Avon Discloses SEC Investigation

Avon Products confirmed Thursday that the SEC has issued a formal order of investigation into possible violations of the Foreign Corrupt Practices Act.

Avon's disclosure appeared in its quarterly report filed with the SEC.

The company, which first disclosed an internal investigation in October 2008, said it has turned over evidence to the SEC and DOJ from 'compliance reviews.'

The investigation, the company said, focused on expenses and accounting for 'travel, entertainment, gifts, use of third party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others.'

The Wall Street Journal said in May the internal investigation uncovered millions of dollars of questionable payments to government officials in China, Brazil, Mexico, Argentina, India, and Japan.

The company's legal fees and costs for outside counsel conducting the investigation were $59 million in 2009, $95 million in 2010, and $22.5 for the first quarter of this year.

Last year, Avon reportedly suspended four employees pending its internal bribery investigation -- three in China and one in New York.

China imposed restrictions on direct selling in the late 1990s that forced Avon to market its products through shops and boutiques. But in 2006, the company convinced China's regulators to allow its traditional door-to-door sales model.

Avon appeared on our 2011 watch list.

Avon Products, Inc. trades on the NYSE under the symbol AVP.

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Avon's FCPA disclosure in its Form 10-Q (pdf) filed October 27, 2011 said:

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As previously reported, we have engaged outside counsel to conduct an internal investigation and compliance reviews focused on compliance with the Foreign Corrupt Practices Act (“FCPA”) and related U.S. and foreign laws in China and additional countries. The internal investigation, which is being conducted under the oversight of our Audit Committee, began in June 2008. As we reported in October 2008, we voluntarily contacted the United States Securities and Exchange Commission and the United States Department of Justice to advise both agencies of our internal investigation. We are continuing to cooperate with both agencies and inquiries by them, including but not limited to, signing tolling agreements, translating and producing documents and assisting with interviews.

As previously reported in July 2009, in connection with the internal investigation, we commenced compliance reviews regarding the FCPA and related U.S. and foreign laws in additional countries in order to evaluate our compliance efforts. We are conducting these compliance reviews in a number of other countries selected to represent each of the Company's international geographic segments. The internal investigation and compliance reviews are focused on reviewing certain expenses and books and records processes, including, but not limited to, travel, entertainment, gifts, use of third party vendors and consultants and related due diligence, joint ventures and acquisitions, and payments to third-party agents and others, in connection with our business dealings, directly or indirectly, with foreign governments and their employees. In connection with the ongoing internal investigation and compliance reviews, certain personnel actions have been taken and additional personnel actions may be taken in the future.

For additional information, see Note 5 to our consolidated financial statements contained in our Form 10-Q for the quarter ended March 31, 2011 and “Risk Factors” contained in our Form 10-K for the year ended December 31, 2010. The internal investigation and compliance reviews of these matters are ongoing, and we continue to cooperate with both agencies with respect to these matters. In connection with the internal investigation and compliance reviews, we continue to enhance our ethics and compliance program, including our policies and procedures, FCPA compliance-related training, FCPA third party due diligence program and other compliance-related resources.

On October 26, 2011, the Company received a subpoena from the United States Securities and Exchange Commission (“SEC”) requesting documents and information in connection with a Regulation FD investigation of the Company's contacts and communications with certain financial analysts and other representatives of the financial community during 2010 and 2011. The Company was also advised that a formal order of investigation was issued by the SEC relating to the FCPA matters described above and the Regulation FD matters that are referenced in the subpoena. The Company intends to cooperate fully with the SEC's investigation.

At this point we are unable to predict the duration, scope, developments in, results of, or consequences of the internal investigation and compliance reviews and the SEC's investigation.

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Who'll Make The Next Top Ten?

Our list of the ten biggest corporate FCPA cases of all time hasn't changed since April, when Johnson & Johnson's $70 million settlement came on as number 10.

Since then we've been considering the seventy or so ongoing investigations, wondering which names from that list might appear among the top ten FCPA settlements a year from now.

