Foreign Bribery Investigations and Possible U.S.-Based Securities Exposure

The growing bribery scandal at Siemens has made the front pages of the world’s financial papers in recent days. For example, on January 31, 2007, the Wall Street Journal (here, subscription required) ran an article entitled “At Siemens, Witnesses Cite Pattern of Bribery.” In its February 1, 2007 SEC filing on Form 6-K (here), Siemens, whose ADRs have traded on the NYSE since 2001, reported that the U.S. Department of Justice is “conducting an investigation of possible criminal violations of U.S. law” and also announced that it “understands that the U.S. Securities and Exchange Commission’s enforcement division is conducting and informal inquiry into matters at this time.”

Siemens apparently is already under investigation in German, Lichtenstein, Italy, Switzerland and Greece. The investigation gained momentum in November 2006, when, according to the Journal, more than 200 German police raided about 30 offices and homes of current and former Siemens employees.” The German police searched office of Siemens management board members, including that of Siemens’ CEO, Klaus Kleinfeld. In December, the company announced that it had uncovered $544 milllion in “suspicious transactions.” covering over seven years. The investigation involves the possibility that Siemens officials diverted funds through sham consulting contract to slush funds used to bribe potential customers. Investigators are looking into possible bribes in a number of countries, including Saudi Arabia, Russia, Slovakia, Argentina, Nigeria, Egypt, Cameroon, and Kazakhstan. A number of high-ranking Siemens officials have been arrested, including a member of the management board. The Company’s former CFO reportedly is a suspect.

It obviously remains to be seen whether the DoJ investigation or the informal SEC investigation will lead to further proceedings. But according to the February 3, 2007 Wall Street Journal article discussing the U.S.-based investigations (here, subscription required), these U.S investigations “heighten the legal risk for Siemens, which could face lawsuits and be banned from bidding on infrastructure contracts in the U.S. and other countries if there is evidence of wrongdoing.”

The company also faces significant (but uncertain) financial risk as well. In its 6-K announcing the U.S. investigations, while acknowledging that the company “cannot exclude the possibility that criminal or civil sanctions may be brought against the Company itself or against certain of its employees,” the company also reported that so far “no charges or provisions for any …penalties or damages have been accrued as management does not yet have enough information to reasonably estimate such amounts.” As a company with 2006 sales of over $113 billion, Siemens would have to sustain a very significant fine, penalty or damages for it to have a material impact on its financial condition, although certain enforcement outcomes could definitely impact the company’s future prospects. The absence of any accrual at this time does raise at least the possibility of a negative financial effect from an adverse investigative development.

The involvement of the SEC in the Siemens investigation underscores a point that The D & O Diary has made in several prior posts relating to investigations involving the Foreign Corrupt Practices Act (most recent posts here and here). That is, these investigations can give rise to follow on securities claims. This is the reason that I have often cited the FCPA as a threatening potential new source of D & O exposure. The threat is not so much from the corrupt practices investigation itself, but from the follow on claims that could arise in which it is claimed that the corrupt practices caused a misrepresentation of the company’s financial condition – which presumably is the question the SEC is examining in connection with the Siemens probe.

The Siemens investigation is also important in connection with the current calls inside the U.S. for regulatory reform to improve the competitive position of U.S. securities markets in the global financial marketplace. The Siemens investigation originated outside the U.S. and only came to this country after the provision by foreign authorities of investigative information to U.S. authorities. It is evident that regulators throughout the world increasingly understand the importance of vigilance and scrutiny. The magnitude and scope of the Siemens investigation suggest cross-border commitment to regulatory rigor and the extent of the alleged misconduct is likely to spur further efforts for oversight and reform As international regulatory standards respond to these circumstances, differences between the standards in the U.S. and those elsewhere are likely to continue to diminish.

The Here After: It turns out that in the cycle of death and rebirth, what we are really here after is beer: