U.S. BODY ARMOR COMPANY ARMOR HOLDINGS SETTLES SEC CHARGES IN FOREIGN CORRUPT PRACTICES CASE

The following is an excerpt from the SEC website:

“Washington, D.C., July 13, 2011 – The Securities and Exchange Commission charged Armor Holdings, Inc. with violating the Foreign Corrupt Practices Act (FCPA) by participating in a bribery scheme from 2001 through 2006 to obtain contracts to supply body armor for use in United Nations (U.N.) peacekeeping missions. The SEC also charged Armor Holdings, a Florida-based manufacturer of military and law enforcement safety equipment, with failing to properly account for more than $4 million in commissions from 2001 through 2007 in violation of the books and records and internal controls provisions of the federal securities laws.

Armor Holdings agreed to settle the SEC’s charges by paying nearly $5.7 million in disgorgement, prejudgment interest, and penalties. Armor Holdings also agreed to pay a $10.29 million fine to settle a parallel criminal investigation announced by the U.S. Department of Justice today. Since 2010, the SEC has filed 32 FCPA cases, including the case against Armor Holdings, and obtained more than $600 million in penalties, disgorgement and interest.
“Illicit payments to U.N. officials are no less reprehensible than bribes to foreign government officials,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The important process of selecting body armor for peace keepers should not be affected by which company pays the best bribes.”
Gerald W. Hodgkins, Associate Director of the SEC’s Division of Enforcement, added, “Armor failed to maintain adequate internal controls to prevent its subsidiary from making illegal payments to win U.N. supply contracts. Just as troubling, Armor improperly accounted for sales commissions for several years even after being warned that the accounting treatment was wrong.”
The SEC’s complaint alleges that certain agents of Armor Holdings caused its U.K. subsidiary to wire at least 92 payments, totaling approximately $222,750 to a third-party intermediary, with the understanding that part of these payments would be offered to a U.N. official who could help steer business to Armor Holdings’ U.K. subsidiary. The complaint alleges that agents of Armor Holdings caused its U.K. subsidiary to enter into a sham consulting agreement with the intermediary for purportedly providing legitimate services in connection with the sale of goods to the U.N. The complaint alleges that, through this bribery scheme, Armor Holdings derived gross revenues of $7,121,237, and net profits of $1,552,306.
The SEC alleges that another Armor Holdings subsidiary disguised in its books and records commissions paid to intermediaries who brokered the sale of goods to foreign governments. Even after being warned by internal and external accountants that this practice violated U.S. Generally Accepted Accounting Principles, Armor Holdings’ subsidiary continued the improper accounting practice. As a result, approximately $4 million in commissions was not properly disclosed in the books and records of the company.
On July 31, 2007, after the conduct alleged in the SEC’s complaint had occurred, Armor Holdings was acquired by BAE Systems, Inc., an indirect wholly owned U.S. subsidiary of Britain’s BAE Systems PLC. Accordingly, Armor Holdings is no longer an issuer of securities.
The SEC’s complaint charges Armor Holdings with violating Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the allegations, Armor Holdings consented to the entry of a permanent injunction against further violations and agreed to pay $1,552,306 in disgorgement, $458,438 in prejudgment interest, and a civil money penalty of $3,680,000. Armor Holdings also agreed to comply with certain undertakings regarding its FCPA compliance program. The settlement is subject to court approval. Armor Holdings conducted a thorough investigation to determine the scope of the improper payments and cooperated with the SEC’s inquiry.
Richard J. Kutchey and Gregory G. Faragasso conducted the SEC’s investigation. The Commission acknowledges the assistance of the Fraud Section of DOJ’s Criminal Division and the Federal Bureau of Investigation. The SEC’s investigation is continuing.”

SEC ALLEGES GOVERNMENT WEB SITE MANAGER WAS TOO PERKY

Many times businesses will pay key employees who leave the business consulting fees for help in solving difficult problems. In the following case the SEC alleges that these fees were paid as perks and were not properly disclosed to investors. Please read the following excerpt from the SEC web site for more details:

"Washington, D.C., Jan. 12, 2011 — The Securities and Exchange Commission today charged a Kansas-based company that manages government websites and four current or former company executives with failing to disclose to investors more than $1.18 million in perks paid to the former CEO over a six-year period.

The SEC alleges that NIC Inc.'s public filings failed to disclose that the company footed the bill for wide-ranging perks enjoyed by former CEO Jeffrey Fraser, his girlfriend, and his family — including vacations, computers, and day-to-day personal living expenses. NIC failed to disclose that it paid thousands of dollars per month for Fraser to live in a Wyoming ski lodge and commute by private aircraft to his office at NIC's Kansas headquarters. Meanwhile, NIC and its executives falsely represented to investors that Fraser worked virtually for free from 2002 to 2005, and then continued to materially understate the perks that Fraser received in 2006 and 2007. NIC's related party disclosures for 2002 through 2005 also were misleading.

NIC, Fraser, current CEO Harry Herington and former CFO Eric Bur agreed to pay a combined $2.8 million to settle the SEC's charges against them without admitting or denying the allegations. The SEC's litigation continues against NIC's current CFO Stephen Kovzan.

