Securities and Exchange Commission v. Hitachi, Ltd.

• Court: District Court, District of Columbia
• Decided: November 24, 2015
• Docket: Civil Action No. 2015-1573
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

SECURITIES AND EXCHANGE COMMISSION,

Plaintiff, Civil Action No. 1:15-cv-01573 (CKK) v.

HITACHI, LTD.,

Defendant.

MEMORANDUM OPINION (November 24, 2015)

Plaintiff Securities and Exchange Commission (the “SEC”) filed the Complaint in the

above-captioned action on September 28, 2015, alleging that Defendant Hitachi, Ltd. (“Hitachi”)

violated certain accounting control provisions of the Foreign Corrupt Practices Act (“FCPA”) [15

U.S.C. § 78m(b)(2)(A)-(B)]. Presently before the Court is the parties’ Joint Motion for Approval

and Entry of Proposed Consent Judgment. See ECF No. [5]. For the reasons stated below, the

Court GRANTS the parties’ Joint Motion for Approval and Entry of Proposed Consent Judgment.

I. BACKGROUND

A. The SEC’s Complaint

As alleged in the Complaint, in 2005, Hitachi created a subsidiary in South Africa for the

purpose of establishing a local presence in that country to pursue lucrative public and private

contracts, including government contracts to build two new major power stations. Complaint ¶ 2.

To obtain preferential bidding status in accordance with post-Apartheid empowerment legislation,

Hitachi sold 25% of the stock in its newly-created subsidiary to a local investment firm, Chancellor

House Holdings (Pty) Ltd. (“Chancellor”), which was a front for the African National Congress (“ANC”), South Africa’s ruling political party. See id. ¶ 3, 21, 28. Hitachi’s arrangement gave

Chancellor—and by proxy the ANC—the ability to share in the profits from any power station

contracts secured by Hitachi. Id. ¶ 3. Hitachi also entered into a separate “success fee”

arrangement with Chancellor, wherein Chancellor would be entitled to “success fees” in the event

Hitachi secured contracts “substantially as a result” of its efforts. See id. ¶¶ 3, 32-35.

During the course of bidding on the power station contracts, a series of news articles in the

South African press reported that Chancellor was a funding vehicle for the ANC—a fact that the

ANC’s Secretary General publicly acknowledged and that Chancellor’s chairman admitted. See

id. ¶¶ 22-26, 40-45, 55. Hitachi, nevertheless, maintained its relationship with Chancellor through

its subsidiaries and encouraged Chancellor to use its political influence to help Hitachi obtain the

government contracts. See id. ¶¶ 4, 46-51.

Ultimately, in 2007, Hitachi was awarded the power station contracts, which were worth

approximately $5.6 billion. See id. ¶¶ 5, 54, 56. In 2008, Hitachi’s subsidiary paid Chancellor

“success fees” totaling approximately $1.1 million. See id. ¶¶ 5, 59. In 2010, Hitachi’s subsidiary

recorded a dividend worth over $1.7 million dollars to be paid to Chancellor. See id. ¶¶ 7, 63-65.

Hitachi’s subsidiary inaccurately recorded both payments in their accounting books, describing

the payments as “consulting fees” and “dividends declared,” without any reference to the fact that

the payments to Chancellor were in exchange for its political influence in assisting Hitachi obtain

two government contracts. See id. ¶¶ 6-7, 60-61, 63. The subsidiary’s inaccurate books and records

were consolidated into Hitachi’s financial statements for the fiscal years ended in 2009 and 2011,

and filed with the SEC. See id. ¶¶ 6-7, 60, 65.

In 2011, Hitachi’s subsidiary declared and recorded a second dividend worth

approximately $3.2 million due to Chancellor. See id. ¶ 66. This dividend declaration reflected on

2 the subsidiary’s books and records was consolidated into Hitachi’s financial statements for the

year ended March 31, 2012, but those statements were not filed with the SEC because Hitachi

voluntarily terminated its registration and duty to file reports with the SEC. See id. ¶¶ 12, 66.

In February 2014, Hitachi repurchased Chancellor’s shares in Hitachi’s subsidiary for

approximately $4.4 million. Id. ¶ 68. In total, Chancellor received approximately $10.5 million

from Hitachi, a return of over 5,000% on its investment in Hitachi’s subsidiary. Id. ¶ 69.

The SEC alleges that Hitachi has violated Sections 13(b)(2)(A) and (b)(2)(B) of the

Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78m(b)(2)(A), (B)]. See id. ¶¶

77-80.

