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SEC Probes Financial Firms on Sovereign Fund Bribes

The U.S. Securities and Exchange Commission headquarters
The U.S. Securities and Exchange Commission started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds , according to two people with direct knowledge of the matter. Photographer: Joshua Roberts/Bloomberg

The U.S. Securities and Exchange Commission started a broad investigation involving several financial firms to determine whether they made improper payments to secure investments from sovereign wealth funds, according to four people with direct knowledge of the matter.

The sweep in part focuses on whether banks, hedge funds and private-equity firms paid placement agents to win access to the state-owned money, said the people, who declined to be identified because the investigation isn’t public. An agent working with a sovereign wealth fund may be considered a government official, making interactions with that person subject to the Foreign Corrupt Practices Act.

Companies including Bank of America Corp., Morgan Stanley and Citigroup Inc. received letters of inquiry from the SEC, one of the people said. James Griffiths, a spokesman for Citigroup, and Mark Lake, a Morgan Stanley spokesman, declined to comment. Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America didn’t immediately return a call for comment after normal business hours.

Blackstone Group LP, the world’s largest private-equity firm, also received an inquiry, a person with direct knowledge of the matter said. Christine Anderson, a Blackstone spokeswoman, declined to comment. The letters were received within the past 10 days, one of the people said.

‘Broad View’

“The SEC takes a broad view of who is considered a government official,” said Gary DiBianco, an attorney at Skadden Arps Slate Meagher & Flom LLP in London. “Accordingly, we can expect the SEC will view sovereign wealth fund employees as government officials under the FCPA, and the SEC will closely scrutinize relationships with consultants or agents who may have connections to state-controlled entities.”

The nature of the probe recalls a spate of public corruption cases in the U.S. where money managers were accused of making improper payments including campaign contributions to win contracts from public pension funds. The agency adopted new rules last year to curb so-called pay-to-play practices.

The SEC investigation was reported on the Wall Street Journal’s website late yesterday. John Nester, an SEC spokesman, declined to comment.

Entertainment or Travel

SEC investigators are also scrutinizing whether the firms improperly provided other benefits, including entertainment or travel, directly to fund employees in order to secure investments or sell securities, one of the people said. The probe marks the first time the agency has applied the anti-bribery provision to the financial-services industry, said Simeon Kriesberg, an attorney at Mayer Brown LLP in Washington.

“Turning to the financial-services sector opens up a vast new area of enforcement” of anti-bribery law, Kriesberg said. “Firms will be looking to see whether they’re doing everything they’re supposed to do” to comply with the statute, he said.

Sovereign wealth funds’ total combined assets reached $3.59 trillion in 2010, London-based research firm Preqin Ltd. said in a May report. More than half of sovereign wealth funds are active in private-equity investments, and about 37 percent invest in hedge funds, according to the report.

Regulators have conducted sweeps of other industries, including pharmaceuticals and natural resources. In November, Panalpina World Transport Holding Ltd., a Swiss freight forwarding company, Royal Dutch Shell Plc, and five oil services companies agreed to pay $237 million to settle civil and criminal claims they paid thousands of bribes to African, Asian and South American officials on behalf of customers in the oil and gas industry.

Other settlements last year included BAE Systems Plc, Europe’s largest defense company, which agreed to pay $400 million to settle bribery claims, and Daimler AG, maker of Mercedes-Benz cars, which said it would pay $185 million.

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