Could they include Alcoa, Avon, Hewlett Packard, and Weatherford? All have disclosed investigations that potentially involve multiple countries and practices over several years.

Or maybe Aon? It's U.K. subsidiary was already fined £5.25 million by the SFO in 2009 for failing to recognize and control the risks of overseas payments being used as bribes.

CB Richard Ellis self-disclosed to the DOJ and SEC potentially improper payments by employees for entertainment and gifts to Chinese government officials. And China Northeast Petroleum Corporation's American director who chaired the board's audit committee made a loud exit after the board refused to investigate alleged improper practices in China.

The drug companies are under scrutiny, as are medical device makers Biomet Inc., Stryker Corp., Zimmer Holdings Inc., Smith & Nephew plc, Medtronic Inc., and Wright Medical.

Then there's Paris-based Alstom. It hasn't disclosed a DOJ or SEC investigation but may be the best candidate for a top-ten spot.

Two years ago, Swiss police arrested an Alstom executive as part of a corruption and money-laundering investigation. Offices near Zurich and in Baden were raided, as were homes in several cantons.

Last year, the U.K.'s Serious Fraud Office staged the dramatic arrests of three directors of Alstom's British unit. They were suspected of paying bribes overseas to win contracts.

The SFO last week beat back a challenge against the U.K. arrests. An Administrative Court at the Queen's Bench Division ruled against Robert Purcell and Stephen Burgin, who argued that the search warrants for their homes weren't legal. They claimed a lack of reasonable grounds for the searches, "omission of relevant information, inclusion of irrelevant information, [and] overbroad and non-specific warrant." 

The investigations of Alstom may involve suspected corrupt payments in Asia and South America between 1995 and 2003. Reports in May 2008 said Swiss authorities found evidence Alstom paid around €20 million via shell companies to agents and others in Singapore, Indonesia, Venezuela and Brazil. Also mentioned were payments of $6.8 million in connection with a $45 million contract for the Sao Paolo subway and a Brazilian energy plant.

Alstom develops transport infrastructure and power plants and lines. It operates in about 100 countries with 93,500 employees. Last year it had sales of €20.9 billion.

In the United States, Alstom SA trades over the counter in the pink sheets under the symbol ALSMY.PK.

The company has been working on compliance (often a sign of a coming settlement). It's new-look code of ethics page is here.

Avon's Pricey Looking Glass

In the New York Times' DealBook, Peter Henning had a terrific post about the cost of Avon Products' internal FCPA investigation.

The company's legal fees and costs for outside counsel conducting the investigation were $59 million in 2009, $95 million in 2010, and $22.5 for the first quarter of this year, said Henning, a Wayne State University Law School prof who writes the DealBook's White Collar Watch.

"The final tally for the internal investigation could easily reach $250 million," according to Henning, "a significant expenditure for any company to bear."

After the investigtion, Henning said, Avon is likely to end up paying millions more to settle FCPA claims by the DOJ and SEC.

Henning's conclusion: "While crime does not pay, it sure can be lucrative for law firms."

Fox's Favorite Investigations

By Thomas Fox

Last week I picked my favorite FCPA enforcement actions for 2010. Here are my choices for the top ten investigations disclosed or making news this year:

1. Avon-What's the cost of non-compliance?

Investigative Cost, Revenue or Earnings Loss in 2009/2010
Investigative Cost (2009)	$35 Million
Investigative Cost (anticipated-2010)	$95 Million
Drop in Q1 Earnings	$74.8 Million
Loss in Revenue from China Operations	$10 Million
Total	$214.8 Million

2. Gun Sting Case-Organized Crime Fighting Techniques Come to FCPA Enforcement-Undercover criminal enforcement techniques such as wire taps, video tapes of the defendants and a cooperating defendant were used in a sting operation resulting in the arrest of 22 persons. An undercover FBI Agent posed as a corrupt official from a country later identified as Gabon seeking to purchase a wide array of arms.

