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Tom Fox on United: SEC uses new tool to fight domestic corruption

One of the most interesting non-Foreign Corrupt Practices Act enforcement actions was announced Friday by the Securities and Exchange Commission.

It involved a clear quid pro quo benefit paid by United Airlines to David Samson, the former Chairman of the Board of Directors of the Port Authority of New York and New Jersey, the government entity with authority over United Airlines’ operations at the company’s east coast hub at Newark, New Jersey.

The thing of value was the reinstitution of a United route to South Carolina so Chairman Sampson could fly to his weekend cottage. In return, United wanted approval of a new maintenance hangar at the Newark airport.

The case involved not foreign but domestic corruption and therefore wasn’t subject to the FCPA. But it’s easy to see some potential application to FCPA enforcement.

Samson pleaded guilty in July to criminal bribery charges. United entered into a non-prosecution agreement with the New Jersey U.S. Attorney’s Office requiring it to cooperate, to reform its compliance program, and to pay a $2.25 million penalty.

At the time of the offenses, the SEC said Friday, United’s Code of Conduct prohibited “United employees from directly or indirectly making bribes, kickbacks or other improper payments to government officials, civil servants or anyone else to influence their acts or decisions” and that “[n]o gift may be offered or accepted if it will create a feeling of obligation, compromise judgment or appear to improperly influence the recipient.”

Only the United Board of Director’s could grant a waiver to the Code and none was sought or obtained by United CEO Jeff Smisek, who personally ordered or approved the reinstitution of the air route service.

The SEC Order (pdf) concluded, “The [Chairman’s] Route was initiated in violation of United’s Policies.”

The company had a Code of Conduct, which was violated by the CEO and this caused the company to violate Section 13 of the Securities Exchange Act of 1934. It would be easy enough to see this resolution in the FCPA context but this was all domestic conduct and jurisdiction. This may be the first time the violation of a Code of Conduct resulted in an enforcement action by the SEC around domestic bribery and corruption.

United was also sanctioned for not having internal controls in place to prevent such actions as those taken by Smisek, with the SEC also finding this was a violation of Section 13. The Order stated, “In particular, United had insufficient internal accounting controls in place to prevent approval of the South Carolina Route in derogation of United’s Policies.”

So there was the equivalent of a FCPA internal controls failure leading to a violation as well.

This might well be a new enforcement theory to use inside the United States, for domestic bribery allegations. Now imagine if United’s profit estimates of $47.5 million had been used as the basis of a profit disgorgement order.

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Tom Fox is a Contributing Editor of the FCPA Blog. He has practiced law in Houston for 30 years. He is now the Compliance Ambassador for the Red Flag Group. He’s the creator of the award winning FCPA Compliance and Ethics website. His best-selling seminal book, “Best Practices Under the FCPA and Bribery Act: How to Create a First Class Compliance Program” (available from Amazon here) is widely viewed as one of the top volumes on the nuts and bolts of compliance.

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2 Comments

  1. An interesting case. Given the success the S.E.C has had enforcing the FCPA, and given the pervasive and entrenched nature of international corruption, one can only see increased S.E.C. enforcement of the FCPA as a good thing. One has to wonder, what if a foreign company, committed bribery in a foreign land but it was making use of the U.S. financial system through bond sales or a U.S. listing, would the S.E.C. have an interest? This would certainly be outside the realm of the Lockheed bribery scandal and the original FCPA. One can only hope the S.E.C. would get increased resources to match an increased jurisdiction.

  2. It is not just the failure of internal controls. Fundamentally the entire episode is what is known to be "Management Override" which happens all the the time in the Corporate world whether it is a Public Company or in a Private company. It's a behavioral issue from the time of Project Management until some one can layer it to be rationalized. Senior and Top Managements do not see the consequences so long a quid pro quo was orchestrated and organized. It's not unusual for me believe that it (Management Override) never happens or happened in large Private companies like KOCH and TRUMP Organizations.


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