B. The Proposed Settlement

Hitachi has agreed to settle the SEC’s charges and consented to the entry of a proposed

consent judgment. See Consent of Hitachi, ECF No. [1-2]; Proposed Consent Judgment, ECF No.

[1-3]. The terms of the settlement were negotiated by Hitachi’s counsel and were considered and

approved by the SEC. Joint Mot. at 3. The proposed consent judgment permanently enjoins

Hitachi from violating the Exchange Act’s books and records and internal accounting controls

provisions—which are the provisions that the SEC’s complaint alleges that Hitachi violated. See

Proposed Consent Judgment, ECF No. [1-3], at 1. The proposed consent judgment also orders

Hitachi to pay a civil penalty in the amount of $19,000,000 under Section 21(d)(3) of the Exchange

Act. See Consent of Hitachi, ECF No. [1-2], at 1; Proposed Consent Judgment, ECF No. [1-3], at

1-2. Under the proposed consent judgment, Hitachi would make this payment within 30 days after

entry of a final judgment. Proposed Consent Judgment, ECF No. [1-3], at 2.

II. LEGAL STANDARD

Prior to approving a proposed consent decree, or consent judgment, “a court must satisfy

3 itself of the settlement’s overall fairness to beneficiaries and consistency with the public interest.”

Citizens for a Better Env't v. Gorsuch, 718 F.2d 1117, 1126 (D.C. Cir. 1983) (internal quotation

marks omitted). Specifically, the Court must “determine that the settlement is fair, adequate,

reasonable and appropriate under the particular facts and that there has been valid consent by the

concerned parties.” Id. (citation omitted); see also Massachusetts v. Microsoft, 373 F.3d 1199,

1206 n.1 (D.C. Cir. 2004) (noting that any consent decree must “fairly and reasonably resolve the

controversy in a manner consistent with the public interest”) (internal quotations and citation

omitted). Approving a consent decree “is a judicial act” that the Court undertakes with care. See

United States v. Microsoft Corp., 56 F.3d 1448, 1462 (D.C. Cir. 1995). However, short of a decree

that “make[s] a mockery of judicial power,” the Court should accept an agreement between the

parties. Id. As this circuit has recognized, “voluntary settlement of civil controversies is in high

judicial favor,” as “[n]ot only the parties, but the general public as well, benefit from the saving of

time and money that results from the voluntary settlement of litigation.” Citizens for a Better Env't,

718 F.2d at 1126.

III. DISCUSSION

The parties jointly request that the Court approve and enter the proposed consent judgment

filed by the parties. See Joint Mot. at 1. In reviewing the proposed consent judgment for approval

and entry, the Court considers (1) whether there was valid consent by the parties to the proposed

consent judgment; (2) whether the proposed consent judgment is fair, reasonable, and adequate;

and (3) whether the proposed consent judgment is consistent with the public interest. See Citizens

for a Better Env't, 718 F.2d at 1126.

A. There was valid consent by the parties to the proposed consent judgment.

The Court must first determine whether there was valid consent by the parties to the

4 proposed consent judgment. See Citizens for a Better Env't, 718 F.2d at 1126.

Here, both parties represent that the settlement is a product of good-faith, arms-length

negotiation. Joint Mot. at 1. The parties further represent that they have each taken into account

the “litigation risks, the benefits to both parties of avoiding those risks and of avoiding protracted

litigation, and the public interest, including that the public settlement sends a message of

deterrence to other publicly-traded companies with international operations.” Id. The content of

the proposed consent judgment also supports a finding of valid consent. The proposed consent

judgment carefully delineates the scope of the injunctive relief, the civil penalty, the timing and

manner of its payment, and other terms to which Hitachi and the SEC have agreed. See ECF No.

[1-3]. The Consent of Hitachi signed by Hitachi’s Vice President and Executive Officer—the

agent authorized to sign on behalf of Hitachi—also indicates that Hitachi entered into the

agreement voluntarily, and that Hitachi understands and agrees to the terms of the proposed

consent judgment. See Consent of Hitachi, ECF No. [1-2]. Finally, the parties’ status—Hitachi is

a private, sophisticated, counseled litigant, and the plaintiff is the United States government

itself—strongly supports a finding of valid consent. See United States v. Wells Fargo Bank, NA,

891 F. Supp. 2d 143, 145 (D.D.C. 2012)

B. The proposed consent judgment is fair, adequate, reasonable, and appropriate under the particular facts.

Second, the Court must determine whether the proposed consent judgment is “fair,

adequate, reasonable, and appropriate under the particular facts.” Citizens for a Better Env't, 718

F.2d at 1126 (citation omitted).

