03 Sep SEC’s Foreign Corrupt Practices Act Action Against BNYM Shows Importance of Adhering To Established Standards

Posted at 22:13h in Securities Litigation & Regulation by

The SEC’s recent enforcement action against BNY Mellon (“BNYM”) for violation of the Foreign Corrupt Practices Act (“FCPA”) may represent a series of “firsts” in the FCPA arena. But in a broader sense it is just the latest example of the industry failures to adhere to declared values or procedures, previously seen in matters as diverse as the Enron debacle and actions against hedge funds for dubious valuations. Each of these failures reflect an elevation of business expedience over core values. On the flip side, they reflect a subversion of compliance and control functions, which time and again undermines investor confidence and exacts a reputational toll far greater than any short term economic benefit.

In the BNYM case, the Commission found that two units of BNYM ignored established criteria for accepting candidates into the bank’s highly competitive summer internship program in order to accommodate the requests of two senior officials at a foreign sovereign wealth fund (“SWF”). At the time, both BNYM units were providing services to the SWF, and seeking to grow that relationship. The SWF officials, one of whom was identified within BNYM as a “key decision maker” at the SWF, made the requests on behalf of their respective sons and a nephew (“the Family Members”), none of whom met BYNM’s established criteria for admission to either of its summer programs. In fact, the Family Members did not even apply for the internships, yet they were hired without interview or even meeting anyone at BNYM. Where the internship program for other participants was exclusively a summer experience, BNYM created unique training experiences for the Family Members that lasted several months, through summer, fall and well into winter.

The SEC further found that BNYM had a FCPA policy but failed to ensure its employees took training in or understood the policy, particularly with respect to hiring customers, or relatives of customers or of foreign officials. The net result was BNYM incurring the dubious distinction of being the first financial services firm to be tagged with a FCPA violation for corruptly seeking to influence a foreign official (with the valuable internships), for which it agreed to pay disgorgement and penalties totaling $14.8 million.

The SEC’s 2013 case against hedge fund Agamas Capital Management, LP (“Agamas”) reflected a similar deviation from an articulated standard. The Commission found that Agamas failed to adhere to the valuation methodology represented in its private placement memorandum for how it would price illiquid/non-widely quoted securities held in its portfolio. (The SEC’s similar claims against Yorkville Advisors, LLC are pending.) Not only did Agamas not adhere to its represented methodology, but it further failed to document how it exercised discretion to derive certain assigned valuations. Its pricing committee, which had final say on all valuation determinations, approved each valuation submitted by portfolio managers, never questioning their exercise of discretion nor challenging any deficiencies or deviations from the represented methodology.

When the financial crisis began in the fall of 2008, Agamas was hit with a wave of redemption requests and was unable to provide value calculations consistent with the methodology represented to investors. It ultimately withdrew its SEC registration and was later ordered to pay a civil penalty of $250,000.

These deviations from announced standards are not uncommon, and even harken back to the Enron days, when that company’s board waived various provisions of the company’s code of ethics – its declaration of core values – to allow its CFO to engage in and benefit from certain off-book transactions that led, ultimately, to the company’s undoing. Yet, despite many years of regulators and corporate governance gurus underscoring the need to adhere to a published code of ethics and maintain robust internal controls, the Enron, Agamas and BNYM cases highlight that the expedient compromise of professed standards is a recurrent, if not intractable, challenge not tied to a particular time, industry, or business structure.

It can occur at the highest level (the board room), the lowest level (hiring interns) and anywhere in between (portfolio managers and pricing committees). This underscores the need for public companies and registered entities to empower all employees to “own” the company’s ethics and procedures, to ask questions when a novel issue arises, and to report suspected violations. Periodically reminding employees of the company’s commitment to a set of core values, as well as providing a hotline or other avenue of anonymity, are ways to underscore the company’s commitment to maintaining a compliant culture, which is favored by both employees and investors. Where internal shortcomings are found, senior executives should move quickly to check and correct them, even if it requires the assistance of independent professionals. Had someone at BNYM thought to question whether it made sense to hire, sight-unseen, unqualified candidates who had not even applied to the intern program, or why they were being given special treatment, a thoughtful employee should have at least elevated the inquiry to a level where a deeper review might have occurred.

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood

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