Short Seller Hits China Valves With FCPA Concerns

A post Wednesday on Seeking Alpha asked, Does China Valves comply with the anti-corruption laws?

Contributor Richard X Roe looked deep into the latest quarterly SEC filing by Chinese manufacturer and U.S. issuer, China Valves Technology, Inc. The company, he said, made a merely routine mention of FCPA risks. But because the disclosure hadn't appeared before, and because China Valves bought another Chinese company already linked to FCPA violations, Roe thinks problems are likely. He also said he's a short seller of China Valves.

It's been a terrible year for Chinese companies listed on a U.S. stock exchange. According to Kevin LaCroix at the superblog D&O Diary, there have been 36 securities class action lawsuits in 2011 involving U.S. listed Chinese companies, and a total of 47 since January 1, 2010. Will China Valves be joining the list?

Roe said that in February 2010, China Valves acquired Watts Valve (Changsha) Co., Ltd., a wholly-owned subsidiary of Watts Water Technologies. Last month, Watts Water settled an FCPA-related administrative action with the SEC by paying $3.7 million. The Chinese subsidiary, Watts Valve, the SEC said, made corrupt payments 'to influence the design institutes to recommend' [Watts Valve's] products to state-owned customers.

'A review of disclosures,' Roe said in Seeking Alpha, 'including correspondence between [China Valves] and the SEC made public in late September, indicates that [China Valves] management may have reinstated [Watts Valve's] practice of paying bribes as soon as the acquisition was complete, while actively trying to conceal it from investors and regulators. The clues come from [China Valves'] flipflopping on the reasons for the acquisition, repeated denials that any violations have occurred, and [Watts Valve's] sales commissions since the acquisition.'

With the awful track record of U.S.-listed Chinese companies, who will bet that China Valves is clean and compliant?

China Valves Technology, Inc. trades on the Nasdaq Global Select Market under the symbol CVVT.

Do DOJ Opinions Harm American Companies?

Earlier this month, the DOJ's Lanny Breuer said his agency expects to release detailed new guidance on FCPA enforcement sometime in 2012. Breuer said he hopes it will be 'a useful and transparent aid.'

So do many other people.

Former U.S. Attorney General Michael Mukasey, for example, told Congress in June that federal guidance and advisory opinions for the FCPA are inadequate and little used.

Right on both counts.

Since 1993, the DOJ has issued only 34 FCPA opinions (called Releases), an average of about 1.8 per year.

Why so few? The advisory opinion process, as we've said, is just too public. The DOJ can't or won't render private advice or opinions about FCPA enforcement. So merely asking for help can damage the requesting company.

The worst example was Release 08-02 from June 2008. Halliburton (by then no stranger to FCPA problems) wanted to buy British firm Expro through a hostile takeover. A competing group from the U.K. called Umbrellastream was also in the hunt.

Halliburton couldn't do any real due diligence during the hostile bid. To protect itself, it asked the DOJ for an advisory opinion. It wanted assurance that Halliburton itself wouldn't be prosecuted for buying a potentially bribe-tainted foreign company. In return, Halliburton promised to investigate Expro after the acquisition and blow the whistle on any corruption it found there. Halliburton also promised to help the DOJ prosecute anyone at Expro who might have been involved in potential FCPA offenses before the acquisition.

Those gory details were made public in Release 08-02. Predictably, when Expro saw  the Release, it ran from its American suitor into the arms of the local Umbrellastream.

The rest of the business world learned then that American companies with their FCPA baggage can be dangerous  suitors.

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The Opinion Procedure Regulations appear in 28 CFR Part 80. They say, among other things, that a request must come from an issuer or domestic concern, must be in writing, and must contain all details of the transaction. A DOJ opinion, the law stipulates, creates "a rebuttable presumption" that the conduct in question complies with the FCPA and with the DOJ's current enforcement practices. 15 U.S.C. § 78dd-1(e) [Section 30A of the Securities & Exchange Act of 1934] and § 78dd-2(f).

All Opinion Procedure Releases from 1993 to 2008 in PDF are linked below. (Years that don't appear had no Releases.) Earlier Releases from 1980 to 1992, then known as Review Procedure Releases, can all be found here.

2011	11-01
2010	10-01	10-02	10-03
2009	09-01
2008	08-01	08-02	08-03
2007	07-01	07-02	07-03
2006	06-01	06-02
2004	04-01	04-02	04-03	04-04
2003	03-01
2001	01-01	01-02	01-03
2000	00-01
1998	98-01	98-02
1997	97-01	97-02
1996	96-01	96-02
1995	95-01	95-02	95-03
1994	94-01
1993	93-01	93-02

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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Oracle: Why No Public Disclosure?