3. HP-To Report or Not to Report-allegations of a payment of an approximately $10.9 million bribe to obtain a $47.3 million computer hardware contract in Russia. HP did not self-report and the DOJ/SEC announced investigations after the WSJ reported German authorities were investigating the transaction.

4. Team Inc.-No de minimis exception in the FCPA-Team disclosed that an internal investigation that it made improper payments over the past five years that did not exceed $50,000. Its 2009 and 2010 investigation costs-reportedly at $6.2 million.

5. ALSTOM-Arrests in the Board Room-Three members of the Board of ALSTOM in the UK were arrested on suspicion of bribery and corruption, conspiracy to pay bribes, money laundering and false accounting.

6. PBSJ- The Effect of an Ongoing FCPA Investigation in a Merger and Acquisition-PBSJ was required to accept a takeover offer of lease money rather than allow the purchaser to back out of the deal if the FCPA investigation goes south.

7. Schlumberger-Red Flags, Red Flags and More Red Flags-Investigation of allegations of possible bribery in Yemen by Schlumberger Ltd. regarding a contract with the government. The reported allegations stand out as classic Red Flags. (1) Agent proposed by customer at or near the time the contractual negotiations were nearing conclusion. (2) Agreed to pay the agent before contract was signed. (3) No written contract was executed for these services.

8. CB Richard Ellis-No business or industry is immune from the FCPA-CB Richard Ellis, global real estate firm, disclosed possible FCPA violations in China. Any company which does business overseas needs to have a full FCPA compliance program in place. 

9. Rino-Welcome to the (FCPA) Club. The first FCPA inquiry on a China-based issuer. 

10. SciClone-Hell hath no fury like an SEC Notice-SciClone received notice of a SEC investigation. Within one week, its stock dropped over 31% and five law firms announced that they were investigating the company for potential securities laws investigation. Within two weeks, seven different law firms had filed class actions suits against the company for securities violations.

Thomas Fox is an attorney in Houston, Texas, specializing in FCPA compliance, risk management and international transactions. His blog can be found here and he can be reached at tfox@tfoxlaw.com.

Watching For Whistleblowers

In its quarterly report released August 9, SciClone Pharmaceuticals, Inc. said it received an SEC subpoena and a letter from the DOJ investigating the "sale, licensing and marketing of its products in foreign countries, including China."

According to SciClone, the DOJ said it was looking at FCPA issues in the pharmaceutical industry generally, and had received information about SciClone's practices suggesting possible violations.

A reader was curious about the timing of SciClone's announcement. Less than a month ago, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. It authorizes payments of 10% to 30% for recoveries of at least a million dollars based on information about violations of the securities laws, including the FCPA.

So we asked SciClone if the FCPA investigation was triggered by a recent whistleblower complaint. Ana Kapor, the firm's director of investor relations and corporate communications, answered quickly but said only: "We are not able to comment on this topic beyond what we included in our filings earlier this week."

Is this the first FCPA-related whistleblower case under the new reward program? Or is it, as most assume, part of the year-old investigation of drug makers that already targeted GlaxoSmithKline, AstraZeneca, and Merck? Or is it both? There's no way to tell until someone involved goes on the record.

SciClone Pharmaceuticals, Inc. trades on NASDAQ under the symbol SCLN.

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A slice of the FCPA pie. In his August 16 article about FCPA-related civil suits, Forbes' Nathan Vardi correctly says there's no private right of action under the FCPA. So plaintiff lawyers look for other ways to sue directors and officers for their company's overseas bribery.

Results of the suits have been mixed but some have produced big settlements. He lists Faro Technologies, which paid $6.9 million; Nature’s Sunshine, which paid $6 million; Immucor, $2.5 million; and Syncor, $15.5 million. And he says plaintiff lawyers are prowling for more targets by following SEC and DOJ leads -- including Weatherford International, Parker Drilling, Avon Products, and Pride International.

Ther article is Plaintiff Lawyers Join The Bribery Racket.