Entries in Oracle Corp. (12)
Many of us scratched our head in 2010 when the Oracle FCPA enforcement action came out. We didn't understand how a company could be prosecuted, even civilly by the SEC for internal controls or book and records violations, without evidence that bribes had been paid. But after the past few months, I think Oracle was a precursor to a strict liability standard that's coming to FCPA enforcement.
Oracle Corporation said Thursday that Sandeep Mathur, managing director of the company’s Indian subsidiary, Oracle India Pvt. Ltd., has quit. But Oracle denied his leaving was linked to recent allegations in the India press of bribery.
Since August 2012, there has been a lot of discussion in anti-corruption circles about Oracle’s settlement with the SEC, including here. Much of the past discussion has focused on the fact that the SEC charged Oracle with books & records and internal controls FCPA violations without an attendant allegation of bribery. Rather, the SEC said in its complaint that “[f]rom 2005 to 2007, certain employees of Oracle's Indian subsidiary Oracle India Private Limited ("Oracle India") secretly "parked" a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement.” (emphasis added).
Twelve companies settled FCPA enforcement actions in 2012 by paying a total of $259.4 million.
During the quarter just ended, there were five corporate FCPA enforcement actions, one enforcement against an individual by the SEC, four criminal sentencings of individuals, and three and a half corporate declinations.
Here's what happened:
Oracle Corporation on Thursday agreed to pay a $2 million civil penalty to the SEC to settle FCPA charges arising from a slush fund in India used to pay bribes.
The SEC said California-based Oracle 'failed to prevent a subsidiary from secretly setting aside money off the company's books that was eventually used to make unauthorized payments to phony vendors in India.'
In case you haven’t been keeping score, the FCPA has quickly become one of prosecutors’ favorite tools.
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.
In May, a month after it agreed to be acquired by Oracle for $7.4 billion, Sun Microsystems said it may have violated the Foreign Corrupt Practices Act and that the violations could have a material effect on its business. It launched an internal investigation and shared the results with the Justice Department and the Securities and Exchange Commission. See our post here.
Now it looks like it was all a false alarm. Sun's latest SEC filing, a Definitive Merger Proxy dated June 8, 2009 (Schedule 14A), says this:
Section 4.13. Compliance with Applicable Law.And a little later in the merger document, Sun represents to Oracle that without exception it has "complied with the U.S. Foreign Corrupt Practices Act of 1977 and other applicable anti-corruption laws." (see Section 4.24)
(a) The Company and each of its Subsidiaries is and, since June 30, 2006 has been, in compliance in all material respects with all Applicable Laws and Orders. Neither the Company nor any of its Subsidiaries has received any written notice since June 30, 2006 (i) of any administrative, civil or criminal investigation or audit by any Governmental Authority relating to the Company or any of its Subsidiaries or (ii) from any Governmental Authority alleging that the Company or any of its Subsidiaries are not in compliance with any Applicable Law or Order in any material respect.
So, no FCPA violations and no notice from the DOJ or SEC of any investigations. A clean slate.
Not many internal FCPA investigations end this way. More often -- usually, in fact -- they start because of apparently reliable signs of compliance trouble. Most investigations then end up confirming that yes, violations occurred -- usually beyond the scope of initial concerns. Sun's outcome, therefore, isn't typical.
What happened here? Sun isn't saying. But the timing may not have been accidental. Did anonymous whistleblowers opposed to Oracle's acquisition file false complaints? It's happened before. Did people upset about potential disturbances in Sun's pivotal and hallowed role in the open-source community try to torpedo the deal by tossing false allegations into the mix? Twisted, but possible.
Wherever the allegations came from, Sun made all the right moves. It responded fast with a proper internal investigation, self-reports to the feds, and full disclosure to the marketplace. After all that, it came up with nothing. Compliance program and corporate integrity intact. Great result. Time to move on.
Before we all scatter, though, one last question.
Could Sun's statements in its merger proxy be wrong? Just boilerplate reps saving the place in the text? Might Sun still have FCPA problems it isn't disclosing just yet? Not likely, considering the Lockheed Martin / Titan case.
Those companies planned to merge in 2003. During due diligence, Titan was found to have serious FCPA compliance issues. Before Lockheed Martin terminated the merger, Titan had already filed an 8-K disclosure document with the SEC that included a proxy form with the merger agreement attached to it. That merger agreement, like Sun's, contained an unqualified representation by Titan to Lockheed Martin affirming FCPA compliance. But the representation later proved to be untrue.
The SEC warned through a release that the 8-K was a "communication with shareholders" from Titan and that a reasonable investor could have relied on the untrue FCPA representation, resulting in liability for securities law violations. Presumably, that SEC release would have guided Sun's preparation and publication of its Definitive Merger Proxy, including the compliance reps quoted above.
