The federal judge overseeing a settlement between International Business Machines Corp. (IBM:US) and U.S. regulators over alleged foreign bribes said he won’t drop demands for reports of possible wrongdoing by the company.
U.S. District Judge Richard Leon, who refused to accept the deal the company struck with the Securities and Exchange Commission, denied IBM’s request to alter a requirement that he be told about any future law enforcement or administrative or probes. He agreed to narrow his insistence that IBM tell him of accounting violations to include only those involving payments covered by the Foreign Corrupt Practices Act.
“Bear in mind, this is a company that has a history of violating the books and records provision of the FCPA,” Leon said today during a 20-minute hearing in Washington. “This is a company that has made major payments to foreign governments in the past.”
Leon said in December there’s a growing awareness among federal judges of the need for more rigorous review of corporate settlement agreements. Even so, his extended challenge to an agreed-upon settlement between a company and the government is a rare occurrence. Of 34 foreign bribery settlements the SEC reached with companies since 2010, only two others failed to win judicial sign-off in less than three months.
IBM, based in Armonk, New York, said in March 2011 that it had settled with U.S. regulators over allegations that it bribed Chinese and South Korean officials to win at least $54 million in government contracts. Leon, who has had the case under review for 23 months and must sign off on it before it becomes effective, said he won’t accept the reporting terms worked out between the government and IBM. He wants continuing disclosure on a broader range of possible wrongdoing than the company is willing to turn over.
The company, without admitting or denying wrongdoing, agreed in 2011 to pay $10 million in disgorgement and penalties to settle alleged violations of the books-and-records and internal-control provisions of the FCPA.
At the December hearing, Leon said he wouldn’t “rubber stamp” the settlement or “roll over like the SEC has” regarding IBM’s objections that the reporting demands were too burdensome for the company.
Today, Kyle DeYoung, a lawyer for the SEC, told Leon that he was optimistic that a resolution could be reached.
IBM’s lawyers referred to nonpublic conversations the parties have had with the judge in his chambers, as well as documents turned over to the court that weren’t placed on the public record, when they addressed the court. At least three private meetings with the parties took place in Leon’s chambers without a court reporter present, according the case file and court stenographers.
Noel Francisco of Jones Day, a lawyer for IBM, said an earlier demand required IBM to report only probes related to foreign bribery. He then asked why a later version included all criminal investigations.
“It was overtaken by events,” Leon said. “There’s been a lot of water over the dam since then.”
Leon didn’t explain in court what those events were.
Another IBM lawyer, Peter Barbur of Cravath, Swaine & Moore LLP in New York, said the company was concerned that reports of law enforcement probes to the court could potentially be released to the public. Some of these investigations sought by Leon don’t rise to the level triggering an SEC disclosure, he said.
“If there’s an industry-wide probe and there’s no reason to think IBM did anything wrong, then they may not disclose that in annual disclosures,” Barbur said.
Leon, who scheduled another hearing for Feb. 19, said he would probably keep such reports under seal.
The IBM case is one of five filed by the SEC since 2010 that didn’t include criminal charges brought by the Justice Department.
The only other FCPA settlement of the SEC awaiting approval is its $13.1 million deal with Tyco International Ltd. (TYC:US) that was filed in Washington on Sept. 24. Leon is overseeing that case, too.
The alleged payments at issue in the IBM case occurred from 1998 through 2009 and were made by employees at three subsidiaries of IBM, as well as LG IBM PC Co., a joint venture with LG Electronics Inc. (066570), according to the SEC’s complaint.
The SEC said cash payments to South Korean officials from 1998 to 2003 totaled $207,000 and were connected to contracts worth almost $54 million. Some of the money was delivered in shopping bags.
In China, the IBM employees created “slush funds” at local travel agencies that were used to pay for overseas excursions by government officials, the SEC said. IBM employees also gave gifts, such as cameras and laptop computers, to Chinese officials, according to the complaint.
The SEC didn’t say what IBM received in return from those officials.
In 2000, IBM settled with the SEC over alleged bribes in Argentina. An IBM subsidiary in the country was accused of making payments through a subcontractor in 1994 and 1995 to win a $250 million contract.
Without admitting or denying the allegations, IBM paid $300,000 to settle the matter.
The SEC ordered that the company “cease and desist” from “committing or causing any future violation” of the books-and- records provision of the Securities Exchange Act.
The case is SEC v. International Business Machines Corp., 11-cv-00563, U.S. District Court, District of Columbia (Washington).
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