Insights & Reports > Kroll Global Fraud Report

The recent increase in Foreign Corrupt Practices Act (FCPA) enforcement by the Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) has been widely noted. NERA has recently published a paper examining trends in FCPA regulatory settlements from 2002 through 2008, as well as potential related exposure to civil litigation in certain cases.¹ NERA’s data shows that, in the universe of all SEC regulatory settlements with a monetary component, regulatory settlements involving FCPA-related allegations settled for larger amounts than previously during the period 2004-2008.

The direct impact of alleged FCPA violations is limited to penalties and the disgorgement of ill-gotten gains. These costs constitute a one-time charge to the income statement, and may often be relatively small compared to a firm’s total value. The behavior connected to the alleged wrongdoing, however, can sometimes have a lasting impact on the company. The loss of business obtained through alleged bribery, for example, can be substantial.

One way to assess the full impact of an FCPA violation is to analyze stock price reactions to announcements of an FCPA action by publicly traded companies. NERA has examined the relationship between the S&P 500 index and a company’s stock price to assess the statistical significance and magnitude of price reactions to news connected to FCPA-related allegations for all companies that experienced SEC regulatory actions over the period 2002 through 2008. Of the 31 price reactions considered, nine, or just under a third, led to stock price declines that were statistically significant at least at the 10 percent level (see chart). Most had an even greater significance.

In all nine cases, the impact on market capitalization of an FCPA-related announcement was far larger than the regulatory settlement imposed. For example, when Syncor International Corporation announced to the public that it was investigating suspicious payments in Asia that may have violated the FCPA, its stock price plummeted almost 45 percent on a market adjusted basis, implying a loss of US$343 million in market capitalization. The amount paid in its eventual settlement with the SEC and the DOJ, on the other hand, was only half a million dollars.

Moreover, in five of the six cases where an FCPA-related announcement resulted in a statistically significant price reaction at the 99 percent confidence level (signified by three stars in the attached chart), a securities class action lawsuit was also filed against the company in question. Three companies eventually settled these suits for amounts that were more than double those of their regulatory settlements, one settled for almost one-third of the regulatory settlement amount, and only one had the civil litigation dismissed.

Given the increase in FCPA enforcement, more FCPA-related civil litigation may well be forthcoming. In some cases, the exposure from stock price declines and civil litigation may significantly exceed regulatory settlements.

¹ FCPA Settlements: It’s a Small World After All, http://www.nera.com/publication.asp?p_ID=3710

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Dr. Patrick Conroy is vice president at NERA, where he specializes in securities and finance. His work has included economic analysis involving securities fraud, mutual funds, suitability of investments, derivatives, and company valuation. He has testified in federal court on issues dealing with securities trading. Prior to joining NERA, He was an economist at the Securities and Exchange Commission.

Raymund Wong specializes in valuation, accounting, and financial economics. In his work at NERA, he has devised and implemented analyses for numerous projects involving securities fraud litigation, insider trading, employee restricted stock and stock options, private equity, and thinly traded securities. He is a CFA charterholder and a Certified Public Accountant, and is Accredited in Business Valuation by the AICPA.

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