IT Giant Hewlett-Packard Charged with FCPA Violations

What started in a one-car garage in Palo Alto, California ultimately became one of the biggest names in the personal computer manufacturing industry. Hewlett-Packard’s (HP) success is the epitome of the American success story, but as often happens, with growth comes a disconnect with the founding principles of “corporate America.” Such is the case with a recent Securities and Exchange Commission investigation. The SEC has charged HP with breaching the Foreign Corrupt Practices Act of 1977 (FCPA) because three of its counterparts in three countries made illicit payments to government officials in order to either get or keep advantageous public contracts.

The SEC’s settled order proceedings determined that HP’s subsidiary in Russia had bribed a Russian government official with more than $2 million by using agents and shell companies in effort to retain a multi-million dollar contract that it held with the federal prosecutor’s office. The SEC’s order states that the scam involving HP’s Russian subsidiary took place from about 2000 – 2007 and that agents and consultants received the bribes to influence the winning of the government contract for both hardware and software. Although some employees within the subsidiary and others inquired about the major increase being paid to the agent on the deal and the subcontractors that the agent planned to use, the deal went through with little to no due diligence pertaining to the agent or the subcontractors.

Further corruption occurred in HP’s subsidiary in Poland where the company gave both gifts and cash bribes totaling more than $600,000 to a Polish government official in order to gain contracts with the national police agency. The order finds that these acts of bribery occurred between 2006 and 2010. Through the use of its public sector sales manager, the subsidiary agreed to pay a Polish government official for the express purpose of winning contracts for IT products and services. The cash bribes were taken from off-the-books accounts and the official was paid a percentage of the net revenue that was earned from the contracts.

Hewlett-Packard’s nefarious foreign faux pas didn’t stop there. In attempting to win its bid for a software sale to a state-owned petroleum company in Mexico, HP’s affiliate in Mexico paid a consultant with ties to company officials inflated commissions of more than $1 million. That money was then funneled to one of those officials.

The SEC’s order addresses Hewlett-Packard’s subsidiary in a Mexico pay-off, as well. A consultant was hired to assist the company win a public IT contract which was valued at nearly $6 million. Approximately $125,000 was siphoned off of that amount so that it could be redirected to a government official at the state-owned company that had connections to the consultant. Even though the consultant was not subject to due diligence because he was not an approved deal partner with the company, HP Mexico sales managers still used a pass-through entity to pay exorbitant commissions to him. They even had an internal name for this process – “influencer fee.”

“Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses,” said Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit. “Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”

Ultimately, the SEC’s order found HP in violation of internal controls, and books and records provisions of the SEC Act of 1934. The company consented to these findings and agreed to pay $29 million in disgorgement. Nearly $26.47 million of this will go to the SEC with $2.53 million being used to satisfy an Internal Revenue Service forfeiture as part of the criminal case. Hewlett-Packard also agreed to pay prejudgment interest of $5 million to the SEC and fines of $74.2 million in the criminal case which totals more than $108 million in disgorgement and penalties for the company. In a parallel action, the U.S. Department of Justice had filed a criminal case against HP.

The Blum Law Group specializes in helping people who have been victimized by brokers/firms. If you believe you have suffered financial losses as the result of the practices of Hewlett-Packard, please give us a call at 877-STOCK-LAW for a free consultation.