Herbalife Nutrition Ltd (Herbalife) recently concluded a long running Foreign Corrupt Practices Act (FCPA) enforcement action with both the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Herbalife settled with the DOJ via a Deferred Prosecution Agreement (DPA) and Information and with the SEC via a Cease and Desist Order (Order). The documents all help to more fully fill out the picture of the corruption at the organization which went for some 10 years between at least 2006 and 2016 and was originally disclosed in the Indictments of Jerry Li and Mary Yang in November 2019. The SEC also brought civil charges against Li at the time of his Indictment, via a Civil Complaint.
All in all, these documents provide a sordid tale of a company which did not give one whit about compliance, doing business ethically or even in a non-criminal manner. As for the reason, it was quite simple. According to the Information, by 2016, the Chinese business unit brought in some 20% of the company’s worldwide sales or approximately $860 million. Over the next few blogs posts, I will be exploring the Herbalife enforcement action in depth, data mining it for lessons learned and seeing what, if anything, it might say about where FCPA enforcement might be headed if there is a second term to the Trump Administration.
It was clear from the start of Herbalife’s business relationship in China that it was committed to illegal activity which it knew was in violation of the FCPA. As far back as 2007, the Managing Director for Herbalife China admitted they were illegally bribing Chinese government officials to obtain licenses to do business in China. According to the Order, there was the following conversation, “in a January 10, 2007 telephone call, Managing Director (serving then as the Director of Sales for Herbalife China) asked EA Director whether Herbalife China had “taken care of” an official at Chinese Government Agency 1 (“Official 1”). Managing Director then asked, “We have given the money to [Official 1], haven’t we?” to which EA Director replied, “Of course we have.” Managing Director then stated, “The money works well on him.”” This was the basic state of how Herbalife did business in China for the next 10 years.
But it was more than simply the corruption of the Chinese business unit. Consider this exchange that the China MD had with a senior executive in the US in 2007 about the limit of 6 meals for any specific government official per year. Once again from the Order, “MD told Senior Executive that this policy will put the onus on U.S. executives to approve any dinners in excess of six times per year, “I can always write back to you folks and ask for approvals but then it’s like putting the onus back on you folks to answer future questions.”” In other words, the China MD knew he was putting US executives at risk by mispresenting expense reimbursement requests.
However, the US executive was no less culpable than the Chinese MD as he advised lying on the expense reimbursement requests, stating “I am sure there are a lot of government officials, you can put different names down…but I didn’t tell you that.” After Former MD explained that “with the license process, you know, it is tough for me to use all the names,” Senior Executive responded, “How would anybody ever know?” Former MD said he understood, and Senior Executive told Former MD, “All an auditor is going to do is pick up your receipts, your expense report, oh he did Mr. X, Mr. A, Mr. B, Mr. C, Mr. D., and if he did a few of these guys a couple times but that was it.”
Bob Woodward is back in the news with his latest book Rage and it is a useful reminder that one must always follow the money. In the case of Herbalife, it was multi-million dollars paid out in bribes. The funding mechanism for this pot of money to pay bribes was fraudulent expense requests. In the first six months of 2012 alone, Mary Yang submitted “approximately $3.7 million for claimed meals, gifts, and entertainment of government officials and media, including state- owned media officials.” Normally I would have the Bribery Box Score at this point, but Matt Kelly did such a great job in summarizing the submitted reimbursement requests from Mary Yang on the first six months of 2012, I am citing to his Table.
Kelly went on to somewhat dryly note, “In other words, Yang was supposedly eating at least one lavish meal with 17 other people every day — and twice on weekends! — for six months. I’m all for treating oneself from time to time, but obviously these numbers cannot be accurate.”
Normally such numbers would catch the eye of someone; Internal Audit, Compliance or the Board. Unfortunately, Herbalife did not see fit to have a Chief Compliance Officer (CCO) during this time frame so no joy there. The internal audit report did make its way to the Board of Directors. On Board member “emailed the Audit Committee and IA Director asking whether the high spending by China EA was reasonable. Another Board member responded: “Please note I have questioned this every year I have been on the board, and the company has defended its position that these are reasonable within FCPA guidelines.””
Rather amazingly, the “IA Director responded that “the findings are the typical issues in these audits” and are within “tolerance.”” This response clearly portends that the head of IA was in on the scheme (or perhaps the most idiotic Director of IA ever) as the company approved over $7.2 million in expense reimbursements from China from 2012 to 2016.
All of this demonstrates that the Herbalife FCPA enforcement action was not about some ‘rogue actors’ in China or the ubiquitous ‘them’. It was about a well-known bribery scheme existing in the organization for many year.
Join me tomorrow for a consideration of the fine, penalty, lack of monitorship and role of short sellers in this sordid saga.
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© Thomas R. Fox, 2020