Smith & Wesson Holding Corporation agreed Monday in an out-of-court settlement with the Securities and Exchange Commission to pay $2 million to resolve Foreign Corrupt Practices Act offenses.
The U.S.-based parent company paid bribes in Pakistan, Indonesia and other countries to win gun sales to military and police forces, the SEC said.
The SEC didn’t file a civil complaint against Smith & Wesson or go to court. Instead it settled the case through an internal, administrative order.
Smith & Wesson must also report to the SEC on its FCPA compliance efforts for two years.
The Springfield, Massachusetts-based gunmaker was trying to expand into new overseas markets from 2007 until early 2010, the SEC administrative order said.
“During that period,” according to the SEC, “Smith & Wesson’s international sales staff engaged in a pervasive effort to attract new business by offering, authorizing, or making illegal payments or providing gifts meant for government officials in Pakistan, Indonesia, and other foreign countries.”
Smith & Wesson violated the anti-bribery, internal controls and books and records provisions of the Securities Exchange Act of 1934, the SEC order said.
The company agreed to pay the SEC $107,852 in disgorgement, $21,040 in prejudgment interest, and a $1.906 million penalty.
Smith & Wesson consented to the order without admitting or denying the findings.
Last month, the company said in a securities filing that the DOJ had declined to prosecute it after an FCPA investigation.
In the filing, Smith & Wesson said it was close to a resolution with the SEC and had reserved $2 million for the settlement.
The DOJ launched an FCPA investigation after the 2010 indictment of Smith & Wesson’s VP for sales at the start of the bungled Africa sting prosecution. The company wasn’t charged but it received a grand jury subpoena for its records.
Amaro Goncalves, the sales vice president, was one of 22 individuals exonerated in 2012 when the DOJ dismissed the charges and ended the prosecution. He’s no longer with Smith & Wesson.
In the June filing, Smith & Wesson said the DOJ investigation caused it “to make substantial changes in our foreign sales personnel and foreign representatives, modify our processes, and cease sales in certain foreign countries.”
The changes have had “a material adverse effect” on foreign sales, the company said.
The SEC’s order Monday said Smith & Wesson retained a middleman in Pakistan in 2008 to help it win a deal to sell firearms to a Pakistani police department.
“Smith & Wesson officials authorized the agent to provide more than $11,000 worth of guns to Pakistani police officials as gifts, and then make additional cash payments,” the SEC said.
Smith & Wesson ultimately won a contract to sell 548 pistols to the Pakistani police for a profit of $107,852.
The SEC’s order said in 2009, Smith & Wesson tried to win a contract to sell guns to an Indonesian police department by making improper payments to its third-party agent in Indonesia. The agent said “he would provide a portion of that money to Indonesian officials under the guise of legitimate firearm lab testing costs,” according to the SEC order.
“Smith & Wesson officials authorized and made the inflated payment, but a deal was never consummated,” the SEC said.
The company also authorized improper payments to third-party agents who said money would go to foreign officials in Turkey, Nepal, and Bangladesh, the SEC order said. Smith & Wesson didn’t win contracts in those countries.
“The SEC considered Smith & Wesson’s cooperation with the investigation as well as the remedial acts taken after the conduct came to light,” the agency said.
Smith & Wesson stopped “impending international sales transactions before they went through,” the SEC said, and improved its internal controls and compliance process.
It also fired its entire international sales staff, the SEC said.
The SEC’s July 28, 2014 release is here and its administrative order is here (pdf).
Richard L. Cassin is the publisher and editor of the FCPA Blog. He can be contacted here.
This case serves as a succinct template for what small and medium sized businesses need to accomplish before they expand globally. Also, based on a relatively micro disgorgement for doing business for nearly 4 years outside of the US in these countries, we can see that it is not so easy, even for a well-known brand, to expand its market in certain countries. The penalty was appropriately more sized to serve as a warning to others. Lots of lessons learned!
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