The Foreign Corrupt Practices Act and Control Person Liability: SEC v. Nature's Sunshine Products

In SEC v. Nature's Sunshine Products, Inc. (“NSP”), and SEC v. Douglas Faggioli and Craig Huff (collectively “Nature’s Sunshine”), the SEC brought a suit in the Federal District Court of Utah under control person liability based on an unprecedented extension of the Federal Corrupt Practices Act (“FCPA”).    The SEC claimed that when NSP allegedly made cash payments to bypass government regulations, control person liability applied because NSP’s business records and internal accounting controls failed to accurately record the alleged bribes.  However, without admitting guilt, the defendants consented to a final judgment, thereby closing the case.

NSP is a Utah based corporation which manufacturers nutritional and personal care products.  It has subsidiaries in 21 foreign countries, including Brazil (“NSP Brazil”).  By the late 1990’s, Brazil was NSP’s largest foreign market responsible for $22 million in sales in 2000.  At the height of NSP’s Brazilian profits, Brazil reclassified certain vitamins, herbal products, and nutritional supplements as medicines, which required NSP Brazil to register previously sold products as medicines.  NSP Brazil attempted, unsuccessfully, to reclassify numerous products, resulting in a massive decline in sales revenue, down to $2.6 million in 2003. 

The SEC alleged that in an effort to sell NSP’s products without the required re-classification, NSP engaged in bribery.  Specifically, NSP made undocumented cash payments totaling over $1 million, which it booked as importation advances to customs brokers and customs officials.  In November, 2001, a new controller discovered that NSP Brazil had made eighty undocumented cash payments. 

The SEC brought five causes of action against NSP and its former CEO and CFO, alleging illegal payments to foreign officials, securities fraud, false filings, and books and records violations.  The SEC brought an action against the officers relying on control person liability. 

Along with the SEC’s traditional securities violation claims, the SEC broke into uncharted territory by using the FCPA to charge the officers with control person liability based on the violation of books and records and internal controls provisions of the securities laws.  As stated in a client publication by the law firm Shearman & Sterling, the SEC rarely uses control person liability in FCPA cases.  The SEC relied upon Section 20(a) of the Exchange Act to expand control person liability.  Section 20(a) states:

• Every person who, directly or indirectly, controls any person liable under the provision of this chapter or any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.” 

Although the SEC never claimed the former officers had any personal knowledge, activity, or awareness of the cash payments, the indirect supervisory oversight of fraudulent records from NSP Brazil was enough to establish control person liability for both officers.  Both were charged despite the language in Section 20 that excepted those who did not “directly or indirectly induce the act.” 

Because the Nature’s Sunshine defendants consented to a Final Judgment without admitting or denying the allegations, this case was not actually litigated and no fact finder resolved the underlying issues.  The company agreed to a permanent injunction, stipulated to implement a more vigorous accounting system, and pay $600,000.  Each former officer agreed to pay $25,000. 

Although the case holds no precedential value, it does show an aggressive enforcement policy by the SEC and its willingness to use control person liability to bring actions against individuals who played no actual role in the illegal payments but had some type of supervisory responsibility.  It may portend more actions against supervisory personnel in the future. 

The primary materials for this post are available on the DU Corporate Governance website.