According to a report Wednesday in the Wall Street Journal, Oracle has been the subject of a criminal bribery investigation centered on selling practices in Africa. FBI agents and DOJ prosecutors, the report said, have been looking into the allegations for more than a year.

More than a year? Most boards of directors at public companies today quickly disclose any whiff of possible FCPA violations. After all, disclosure is the directors' best friend. It protects them from charges they withheld material information from investors and enforcement authorities. ('Cover ups are often worse than the original acts.')

So why no word from Oracle about the year-old federal investigation?

We don't know. But here are some guesses:

◙ The DOJ and FBI have been running an undercover operation and Oracle was cooperating by keeping things quiet. As we said, we're guessing here. But it could be that Oracle first went to the DOJ a year ago and said, 'Look, in Africa we're getting ripped off by our people and shaken down by crooked officials, and we need  some help.' So the company and the feds made a deal and kept it secret.

◙ Oracle didn't know about the investigation. It's possible (although unlikely) the company found out only when word leaked to the the WSJ. The DOJ and FBI don't tell every target it's under investigation. Maybe they didn't tell Oracle.

◙ The investigation is focused on Oracle's agents and not on Oracle itself. Press reports citing unnamed sources said investigators are looking at potential FCPA violations by both Oracle's employees and its agents in Africa. But if only Oracle's agents are in the crosshairs, and if Oracle took effective steps to control them but failed, Oracle itself may not have culpability. If true, then it might not need to disclose anything.

◙ Oracle already has immunity. Through early cooperation with the DOJ and SEC, perhaps Oracle has secured for itself some kind of immunity from an FCPA enforcement action. In that case, a disclosure may not be necessary. It would mean Oracle may be giving up employees, agents, and others to investigators. But the corporation itself would be safe from prosecution.

There's one other scenario. That Oracle knew about the investigation into its sales practices a year ago and simply chose not to make a disclosure. That seems unlikely in light of the benefits of disclosure and risks to directors and officers who keep quiet. But it's still a possibility.

Are We All Issuers Now?

For years, critics have said the FCPA hurts U.S. financial markets by scaring away foreign companies that don't want the burden of compliance. We don't know of any hard evidence to support that argument, and no foreign executives have told us they're staying out of American markets because of the FCPA.

In fact, we view the NYSE-Deutsch Börse deal as evidence of more foreign interest in the U.S. stock exchanges, not less. Could that be because laws like the FCPA help protect the integrity of the American exchanges, which makes them more attractive to investors everywhere?

That's right, according to NYC's Mayor Bloomberg. Last week he said the merger will force European companies to switch to using U.S. accounting rules which have superior disclosures.

"This will force a common set of accounting standards on the world; the American disclosures are better," Bloomberg said, even though, he added, they didn't prevent the Madoff scandal.

How many companies trading on the Deutsch Börse will now want their securities to trade on the NYSE? That would require them to register the securities with the SEC, making them "issuers" and subject to both the antibribery and accounting provisions of the FCPA.

An "issuer" includes any entity “which has a class of securities registered pursuant to” Section 12(g) of the Securities Exchange Act of 1934 or “which is required to file reports under” Section 15(d) of the Securities Exchange Act. 15 U.S.C. §§ 78dd-1(a), 78c(a)(8), 781, 78o(d).

The FCPA's accounting provisions require "issuers" to keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the company, and to have a system of internal accounting controls that keeps management in charge of the company's assets. 

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The NYSE's merger with Germany's Deutsch Börse has produced some memorable rhetoric and prose.

John C. Whitehead, the 88-year-old former co-chairman of Goldman Sachs said last week, “It would be an insult to New York City, and New York State, and indeed to all America. . . . I think of [the NYSE] as a holy institution."

Gary Weiss of thestreet.com wrote this week:

The boards of the two exchanges approved the merger yesterday [February 15], which means an icon of American capitalism falls under non-U.S. control for the first time since traders gathered under a buttonwood tree in 1792. The combined German-American stock exchange company will be 60% owned by the Frankfurt borse, and 40% by NYSE-Euronext shareholders. In other words, we've become minority owners of our own financial heritage, such as it is -- a fate that could not have been forced upon us by the Wehrmacht has been achieved, three generations later, voluntarily. Thank heavens, for their sake, that most of the World War II generation has died out.