PTC Inc. and No Cooperation Credit Case Under Yates
On February 16, 2016, the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) announced parallel resolutions with PTC Inc, (formerly Parametric Technology Corporation), a Massachusetts based software company, and two wholly owned Chinese subsidiaries Parametric Technology (Shanghai) Software Company, Ltd., and Parametric Technology (Hong Kong) (PTC China), respectively to settle allegations that PTC and PTC China had bribed employees of Chinese state owned entities (SOEs) in order to obtain and retain contracts with their employers.
PTC China, according to admissions made in the resolution documents, paid nearly $1.5 million, for over 100 employees of various SOEs to travel to the United States for "improper recreational travel". While the stated purpose of these trips was to attend training sessions at PTC headquarters, their primary purpose was for recreational travel to New York, Los Angeles, Las Vegas, San Diego, Atlanta and Hawaii. These trips were taken during the same time period that PTC China entered into more than $13 million in contracts with the SOEs.
PTC China admitted that the costs of these trips were routinely hidden within the price of PTC China software sales to the SOE's whose employees went on the trips by inflating subcontracting and commission payments made to its local "business partners", third parties that helped PTC China identify and execute business opportunities with Chinese SOEs. In addition to the improper travel, PTC China provided over $250,000 in improper gifts and entertainment directly to Chinese SOE employees in order to obtain and retain business.
PTC and PTC China agreed to pay a combined $28 million in fines and penalties. PTC agreed to pay $11.858 million in disgorgement and $1.764 million in prejudgment interest to settle the SEC's charges, while PTC China agreed to pay $14.54 million in monetary penalty pursuant to the terms of their Non-Prosecution Agreement (NPA) with the DOJ. According to the NPA:
"PTC China did not receive voluntary disclosure credit or full cooperation credit because, at the time of initial disclosure, it failed to disclose relevant facts that it had learned in connection with a prior internal investigation and did not disclose those facts until the department uncovered additional information independently and brought them to PTC China's attention. By the conclusion of the investigation, however, the companies had provided to the department, all relevant facts known to them, including information about individuals involved in the FCPA misconduct."
The NPA states that "the companies received partial cooperation credit of 15% off the bottom of the Sentencing Guidelines fine range for their cooperation with the Office's investigation ... but did not receive full cooperation credit for the reasons described..."
Bottom Line: The DOJ is using the PTC matter to send the following message: incomplete or piecemeal self-disclosures are insufficient and that self-disclosure must be complete to be fully rewarded.
Takeaways for corporate management, audit staff, compliance directors and in-house counsel:
- Adequacy of internal investigation: DOJ has made it known that it will "pressure test a company's internal investigation with the facts we gather on our own." Self-disclosure must be complete and not withhold any material information.
- What is the impact of the PTC resolution on a company deciding whether or not to self-disclose as well as the timing of such disclosure: a company should not self-disclose unless it is in a position to fully disclose all relevant facts relating to the misconduct. Also it is not clear how DOJ will treat an inadvertent failure to disclose vs. an intentional failure to disclose and what impact does this have on the question of whether to self-disclose at all.
- Continued risk presented to companies by the conduct of third parties.
- Impact of illicit conduct by foreign subsidiaries of U.S. companies.
- Expansion of payment of "anything of value" to obtain foreign business.