Friday, January 18, 2008

Will Siemens Have the Mother of All Monitorships?

With each passing quarter the internal investigation at Siemens AG keeps delivering more bad news about the company's overseas bribes.  A case that started with accusations of a few payments in one division has now stretched across what seems like the entire company, with total payments exceeding $2 billion, by far the largest FCPA case seen to date.  The latest letter (here) from Debevoise & Plimpton, the law firm conducting the internal investigation, now indicates that the wrongdoing stretches into Siemens' executive suite, specifically members of its Managing Board.  The firm states, "Since November 28, 2007, we have obtained significant new information and developed very substantial leads from participants in Siemens' amnesty program, as well as other sources, regarding topics relevant to our investigation.  In particular, certain of this new information pertains to the conduct and knowledge of a number of individuals who have served on the Managing Board during the past several years." [italics added]  That is certainly bad news for a company that tried to downplay the bribery problems and insisted, at least to this point, that the payments were a localized issue that did not implicate senior managers.  That line of defense is now pretty much over.

Under German corporate law, there are two Boards at a company.  The Managing Board is responsible for the day-to-day management of the enterprise, the equivalent of the senior managers in a U.S. company.  At Siemens, there are eight members of the Managing Board, including CEO Peter Löscher, and they are responsible for the different operating units.  Above them is the Supervisory Board, which has oversight responsibility for the company and appoints (or dismisses) the members of the Managing Board.  This is the equivalent of the board of directors at a U.S. company, although only half the Supervisory Board members are elected by the shareholders, while the other half represent employees, many of whom are members of unions.  That is quite different from the board of an American company, which is elected only by shareholders and the members are usually picked by management to stand for election.

Siemens has already settled an investigation by local German prosecutors, and the SEC and Department of Justice are conducting FCPA investigations.  The latest revelations will make settling the case more difficult, and the involvement of senior management will require that any deferred prosecution agreement include a monitor with wide-ranging responsibilities.  Siemens had almost €87 billion in sales in 2007, and has nearly 475,000 employees in every major country and region in the world.  The scope of the overseas bribery will require a monitor to go into almost every part of the operation, and given the extensive sales in countries like China, where corruption is endemic, it could take years for an outside agency to assess Siemens' compliance with a DPA.

I suspect the Debevoise investigation has already cost Siemens upwards of $50 million, and quite possibly more as it expands -- the letter states that "significant new information continues to be developed on virtually a daily basis."  The monitorship could well cost it over $250 million.  There has been quite a bit of controversy lately over the appointment of monitors in cases settled by DPAs  (see Washington Post story here), and much has been made of the estimated cost of former Attorney General John Ashcroft's monitorship for Zimmer Holdings that will cost the company between $28 million and $52 million.  That case is fairly straightforward, involving illicit payments to doctors to use the company's devices in replacement surgeries.  Indeed, it's not clear how Ashcroft can charge that much for a fairly simple monitorship, but if that's the going rate, Siemens will easily cost ten times as much, and possibly even more. 

The Department of Justice has been formulating guidelines for the appointment of monitors to regularize the process and remove any appearance of impropriety from positions that can be quite lucrative.  The Siemens monitorship will be the big prize, so let's hope that a program is in place for the appointment of the inevitable outside monitor.  And look for Siemens to create a hefty reserve to settle the case, because I suspect the federal government will be looking for a sizable fine and appointment of a long-term monitor to police the global enterprise. (ph) 

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