SEC Announces First-Ever Deferred Prosecution Agreement
The Securities and Exchange Commission has reached its first-ever deferred prosecution agreement (“DPA”) with Tenaris, S.A., a global supplier of steel pipe products to the oil and gas industry. Tenaris disclosed to the Commission that its employees had engaged in conduct that potentially violated the Foreign Corrupt Practices Act (“FCPA”). Following an investigation, in which Tenaris fully cooperated, the SEC agreed to defer prosecution in exchange for Tenaris’s continued cooperation, $5.4 million in disgorgement and prejudgment interest, and certain other undertakings, detailed below. This agreement provides much-awaited guidance to companies who uncover potential securities law violations and hope to obtain leniency from the SEC through disclosure and cooperation.
Allegations Against Tenaris
Tenaris is a global manufacturer and supplier of steel pipe products that competes for contracts. OAO is a subsidiary of a state-owned holding company in Uzbekistan’s oil and gas industry. OAO was an agency and instrumentality of Uzbekistan, meaning its employees were “foreign officials” within the meaning of the Foreign Corrupt Practices Act.
To facilitate obtaining steel pipe contracts with OAO, Tenaris hired a local agent on a commission basis. In his efforts, the agent allegedly obtained confidential competitor bid information from OAO officials and relayed that information to Tenaris. Tenaris revised its bids based on this confidential information and obtained multiple contracts using this strategy. Tenaris employees allegedly understood that the local agent would pass some of his commission from Tenaris to OAO officials for their cooperation in the scheme.
Following this conduct, the Commission alleged, Tenaris learned that complaints had been filed with an Uzbek government agency concerning its conduct in obtaining OAO bids. E-mails revealed that certain Tenaris employees agreed to offer payment to officials of this government agency in an effort to quell any investigation that may result. It is unknown whether any payments were ever made, and Tenaris found no evidence of any payments.
Tenaris’s Investigation, Disclosure, and Cooperation
After receiving notice of other potential FCPA infractions, Tenaris, with the help of legal counsel, launched a worldwide investigation of its business operations and controls. This investigation uncovered the allegations discussed above.
According to the DPA, Tenaris made “timely, voluntary and complete disclosure” of the findings of its investigation to the Commission and to the Department of Justice and reviewed its compliance system. The company took steps to update its Code of Conduct, Business Conduct Policy, and Agent Retention Procedure, addressing anti-corruption and compliance with the FCPA and enhanced its due diligence procedures regarding agent retention and payments to third-party agents.
The Deferred Prosecution Agreement
In light of Tenaris’s disclosure, cooperation, and remedial actions, the Commission offered Tenaris a deferred prosecution agreement. A deferred prosecution agreement is a formal agreement in which the SEC agrees to defer prosecution for a certain period of time in exchange for a respondent’s cooperation with an SEC investigation. While that agreement is in effect, the respondent agrees to certain prohibitions and undertakings and agrees to continue its cooperation with the Commission. The Department of Justice has made frequent use of such agreements.
Under the SEC’s DPA in this case, Tenaris agreed to pay $5.4 million in disgorgement and prejudgment interest and to continue to cooperate with the SEC, the Department of Justice, and any other law enforcement agency in connection with its conduct. Cooperation was defined as the “full, truthful, and continuing” cooperation of Tenaris employees and the company’s best efforts to secure that same cooperation from former officers, directors, employees, and agents of the company. Specifically, Tenaris agreed to, at the Commission’s request, produce documents, participate in interviews, respond to inquiries, and provide testimony.
The DPA also requires Tenaris to (1) notify the Commission of any convictions, charges, or complaints against the company or its employees for anti-bribery or securities laws violations, (2) review and update its Code of Conduct annually, and (3) require each director, officer, and management-level employee to certify compliance with the Code of Conduct annually. Finally, the DPA requires Tenaris to train all current and future management and financial employees regarding anti-corruption and FCPA compliance.
Tenaris also reached a non-prosecution agreement with the Department of Justice under which it agreed to pay a $3.5 million fine. The DPA does not preclude other law enforcement agencies from taking action against Tenaris for its conduct.
Helpful Guidance for Others
In December 2010, Haynes and Boone issued an alert concerning a non-prosecution agreement announced by the Commission. See that alert here. That agreement and the deferred prosecution agreement detailed in this alert are part of a recent push by the Commission to increase cooperation by individuals and corporations who find their conduct to be in violation of securities laws. Those hoping to gain cooperation credit should take note of Tenaris’s conduct in launching a broad internal investigation on its own initiative, taking steps to remediate and prevent potentially unlawful conduct in the future, making full disclosure to the Commission, and cooperating in every aspect of the SEC investigation.
Through these measures, Tenaris managed to avoid what could have been a lengthy enforcement investigation, a much larger civil penalty, and perhaps even criminal indictment or prosecution by the Department of Justice. Also, by avoiding an SEC injunction, the company preserved its ability to access the capital markets through simpler securities registration and offering provisions.
For more information, please contact one of the Haynes and Boone attorneys below. You may also view the alert in the PDF linked below.