See Securities Exchange Act of 1934 Release No. 51283 / March 1, 2005 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on potential Exchange Act Section 10(b) and Section 14(a) liability here.
Editor's Note: It's not all that clear whether Sun's reps are correct as written. Take a look at the AmLaw Daily's story suggesting Sun may have jumped the gun with its filing. We're waiting for clarification from Sun itself. And so, we imagine, are its shareholders.
Sun Microsystems said last week it may have violated the Foreign Corrupt Practices Act. It didn't reveal where the payments might have occurred or how much the bribes amounted to. But it said the potential offenses, which it has reported to U.S. and other authorities, "could possibly have a material effect on our business." Oracle Corp., which agreed last month to buy Sun for $7.4 billion, said it was aware of the potential anti-bribery violations.
Sun's Form 10-Q filed May 8, 2009 for the period ending March 29, 2009 said:
We have identified potential violations of the Foreign Corrupt Practices Act, the resolution of which could possibly have a material effect on our business. During fiscal year 2009, we identified activities in a certain foreign country that may have violated the Foreign Corrupt Practices Act (FCPA). We initiated an independent investigation with the assistance of outside counsel and took remedial action. We recently made a voluntary disclosure with respect to this and other matters to the Department of Justice (DOJ), Securities and Exchange Commission (SEC) and the applicable governmental agencies in certain foreign countries regarding the results of our investigations to date. We are cooperating with the DOJ and SEC in connection with their review of these matters and the outcome of these, or any future matters, cannot be predicted. The FCPA and related statutes and regulations provide for potential monetary penalties, criminal sanctions and in some cases debarment from doing business with the U.S. federal government in connection with FCPA violations, any of which could have a material effect on our business.The timing of Sun's disclosure suggests the potential FCPA compliance problems were discovered during pre-acquisition due diligence, either by Oracle or by Sun itself. Their merger agreement was dated "as of April 19, 2009." That's after the period when Sun reported the questionable payments to the government.
Sun provided anti-corruption warranties in the merger agreement (see below), but it had a chance to give Oracle an "exceptions list" of potential violations before signing. Assuming it did that, Oracle couldn't cite the disclosed violations as a reason to renege on its agreement to buy Sun. If Sun were to cause the deal to fall through, however, it would have to pay Oracle a $260 million breakup fee and reimburse up to $45 million of Oracle's expenses.
Sun and Oracle must be hoping for a quick resolution of the potential violations. The federal government is one of Sun's biggest customers and, as the disclosure noted, a penalty for violating the FCPA is possible debarment from government contracts. The law even allows the government to suspend vendors that have been indicted for violating the FCPA but haven't resolved the charges. Sun, of course, hasn't been charged and neither the DOJ nor the SEC have commented publicly on its disclosure.
Download a copy of Sun's Form 10-Q filed May 8, 2009 for the period ending March 29, 2009 here.
In their agreement, Sun gave Oracle the following compliance warranties -- subject to the "exceptions list":
Section 4.24. Compliance with the U.S. Foreign Corrupt Practices Act and Other Applicable Anti-Corruption Laws..
(a) The Company and its Subsidiaries have complied with the U.S. Foreign Corrupt Practices Act of 1977 and other applicable anticorruption laws.
(b) Neither the Company nor any of its Subsidiaries nor any director, officer, agent, employee or representative of the Company or any of its Subsidiaries at the direction of or on behalf of the Company or any of its Subsidiaries corruptly or otherwise illegally offered or given anything of value to: (i) any official, employee or representative of a Governmental Authority, any political party or official thereof, or any candidate for political office; or (ii) any other Person, in any such case while knowing, or having reason to know, that all or a portion of such money or thing of value may be offered, given or promised, directly or indirectly, to any official, employee or representative of a Governmental Authority, any political party or official thereof, or candidate for political office for the purpose of the following: (x) influencing any action or decision of such Person, in his or her official capacity, including a decision to fail to perform his or her official function; (y) inducing such Person to use his or her influence with any Governmental Authority to affect or influence any act or decision of such Governmental Authority to assist in obtaining or retaining business or to secure an improper business advantage; or (z) where such payment would constitute a bribe, kickback or illegal or improper payment to assist the Company or any of its Subsidiaries in obtaining or retaining business for, or with, or directing business to, any Person or in securing any improper advantage.
(c) There have been no false or fictitious entries made in the books or records of the Company or any of its Subsidiaries relating to any illegal payment or secret or unrecorded fund and neither the Company nor any of its Subsidiaries has established or maintained a secret or unrecorded fund.