A plea agreement entered into last week with the U.S. Department
of Justice Antitrust Division (DOJ) provides a sobering reminder of
the serious consequence of obstruction of justice, and highlights
the fact that such obstruction issues can arise even in connection
with seemingly routine merger investigations if key documents
intentionally are altered before being submitted to the
government.
On May 3, 2012, an executive of a South Korean company agreed to
plead guilty and to serve five months in U.S. prison for altering
documents in connection with a proposed merger—first in
documents submitted to the U.S. antitrust agencies as part of a
required premerger Hart-Scott-Rodino filing, and later in documents
submitted to the DOJ after the agency had opened a formal merger
investigation. Criminal prosecution for obstruction of
justice does occur from time to time in antitrust matters, but
almost always in criminal price-fixing or bid rigging cases.
Nevertheless, the DOJ will prosecute attempts to corrupt its
investigative process in whatever context the attempt occurs.
The HSR Act requires that parties to certain transactions notify
the FTC and DOJ and observe a waiting period (usually 30 days)
before closing. This affords the agencies time to evaluate
the likely competitive effects of a proposed transaction before
consummation. If the reviewing agency believes that a
transaction may violate the antitrust laws, it can seek an
injunction in federal court to block the deal.
If an HSR notification is required, each party must complete a
Notification and Report Form. Item 4(c) of the form requires
parties to submit:
These "4(c) documents" are an important part of the agencies' premerger review process because they provide the DOJ and the FTC with their first look at the parties' internal documents. More to the point, the documents may reflect the parties' motivation for the proposed transaction, as well as their thoughts about how the transaction might affect competition. The agencies use these documents, together with other information (such as interviews of customers), to assess whether the transaction warrants additional scrutiny through the issuance of a "Second Request," a broad request for documents, data, and information. A Second Request extends the waiting period, usually until 30 days after all parties have responded. This phase often extends the merger review process by 2-4 months or more, so merging parties always are keen to avoid a Second Request if possible.
Executive plea agreement
On May 3, the DOJ filed a two-count felony charge in federal
district court against Kyoungwon Pyo, a senior vice president for
corporate strategy of Hyosung Corporation, an affiliate of Nautilus
Hyosung Holdings Inc. ("Nautilus"). According to
the DOJ, in July and August 2008, Mr. Pyo altered, and directed
subordinates to alter, existing 4(c) documents before they were
submitted to the DOJ and the FTC as part of Nautilus' HSR
filing in connection with its proposed acquisition of rival
automated teller machine (ATM) manufacturer, Triton Systems of
Delaware, Inc. According to the DOJ, Mr. Pyo did this with
the intent to impair the documents' integrity and availability
for use in an official government proceeding. The alterations
allegedly "misrepresented and minimized the competitive impact
of the proposed acquisition."
After receiving the parties' HSR filings (and apparently
without knowledge that some 4(c) documents had been falsified), the
DOJ initiated a civil merger investigation of the proposed
acquisition. As part of this more in-depth scrutiny, the DOJ
requested additional documents from Nautilus. According to
the DOJ, in August and September 2008, Mr. Pyo falsified additional
documents that Nautilus submitted to the agency. These
alterations too allegedly misrepresented and minimized the
competitive impact of Nautilus' proposed acquisition of
Triton.
Mr. Pyo has agreed to plead guilty and to serve five months in
prison for his conduct. His plea agreement is subject to
court approval. Obstruction of justice carries a maximum
penalty of 20 years in prison and a criminal fine of $250,000 for
individuals. Thus, the five-month sentence (if accepted by
the court) would fall well short of Mr. Pyo's worst-case
criminal exposure.
Company plea agreement
Mr. Pyo's agreement to plead guilty follows his
employer's earlier decision to do the same. In October
2011, Nautilus pleaded guilty to two counts of obstruction of
justice and agreed to pay a $200,000 criminal fine for its role in
the conduct ($100,000 for each count). The company's plea
agreement referenced an unnamed "Executive A" as the
employee who spearheaded the unlawful conduct.
Nautilus' criminal fine of $200,000 could have been much worse.
Obstruction of justice for a corporation carries a maximum
fine of $500,000 per count. According to the company's
plea agreement, Nautilus voluntarily told the DOJ about the
falsified documents in early 2009 and provided "substantial
cooperation" to the agency's criminal investigation of the
obstructive conduct. (The parties subsequently abandoned the
transaction.) As part of its settlement, Nautilus agreed to
provide continuing cooperation to the DOJ's ongoing
investigation. The government, in turn, agreed not to bring
criminal charges against all of Nautilus' current and former
employees for the obstructive conduct save one: Mr. Pyo was
"carved out" of the company's plea agreement.
As suspected, Mr. Pyo is Executive A.
Observations
The DOJ's actions in this case may mark the first time that
criminal charges have been brought against defendants for altering
documents submitted with an HSR filing and during a merger
investigation. The charges serve as a stark reminder that HSR
filings and subsequent FTC and DOJ review and analysis of a
proposed transaction constitutes an "official proceeding"
for purposes of the criminal obstruction statutes. The DOJ
will prosecute attempts to corrupt the government's
investigative process essentially as a strict liability offense.
The DOJ did not allege that the conduct adversely affected
its substantive review of the transaction (before the parties
abandoned the deal). Indeed, the DOJ initiated a more
detailed competitive assessment of the proposed acquisition
despite the falsified 4(c) documents submitted with the
company's HSR filing. (Nautilus only later informed the
agency that the documents were altered.) Companies must avoid
such conduct, even by unauthorized employees, when submitting
premerger filings and documents in response to government requests
for information.
The DOJ press releases can be found at:
Individual: http://www.justice.gov/atr/public/press_releases/2012/282873.htm
Company: http://www.justice.gov/atr/public/press_releases/2011/273954.htm
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.