Additional Materials
SEC Complaint vs. NIC, Fraser, Herington, and Bur
SEC Complaint vs. Kovzan
Litigation Release No. 21809

Public disclosure of executive perks helps investors evaluate whether corporate assets are being used wisely or squandered," said Antonia Chion, Associate Director of the SEC's Division of Enforcement. "NIC and its executives did not comply with their disclosure obligations and the company's internal controls by paying Fraser's personal expenses while telling shareholders that Fraser was working for little or no compensation."

Among the alleged undisclosed perks for Fraser outlined in the SEC's complaints filed in federal court in the District of Kansas:

More than $4,000 per month to live in a ski lodge in Wyoming.
Costs for Fraser to commute by private aircraft from his home in Wyoming to his office at NIC's Kansas headquarters.
Monthly cash payments for purported rent for a Kansas house owned by an entity Fraser set up and controlled.
Vacations for Fraser, his girlfriend and his family.
Fraser's flight training, hunting, skiing, spa and health club expenses.
Computers and electronics for Fraser and his family.
A leased Lexus SUV.
Other day-to-day living expenses for Fraser such as groceries, liquor, tobacco, nutritional supplements, and clothing.
The SEC's complaints allege that Fraser, who did not have a personal credit card, routinely charged living expenses on NIC credit cards and submitted expense vouchers falsely claiming personal items were business-related in order to have NIC pay for these personal expenses. Fraser also sought reimbursement for certain expenses he had not incurred.

The SEC alleges that Kovzan, who was then the company's Chief Accounting Officer, authorized NIC's payment of Fraser's personal expenses, circumventing NIC's internal controls and policies that required the CEO to document the business purpose for his expenses. Kovzan knew, or was reckless in not knowing, that Fraser's expenses were falsely characterized as business expenses in NIC's books and records. Kovzan prepared, reviewed or signed NIC's proxy statements, annual reports and registration statements that materially underreported Fraser's compensation, and Kovzan made false representations to NIC's independent auditors.

The SEC alleges that Bur permitted NIC to pay the expenses that Fraser submitted on his expense vouchers even though he was informed that Fraser was not submitting the required documentation. A finance department employee raised concerns to Bur that some of Fraser's expenses were not business-related. Bur was aware of the SEC's rules requiring the disclosure of executive perks, yet he reviewed, signed or certified NIC's public filings that failed to disclose Fraser's perks.

The SEC alleges that Herington, who was then NIC's Chief Operating Officer, was informed of problems with Fraser's expense reporting and failed to adequately address them. Herington received information showing that NIC was paying for some of Fraser's personal expenses, yet he reviewed or signed NIC's public filings that failed to disclose Fraser's perks.

According to the SEC's complaints, NIC failed to correct Fraser's expense reporting problems even after the finance department employee warned in 2006 of the risk of possible income tax fraud charges, a whistleblower complained to NIC and the company learned of the SEC's investigation of this matter in mid-2007. The majority of Fraser's perks were not repaid or disclosed, and NIC continued to make misleading public filings. NIC failed to disclose to investors in public filings that an internal review concluded Fraser had intentionally misclassified his expenses.

NIC agreed to settle the SEC's charges by paying a $500,000 penalty and hiring an independent consultant to recommend, if appropriate, improvements to policies, procedures, controls, and training relating to payment of expenses, handling of whistleblower complaints, and related party transactions. NIC consented to a final judgment enjoining it from violating Sections 17(a)(2) and (3) of the Securities Act of 1933; Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities Exchange Act of 1934, and Exchange Act Rules 12b-20, 13a-1, 13a-11, 14a-3, and 14a-9.

Fraser agreed to pay $1,184,246 in disgorgement, $358,844 in prejudgment interest, and a $500,000 penalty, and consented to an order barring him from serving as an officer or director of a public company. Fraser consented to a final judgment enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9, and from aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 12b-20 and 13a-1.

Herington agreed to pay a $200,000 penalty and consented to a final judgment enjoining him from violating Sections 17(a)(2) and (3) of the Securities Act and Section 13(b)(5) of the Exchange Act, and aiding and abetting NIC's violations of Sections 13(a) and 14(a) of the Exchange Act, and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9.

Bur agreed to pay a $75,000 penalty and consented to a final judgment enjoining him from violating Exchange Act Rules 13a-14 and 13b2-1, and aiding and abetting NIC's violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a), and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. In addition, Bur agreed to resolve an anticipated administrative proceeding by consenting to an SEC order prohibiting him from appearing or practicing before the SEC as an accountant with a right to reapply after one year.

Kovzan is charged with violating Section 17(a) of the Securities Act, Section 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13b2-1, and 13b2-2; and aiding and abetting NIC's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 14a-3, and 14a-9. The SEC's complaint seeks a permanent injunction, disgorgement, penalties, prejudgment interest, and an officer-and-director bar against Kovzan, against whom the SEC's charges are still pending."

The above case is one in which the SEC really got tough on alleged inaccurate disclosures. Trying to pay people off the books is common in business although usually the IRS and not the SEC end up investigating these matters.