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SEC Dings Vantage $5M on FCPA Issues

Texas-based Vantage Drilling International has agreed to pay $5 million in disgorgement to the Securities and Exchange Commission for sloppy FCPA accounting controls that let the company’s largest outside director and various third parties pay bribes to Brazilian government officials in the 2000s.

The SEC’s settlement order recounting the failures reads like a long, torturous trainwreck of poor due diligence and weak anti-corruption efforts. It started with Vantage’s predecessor company, Vantage Drilling Co., which went public in 2007 as an “ultra-high end driller” selling its services to large oil companies — including, you guessed it, state-owned Brazilian oil giant Petrobras.

Chow Yun Fat, not Director A.

Alas, Vantage owned no actual drilling assets. So it reached an agreement in 2007 with “Director A, a Taiwanese shipping magnate” where the company paid Director A $56 million in cash, gave him 40 percent of the company’s common stock, and appointed him to the board. In exchange, Vantage acquired Director A’s rights to purchase a deepwater drillship called the Titanium Explorer, which a Korean shipyard was building for scheduled delivery in 2012. (I picture Chow Yun Fat playing Director A in the movie here.)

Mistake No. 1 for Vantage: it performed no due diligence on Director A to determine whether he actually had the ability to make payments on the ship. Then came a series of moves where Director A didn’t make a payment, Vantage loaned him $32 million to make it, the shipyard granted Director A an extension, and Director A neglected to mention that point to Vantage.

Sketchy. Regardless, Vantage did not enhance its accounting controls for transactions involving Director A. So right away we could say that Vantage failed to respond to Director A in a risk-appropriate manner, given that his supposed primary asset — the ability to acquire a deepwater drilling ship — was so instrumental to Vantage’s long-term strategy.

Enter the Agents

Then came bidding on a contract with Petrobras in Brazil. Vantage hired “Agent” in Brazil, and failed to perform any due diligence on Agent in violation of the company’s own policies. Agent was approached by “Intermediary A” in Brazil, representing Petrobras, who offered to fix the contract in Vantage’s favor if Vantage paid a bribe. Intermediary A also introduced Agent to “Intermediary B,” who said the money would go to bribe Brazilian politicians.

Agent A then asked the company to arrange a meeting in New York between him and Director A. As the SEC’s settlement says, “Unbeknownst to the CEO… the Agent had requested the meeting in order to speak directly to Director A to ask whether Director A was willing to make the improper payments the [Petrobras official] demanded.”

Sigh. Hindsight is such a painful thing.  

Eventually Agent A arranged for a $1 million bribe to go to the Petrobras official, with funds coming from Director A. The Petrobras executive did agree to defer receipt of his bribe until 2012, when the Titanium Explorer was delivered and working for Petrobras, and Agent A was receiving his commission for the sale. So at least one person demonstrated sufficient skepticism here.

Then Director A flew to Brazil to meet with the intermediaries, and agreed to pay $31 million in “consulting agreements” with Agent A and Intermediary B, which were in fact bribes — roughly 1.7 percent of the total $1.8 billion contract Petrobras eventually awarded to Vantage.

All of this unraveled in the early 2010s. Director A failed to pay for the Titanium Explorer, so Vantage had to bail him out of that mess before defaulting on the Petrobras contract. A consultant who had worked for Director A told Vantage’s CEO that the director expected to be reimbursed for his “payment to P.” A reporter in Brazil emailed the Vantage CEO asking about three bribery payments that Director A had promised to Brazilian officials, before stiffing them on the third payment.

So Vantage had numerous warning signs about Director A, on top of his deadbeat behavior back in 2008 with the first missed shipyard payment. Still, “VDC did not follow up on these red flags, and took no steps to determine whether any payments VDC made to Director A were made to fund or reimburse him for improper payments.”

Finally Agent A flipped for Brazilian authorities in 2015 as part of its Operation Carwash investigation. He blabbed about Director A, Intermediary B, the consulting gigs, and all the rest. And here we are.

Conclusion

I almost feel a twinge of sympathy for Vantage, since the roots of its poor accounting controls and due diligence trace back to the mid-2000s, when aggressive FCPA enforcement was still in its infancy and many companies didn’t appreciate the challenges that effective anti-compliance programs entail.

Still, Director A was not a low-level intermediary or agent, one among many operating on a contract basis. Director A was instrumental to Vantage’s original plans for success back in 2007, and almost immediately proved himself to be untrustworthy. When the intermediaries from Brazil did come along asking for meetings with Director A, wiser heads should have wondered about the purpose of that meeting and demanded more documentation.

Petrobras ultimately canceled the Vantage contract in 2015, which forced Vantage into bankruptcy. The company emerged from bankruptcy in 2016 and has been limping along as a penny stock ever since. (Which is why the SEC settled on $5 million in disgorgement and did not impose any further penalties.)

Vantage did take Petrobras to arbitration over that contract cancellation, and won a $622 million judgment earlier this year. (Petrobras is appealing.)

But, frankly, who cares? We’ve seen these tales of due diligence and third-party oversight before, and we’ll see them again. Imagine how much more money Vantage could have returned to its shareholders if it just took the time to toss out Director A in 2007 as soon as he showed how shaky he was.

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