TheCorporateCounsel.net

In our “Q&A Forum,” we have reached query #3000 (which is really a higher number since many of these have follow-ups queries). I’m so happy Dave is on board; answering those sure can be stressful. You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply…

Posted: SEC’s IFRS Concept Release

Yesterday, the SEC posted a 42-page concept release relating to allowing US issuers to prepare their financials according to IFRS rather than US GAAP. This is a “biggie”…

Becoming a Blogger

The benefits of blogging yourself are many. Do you have what it takes? I’m always happy to discuss this with you if you are interested in trying. In this podcast, Kevin O’Keefe of LexBlog provides some insight into what you should consider if you decide to become a blogger, including:

– Why should corporate lawyers blog?
– How can a lawyer determine whether they have what it takes to blog?
– What are elements of a blog that will attract an audience?
– What are your favorite blogs – and why?

Payments to Terrorists: Chiquita Brands and the Role of the Board of Directors

In his “The Race to the Bottom” Blog, Professor J. Robert Brown recently posted this interesting analysis regarding a troublesome situation involving a former SEC Chairman:

“There was an interesting article in the WSJ last week about Chiquita Brands International Inc. and payments made to a violent group in Colombia designated by the Department of State as terrorists. According to the article, Roderick M. Hills, the former Chairman of the SEC, went to the Justice Department in his capacity as chair of the audit committee to disclose the payments. Despite having self reported, a criminal prosecution resulted with Chiquita ultimately agreeing to a plea of one count of engaging in transactions with a specially-designated global terrorist and topay a fine of $25 million. A grand jury is now apparently weighing a possible indictment of Hills.

The implication of the article was that companies confront heightened risk if they self report their own misdeeds. As the article noted: “The investigation illustrates the recent posture taken by U.S. authorities to prosecute aggressively even when companies turn themselves in for breaking the law.”

But in fact it illustrates no such thing. This is not the usual case of a company discovering improper behavior, putting a stop to it, and self reporting to the government. This is a case that involves a fundamental breakdown in the system of corporate governance.

First, this was not the only payment problem incurred by Chiquita’s Colombian subsidiary. It had already been found to have made improper payments to government officials by the SEC, with Chiquita subjected to a $100,000 fine. See SEC v. Chiquita Brands International, Inc., Litigation Release No. 17169 (D DC Oct. 2. 2001). In other words, the board and management was on notice that there were problems with this particular subsidiary, specifically in connection with the making of improper payments.

Second, the payments in Colombia were made to Autodefensas Unidas de Colombia (AUC), an organization described in the factual proffer as “a violent, right-wing organization” (a copy of the Proffer is posted on the DU Corporate Governance web site). As one US Attorney described in the WSJ article:

“I regarded this as a murder investigation,” from the start, says Roscoe Howard Jr., former U.S. Attorney for Washington, D.C., who helped lead the Chiquita prosecution before he left his position in 2004. “Even though Chiquita didn’t murder anyone, that’s what the money was used for — to buy weapons.”
Moreover, the role of the AUC was not lost on the US Government. It was designated as a foreign terrorist organization in September 2001.

Third, the payments had been discussed and apparently approved by persons in the highest echelons of management. Again, according to the Proffer:

“Defendant CHIQUITA’S payments ot the AUC were reviewed and approved by senior executives of the corporation, to include high-ranking officers, directors, and employees. . . An in-house attorney for CHIQUITA conducted an internal investigation into the payments and provided Individual C [listed only as a high ranking official] with a memorandum detailing that investigation. The results of the internal investigation were discussed at a meeting of the then-Audit Committee of the then-Board of Directors in defendant CHIQUITA’S Cincinnati headquarters in or about September 2000.”
In other words, this was not a case where a company’s management discovered improper behavior and went right to the authorities. This behavior was apparently widely known among top management and allowed to continue.

Fourth, as the WSJ Article indicated, Hills joined the board in 2002 and almost immediately learned about the payments. Nonetheless, it took a year before he reported them to the Justice Department. Moreover, the decision to self report only occurred after the matter was brought to the attention of outside counsel and the entire board. Outside counsel (apparently Kirkland & Ellis), according to the Proffer, indicated that the company “must stop [the] payments.” A report was made to the full board and at least one member “objected to the payments.” It was after that meeting that officials met with officilas at the Department of Justice.

Fifth, Justice Department officials, according to the Proffer, informed Chiquita officials (including, apparently, Hills) that the payments to the AUC “were illegal and could not continue.” Moreover, several months later, officials at Chiquita were told by outside counsel that DOJ officials “have been unwilling to give assurances or guarantees of non-persecution; in fact, officials have repeatedly that they view the circumstances presented as a technical violation and cannot endorse current or future payments.” Nonetheless, the payments continued until February 2004.

Finally, the WSJ left the impression that Chiquita and Hills were being treated harshly. Compare that to an article in the LA Times which suggested that some in the US Attorneys Office wanted more rigorous prosecution at an earlier date and were possibly stymied by higher ups in the Justice Department. That Article indicated that Congress was conducting an investigation. Id. (“As part of an inquiry into corporate payments to violent groups in Colombia, a group of congressmen wants more details about the Justice Department’s handling of the Chiquita Brands International Inc. case, including whether the department was too lenient and why it took four years to file criminal charges after the banana company admitted making payoffs.”).

This is not, therefore, a case where a company learns about a bad practice and immediately coming clean. It is the story of illegal payments that were known at the top levels of management, continued for seven years, went to a violent terrorist group, and were self reported only when the entire board and outside counsel learned about them. Indeed, the history of payments apparently went back beyond 1997. As the WSJ article noted, “Chiquita had previously paid another violent group until it was declared a terrorist organization in 1997.”

There were no doubt moments when Chiquita was truly in a difficult spot. The articles indicate that the payments were made to ensure the security of employees in Columbia. But that might explain the payments for the time it took to either provide adequate security or exit the country. In fact, the payments to AUC continued for seven years, from 1997 to 2004.

Whatever happens to Hills, as a director with fiduciary obligations to shareholders, he (and the entire board) should, once they knew, have put an end to these payments. That they did not is a remarkable failure of governance.”

– Broc Romanek