As a preliminary matter, the Court observes that the Second Circuit recently held that a

district court should not consider the “adequacy” of a proposed consent judgment involving an

5 enforcement agency. SEC v. Citigroup Global Markets, Inc., 752 F.3d 285, 294 (2d Cir. 2014).

In Citigroup, the Second Circuit held that consideration of “adequacy” is unnecessary in cases

involving an enforcement agency—particularly when that agency is the SEC—because such

consent decrees do not preclude future claims by potential plaintiffs with private rights of actions,

if such persons exist. See id. The Second Circuit reasoned that the consideration of “adequacy”

by a Court reviewing a consent decree “appears borrowed from the review applied to class action

settlements, and [is] particularly inapt in the context of a proposed S.E.C. consent decree.” Id.

Since Citigroup, the D.C. Circuit has not ruled on whether a district court should consider the

“adequacy” of a proposed consent judgment between the SEC and a private litigant. The Court

therefore shall review the proposed consent judgment in this case in accordance with the D.C.

Circuit’s decision in Citizens for a Better Environment, that is, whether the proposed consent

judgment is “fair, adequate, reasonable, and appropriate under the particular facts.” 718 F.2d at

1126 (emphasis added). 1

Here, Hitachi has consented to the entry of a judgment that permanently enjoins it from

violating Sections 13(b)(2)(A) and (b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and

78m(b)(2)(B)]. See Proposed Consent Judgment, ECF No. [1-3], at 1. This injunction is designed

to prevent future violations by Hitachi of the books and records and internal accounting controls

provisions that are alleged in the complaint. Joint Mot. at 6. Hitachi also has agreed to pay, within

30 days after entry of the final judgment, a civil penalty in the amount of $19,000,000, pursuant to

Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. See Proposed Consent Judgment,

1 The Court notes that distinction is of no consequence in this case, because the Court finds that the proposed consent judgment is fair, reasonable, appropriate under the particular facts, and adequate. 6 ECF No. [1-3], at 2. The $19,000,000 figure represents a compromise figure that the parties

arrived at following lengthy negotiations regarding the extent of potential monetary liability for

the violations alleged in the complaint and what would be an acceptable penalty in connection with

settlement of the charges. Joint Mot. at 6. The parties indicate that the terms take into account

careful assessment by both parties of the risks likely to be presented in litigation of this matter, the

benefits of avoiding those risks, and other considerations. Id.

The Court finds that the terms set forth in the proposed consent judgment constitute a

“balance of advantages and disadvantages” for each of the respective parties. SEC v. Clifton, 700

F.2d 744, 748 (D.C. Cir. 1983). Accordingly, the Court concludes that the proposed consent

judgment reflects a resolution that is “fair, adequate, reasonable, and appropriate under the

particular facts” of this case. See Citizens for a Better Env't, 718 F.2d at 1126.

C. The proposed consent judgment is consistent with the public interest.

Finally, the Court must ensure that the consent decree is “consisten[t] with the public

interest,” Citizens for a Better Env't, 718 F.2d at 1126; in other words, “that the agreement is not

unlawful, unreasonable, or against public policy,” United States v. Wells Fargo Bank, NA, 891 F.

Supp. 2d 143, 146 (D.D.C. 2012) (internal quotation marks omitted).

Here, no third parties will be injured by the proposed settlement, and no third party has

objected to it. See Joint Mot. at 7-8. Furthermore, the proposed consent judgment would

permanently enjoin Hitachi from violating the Exchange Act’s books and records and internal

accounting controls provisions—the very provisions that the SEC’s complaint alleges that Hitachi

violated. See Proposed Consent Judgment, ECF No. [1-3], at 1. Such an injunction protects the

public by warning the public of potential violations and serves as a reminder to other international

companies the importance of careful due diligence and other controls to ensure compliance with

7 U.S. anti-corruption laws, including the FCPA. See Clifton, 700 F.2d at 748.

IV. CONCLUSION

For the reasons stated above, the Court GRANTS the parties’ Joint Motion for Approval

and Entry of Proposed Consent Judgment.

An appropriate Order accompanies this Memorandum Opinion.

/s/ COLLEEN KOLLAR-KOTELLY UNITED STATES DISTRICT JUDGE