauren Corporation agreed to disgorge $593,000 that was "obtained or retained as a result of the violations discovered during the investigation," along with $141,846 in pre-judgment interest. 

$593,000 also happens to be precisely the same amount the SEC alleges that Ralph Lauren made in illicit bribe payments and gifts to Argentine officials from 2005-2009. This is an odd coincidence considering that disgorgement is an equitable remedy meant to deprive those who violate U.S. securities laws of their ill-gotten gains instead of punishing the violators for their misconduct.

Disgorgement, which has become a fixture of FCPA enforcement over the last ten years, was first used by the SEC in an FCPA context in the Commission's 2004 settlement with ABB Ltd. (see here for a primer on the practice). While the SEC's calculation of ill-gotten gains is a fairly opaque process, I'm unaware of another FCPA disposition in which the amount a company allegedly paid in bribes was also determined to be amount of profit it realized from those bribes.

The SEC has on several occasions disgorged less in illicit profits than the total amount in bribes a company allegedly paid. See, for example: Siemens AG ($350 million in disgorgement / $1.4 billion in improper payments); AB Volvo ($7.3 million in disgorgement / $8.59 million in improper payments); El Paso Corp. ($482,363 in disgorgement / $5.48 million in improper payments); and Panalpina World Transport Ltd. ($11.3 million in disgorgement / $49 million in improper payments). While it is possible that certain companies have escaped disgorgement by failing to turn an undue profit, this dynamic is unusual, as one generally expects a company to realize a return on the bribes it pays, otherwise what is the point?

The SEC's imposition of disgorgement is discretionary though, which leads to several possible explanations that could account for these types of imbalances, including the SEC's occasional decision to forgo disgorgement altogether (something that occurs in about 18% of the SEC's FCPA dispositions). For example:

  • Cooperation: In exchange for cooperation, the SEC may credit a company by using a friendlier methodology to calculate ill-gotten gains or deciding against the imposition of any disgorgement.  Cooperation credit appears to have been provided in the Siemens case, where the company's illegally obtained profits far exceeded $350 million, and it may also have been a factor in the Ralph Lauren settlement, where the SEC imposed no civil fine in recognition of the company's "prompt" voluntary disclosure, its "extensive, thorough, and real-time cooperation," and the "significant remedial measures" it undertook in connection with its investigation.
  • Method of Calculation: What constitutes an ill-gotten gain can be a more complicated determination when dealing with payments that are not directly connected to specific contracts or business, such as the provision of questionable travel or entertainment to officials or certain payments made to clear goods through customs, sidestep paperwork, or avoid inspection. This complexity could have played into the outcomes of cases like Panalpina, El Paso and Ralph Lauren, all of which revolved around the customs clearance process.
  • Negotiation: Some companies are in a stronger negotiating position based on the facts of the case (e.g., jurisdiction, knowledge, type of illicit benefit received, arguments for attributing gain to the misconduct, etc.)

While many companies have struggled to rebut calculations by the SEC as to what constitutes an ill-gotten gain—particularly in situations where a violation has led to the formation of a contract or a long-term business deal, with no break in the causal chain between the improper payment and the business secured—dispositions such as Ralph Lauren's suggest that reigning such calculations is certainly possible.

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Marc Alain Bohn is a contributing editor of the FCPA Blog.