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Manufacturer to Pay over $80 Million to Resolve FCPA and Accounting Violations

bret.campbell@cwt.com's picture
Commentary by Bret Campbell

The DOJ and the SEC announced criminal and civil Foreign Corrupt Practices Act ("FCPA") related settlements with General Cable Corporation ("General Cable"), a Kentucky-based manufacturer and distributor of copper, aluminum, and fiber-optic cable and wire. The two enforcement agencies accused the publicly traded company of paying bribes to government officials in Angola, Bangladesh, China, Egypt, Indonesia and Thailand. The company also settled separate civil charges with the SEC that alleged material misstatements in the company's financial statements due to improper inventory accounting and deficient internal controls at its Brazilian subsidiary. In total, the company agreed to pay approximately $75 million in criminal penalties, disgorgement of profits and prejudgment interest in order to settle the FCPA allegations, and $6.5 million to resolve the Brazil accounting-related violations.

Between 2002 and 2013, General Cable allegedly paid its agents and distributors approximately $13 million, a portion of which was used to make improper payments to obtain business that yielded the company profits of approximately $51 million, which was the same amount that the company agreed to pay the SEC in disgorgement of profits. For example, a Bangladesh-based sales agent emailed the company's Thailand subsidiary in June 2012 to explain that a portion of the monies paid to the agent would be "shared" with government officials. This information was discussed openly in email correspondence with at least one executive from the Thailand subsidiary, who later became an executive of the parent company and, in that role, approved a payment to the same sales agent in May 2013.

The DOJ emphasized that General Cable "fully cooperated" with its investigation, particularly by conducting a thorough internal investigation of its own, sharing its findings, and making employees and relevant documents available. The DOJ also commended the company for taking extensive remedial measures, including employment actions against 13 employees, and the termination of 47 third-party agents and distributors who allegedly participated in the misconduct. As a result of its cooperation, the company received a non-prosecution agreement from the DOJ and an aggregate discount of 50% off the bottom of the U.S. Sentencing Guidelines fine range.

General Cable also settled allegations that its Brazilian subsidiary's inventory accounting resulted in violations of the books and records and internal controls provisions of the Securities Exchange Act, and of the requirement that issuers file accurate annual, current and quarterly reports. When the accounting errors originating in Brazil were brought to the attention of a pair of senior managers of a General Cable regional segment, the SEC reported, the two concealed the overstatement from General Cable's executive management actively by circumventing internal controls, issuing directives to destroy documents concerning missing inventory, and signing false sub-certifications of the segment's financial statements. The SEC noted that General Cable's executive management was unaware of the specific misconduct, but knew that the company used a deficient "highly manual, unevenly implemented" inventory accounting system, which failed to include a reconciliation of physical inventory and lacked an appropriate segregation of duties for making and approving manual journal entries. According to the SEC, the company's improper accounting caused its inventory to be overstated in its financial statements by as much as $43.5 million. These inventory overstatements, in turn, caused General Cable to record a lower cost of sales, and to report net income that was overstated by as much as 29.8% in one period.

Commentary

bret.campbell@cwt.com's picture
Bret Campbell

Although the SEC's investigation found no "personal misconduct" by General Cable's former CEO and former CFO, the two executives returned $3.7 million and $2.1 million in compensation, respectively, which they had received from the company during the period when the accounting violations allegedly occurred. "Therefore," the SEC highlighted in its press release, "it wasn't necessary . . . to pursue a clawback action under Section 304(a) of the Sarbanes-Oxley Act." Section 304 allows the SEC to seek reimbursement of incentive compensation and stock sale profits received by an issuer's CEO and CFO during the 12-month period following an accounting restatement, if the restatement was the result of misconduct that caused material noncompliance. Notably, Section 304 does not require any showing that the CEO and CFO themselves engaged in misconduct, which is why potential clawback actions loom over many SEC accounting cases. Perhaps in recognition of this threat, "voluntary clawbacks," such as those involved here, may be a growing trend in the SEC's enforcement of alleged accounting violations.

In the case of General Cable, the compensation returned to the company may have been effected pursuant to the Compensation Recoupment Policy that it adopted in December 2011. That policy – which is similar to those that would be required of issuers under Proposed Rule 10D-1 – may require current and former executive officers to reimburse amounts paid in the preceding 36 months that exceed the amounts that they would have been paid if their compensation had been calculated on the basis of the restated financial statements. Proposed Rule 10D-1, which will implement Section 954 of the Dodd-Frank Act, indicates that it is not intended to affect amounts due under Section 304; however, any recoveries under Rule 10D-1 may be credited against recoveries due under Section 304 (and vice versa). Presumably, if the company's policy were the mechanism for calculating the CEO's and CFO's compensation return, then the amounts repaid were comparable to the amounts that could have been recovered by the government under a Section 304 calculation. Otherwise, the SEC would have been unlikely to conclude, as it did here, that a clawback action under Section 304 "wasn't necessary."

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