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More Math For The General Counsel

Bruce Hinchey’s post No Good Deed Goes Unpunished kicked up some dust around here. His effort to make sense of FCPA settlement numbers produced some exciting scholarship, which doesn’t often happen.

We had meandered down that path a couple of years ago in our post Handicapping The FCPA, which looked at the amount of bribes paid compared to fines levied. That’s one way to see things. But the settlements can also be viewed differently. Here’s why.

The federal sentencing guidelines (chapter 8, part c) set out how fines should be calculated for organizations. There’s a lot to consider. Like the size of the company, the number of employees, involvement of high-level management, prior history, whether there was voluntary disclosure, cooperation, and acceptance of responsibility, and finally the amount of gain or profit produced by the bribes (minus the amount paid through disgorgement).

Technically, then, disgorgement paid to the SEC is not part of the fine calculation under the sentencing guidelines. And removing disgorgement changes some of the ratios Bruce talked about.

In Baker Hughes’ case, for example, the penalties without disgorgement were $21 million instead of $44 million. Baker’s DPA at paragraph 24 of the statement of facts says: “Net revenues realized by Baker Hughes on the Karachaganak project were $189.2 million. After offsetting net revenues by the company’s expenses, Baker Hughes recognized a profit of approximately $19.9 million.”

The sentencing guidelines, then, would use the $19.9 million profit and not the amount of the bribes, which was $4.1 million. So the ratio for the penalty would be 1.05 — not 10.73, as when looking just at the bribe paid. So is Baker Hughes an outlier and a harsh result as Bruce says? We’re not too sure.

Schnitzer Steel is sometimes mentioned as an example of a self-reporting company not receiving any benefits. That appears to be true because it paid only $204,537 in bribes and $15.2 million in penalties. But $7.7 million was disgorgement. And, as the DOJ said in its June 2007 press release, the net profit to Schnitzer’s subsidiary was $6.3 million, which would be a basis of the penalty calculation under the guidelines. (There was also a lot of management-level involvement in the bribery by Schnitzer’s home-office people; as we said in an earlier post, the company “replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management” as part of its corrective actions.)

One more thing to keep in mind. No study can account for cases where the DOJ doesn’t charge a company that has voluntarily disclosed potential FCPA offenses. Those decisions aren’t public but companies occasionally mention it themselves, Digi International being the latest. The ratios for them would be zero.

To be fair, Bruce didn’t have the space in his post to get into a lot of detail. In his full paper, however, he talked about the sentencing guidelines and some of the issues we’ve mentioned above. And he’ll have a chance to respond to this post soon, which we look forward to.

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