SEC ENFORCEMENT MAKES THE PRICE FOR SEC VIOLATIONS TOO HIGH TO BE WORTHWHILE

sec enforcement

The Securities Act of 1933 and the Securities Exchange Act of 1934, with all of their amendments, give the Securities and Exchange Commission an arsenal of remedies, designed to teach violators the lesson that misuse of funds and deceptive accounting practices do not end up being profitable in the end.  In fact, the price is so high, that the violators usually end up paying out more than they ever received in benefits.

As a prime recent example, a world-wide provider of healthcare products and services engaged in practices to bribe foreign officials as a means of obtaining and/or retaining business contracts.  A “General Manager submitted false invoices and . . . (made) improper marketing and travel expenditures without proper documentation.”  It also “generated approximately $1.77 million through a check writing scheme. Checks were written to . . . employees who cashed the checks and handed the cash to the . . . GM. . . . Employees sometimes stored bags of cash in a safe without proper documentation. The transactions were falsely recorded as project marketing expenses and collection commissions in (the company’s) books and records, which (the company) consolidated. In addition to false descriptions, the transactions lacked appropriate support for the accounting entries.”

The Securities and Exchange Commission also reported that, “A variety of other questionable business schemes included: i) sham consulting agreements with doctors for services never performed, ii) payments to third party agents in which doctors had beneficial interest, and iii) improper travel, entertainment, and gifts to doctors. (The company) failed to conduct due diligence on the doctors and agents, or take steps to ensure that agreed upon services were provided.”

The company also made “Improper payments to Doctor A, a high-ranking (government) official . . . , who . . . played a critical role in (the company’s) factory avoiding an inspection that ‘could have shut down the factory or made it ineligible for (contract awards).’  “(The company) payments to Doctor A were made through commission agreements with no evidence of services provided.”  Also, “Improper gifts valued over $330,000 were provided to doctors and customers without adequate supporting documentation with the more expensive gifts given to the more influential customers.”

(The company) “also made at least $31,000 in improper payments to . . . customs officials through a third-party agent to avoid or reduce penalties and fees. Invoices from the customs agent mischaracterized the payments as handling charges or miscellaneous expenses.”  “Numerous documents were altered, destroyed and falsified in the company’s accounting records to conceal the bribes. The falsification and destruction of records intensified once the company’s internal investigation began. For example, employees created fake accounting records to support a $100,000 check-to-cash transaction related to a bid for a multi-billion dollar (contract).”

In the settlement agreement with the Department of Justice, the company admitted paying $30 million in bribes to government officials that resulted in receiving contracts that earned the company over $140 million in profits.  In order to avoid criminal prosecution, the company agreed to not only pay $147 million for disgorgement of profits and interest on those profits, but also a criminal penalty of $85 million. That is in addition to the $30 million it paid in bribes.

Before implementing any creative accounting practices that are not fully justified by generally accepted accounting principles, come see the attorneys at Wilson, Bradshaw & Cao, LLP.  The cost of sound legal advices is far less expensive than potential lost profits and criminal penalties.

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