Today, I conclude my short exploration of the recent spate of Foreign Corrupt Practices Act (FCPA) enforcement actions brought by the Securities and Exchange Commission (SEC) at the close of its fiscal year. Each FCPA enforcement action was interesting with some significant lessons to be garnered by the compliance professional and this week I have looked at them in some depth. Today, we consider the FCPA enforcement action involving Westport Fuels Systems, Inc., (Westport), a Canadian clean fuel technology company headquartered in Vancouver, Canada, and its former Chief Executive Officer (CEO), Nancy Gougarty, who is a US citizen.
According to the SEC Cease and Desist Order (Order), beginning no later than 2016, Westport, acting through Gougarty and others, engaged in a scheme to bribe a Chinese government official to obtain business and a cash dividend payment by transferring shares of stock in Westport’s Chinese joint venture (JV) to a Chinese private equity fund in which the government official held a financial interest. Westport also agreed to pay $2,546,000 in disgorgement and prejudgment interest and a civil penalty of $1,500,000, and Gougarty agreed to pay a civil penalty of $120,000.
The unusual features of this corruption scheme was two-fold. The first was the bribery scheme itself. While there have been previous FCPA enforcements where the interest in an entity was the quid of the quid pro quo; this scheme was more sophisticated in operation.
Westport was either very inexperienced or something much worse throughout the entire process. It started when the company wanted to take the Chinese JV public through an IPO and were told that it had to be majority Chinese owned to do so. A Chinese state-owned enterprise (SOE) and Westport were 50/50 owners in the JV and it was restructured so that a portion of the shares held by Westport and a privately held Hong Kong conglomerate would have to be transferred to the SOE and a Chinese private equity fund in which the senior government official held a financial interest. The Chinese JV ownership structure was as follows: SOE owned 51%, Westport would own 23.33% through its Hong Kong subsidiary, the Hong Kong conglomerate would own 16.67%, and the Chinese private equity fund would own 9%. In exchange, Westport, through CEO Gougarty and others, believed that the senior government official would use his influence to cause the JV to authorize an increased dividend payment of $3.5 million. However, “Although the shares were transferred to the private equity fund, the contemplated IPO never took place.”
During this process, the company’s “Asia Pacific GM reported that he was told that the Government Official had a significant but undisclosed financial interest in the Chinese private equity fund that was to receive the JV shares from Westport and the Hong Kong conglomerate. He also reported that it was the Government Official’s personal financial interest, not Chinese law, which was motivating the transfer of shares to the private equity fund.”
Providing this interest to the Chinese government official “became a central part of Westport’s negotiation strategy. Gougarty recommended alternatives that included seeking a supply agreement in exchange for a transfer of shares to the private equity fund.” The CEO “explicitly conditioned the share transfer on obtaining a long-term sales agreement. Instructing her team on the ground ““no component sales contract, no share transfer”.” This about as quid pro quo as you can get.
The Chinese government official sought and received “a low valuation in order to “make quick and big money” outside the scrutiny of Chinese regulators.” In June 2015, Westport’s Board of Directors authorized Westport’s management to complete the negotiations and execute the share transfer. The final deal agreed upon was a valuation of $70 million for the Chinese JV, with Westport agreeing to transfer shares to the SOE and the private equity fund in exchange for a long-term framework supply agreement and a cash dividend of 30% of undistributed profits – 20% more than what was provided for under the JV agreement and more than Westport had received in the past.
To obtain this approval, Gougarty for a second time did not disclose to the Board that the APAC GM had told her about the Chinese government officials’ “personal financial interest in the private equity fund or that the Government Official had requested a discount in the share transfer price.” The first time was some nine months prior to this approval when Gougarty deleted this information in a letter to the Board from the APAC GEM. As the Order dryly noted, “If Gougarty had not redacted the sentence, it would have reported to the Board that the Government Official had a financial interest in the Chinese private equity fund.”
After the bribery scheme was effectuated, Gougarty continued her fraudulent conduct by falsely identifying payments to another entity. She compounded this fraud, in connection with the filing of the Form 40-F, falsely executing a certification attesting “that Westport had disclosed all significant deficiencies and material weaknesses in the design and operation of its internal controls to the outside auditors. However, as Gougarty knew, she had failed to disclose to the outside auditors the deficiencies and weaknesses in the internal controls that she had exploited in carrying out an unlawful bribery scheme in circumvention of Westport’s anti-bribery policies and its key accounting controls.”
Gougarty’s conduct was a classic scheme of “control fraud” which is a fraud perpetrated by a senior executive through the circumvention of controls, policies and procedures. Usually the fraud perpetrated is for direct personal gain but here it was to create a pot of money to fund another type of fraud, bribery and corruption. When you have the CEO herself engaging in this type of behavior you have to ask how much due diligence was done on her before she became CEO and how serious the Board was about having ethical people in senior management. It was a very expensive lesson.
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© Thomas R. Fox, 2019