UNITED STATES OF AMERICA
In the Matter of:
|ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate to institute cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against BellSouth Corporation ("BellSouth" or "Respondent").
Accordingly, IT IS HEREBY ORDERED that proceedings pursuant to Section 21C of the Exchange Act be, and hereby are, instituted.
In anticipation of the institution of these proceedings, BellSouth has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or to which the Commission is party, and prior to a hearing and without admitting or denying the findings contained herein, except that BellSouth admits that the Commission has jurisdiction over it and over the subject matter of these proceedings, BellSouth consents to the entry of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order ("Order"). The Commission has determined that it is appropriate to accept the Offer of BellSouth and accordingly is issuing this Order.
The Commission makes the following findings:
BellSouth is a Georgia corporation with its headquarters in Atlanta, Georgia. The common stock of BellSouth has been registered with the Commission since 1983 pursuant to Section 12(b) of the Exchange Act and its common stock is listed on the New York Stock Exchange.
B. Other Relevant Entities
BellSouth International, Inc. ("BSI"), also headquartered in Atlanta, Georgia, is an indirectly wholly-owned subsidiary of BellSouth.
Telcel, C.A. ("Telcel"), a Venezuelan corporation headquartered in Caracas, Venezuela, is an indirectly majority-owned subsidiary of BellSouth. Since August 1997, BellSouth has indirectly held a majority interest in Telcel.
Telefonia Celular de Nicaragua, S.A. ("Telefonia"), a Nicaraguan corporation headquartered in Managua, Nicaragua, is an indirectly majority-owned subsidiary of BellSouth. Telefonia is Nicaragua's only provider of wireless telephone services. From March 1997 through June 2000, BellSouth held a 49 percent ownership interest in Telefonia and an option for an additional 40 percent. During that same period, BSI controlled Telefonia's operations by contractual agreement between BSI and Telefonia, and controlled Telefonia's management through a majority presence on Telefonia's board of directors. BellSouth increased its ownership interest in Telefonia to 89 percent in June 2000.
Over the last decade, BellSouth expanded its operations into Latin America by acquiring telephone companies in 11 Latin American countries: Venezuela, Brazil, Argentina, Colombia, Peru, Chile, Panama, Ecuador, Uruguay, Nicaragua and Guatemala. In the early years of BellSouth's expansion into Latin America, BellSouth acquired minority ownership positions in the local companies and allowed its local in-country partners to manage the companies' daily operations. In a gradual shift of strategy, BellSouth began acquiring majority ownership of the local companies and exercising greater management control over their operations. The violations of law that underlie this Order stem from actions and omissions relating to BellSouth's Latin American subsidiaries in Venezuela and Nicaragua.
In 1991, BellSouth acquired a minority interest in Telcel. BellSouth eventually increased its ownership percentage in Telcel, acquiring a majority interest in August 1997. Telcel has become Venezuela's leading wireless provider, and contributes more revenue to BellSouth's Latin American Group segment than any other Latin American BellSouth operation.
Between September 1997 and August 2000, former Telcel senior management authorized payments totaling approximately $10.8 million to six offshore companies (the "Companies"). Telcel recorded the disbursements in Telcel's books and records based on fictitious invoices. The invoices indicated, without detail, that Telcel had received from the Companies professional, computer and contracting services. However, there were no service or vendor agreements supporting the alleged services, and, in fact, no services were rendered. BellSouth has been unable to reconstruct the circumstances or purpose of the payments, or the identity of their ultimate recipients.
In 1997, BellSouth acquired a 49 percent ownership interest in Telefonia, and an option granted by members of a Nicaraguan family (the "Nicaraguan co-owners") to acquire an additional 40 percent. At the time of BellSouth's acquisition of its minority interest in Telefonia, a Nicaraguan law, Article 29 of the General Law of Telecommunications and Postal Services (the "foreign ownership restriction"), prohibited foreign companies such as BellSouth from acquiring a majority interest in Nicaraguan telecommunications companies. BellSouth intended to exercise its 40 percent option, but could do so only in the event that the Nicaraguan legislature repealed the Article 29 foreign ownership restriction.
In connection with BellSouth's acquisition of Telefonia, BSI and the Nicaraguan co-owners executed an agreement ceding to BSI operational control of Telefonia ("the Operating Agreement"). Under the Operating Agreement, BSI became responsible for Telefonia's daily operations and for its long-term business planning. Additionally, after BellSouth's investment in Telefonia, there was a restructuring of Telefonia's board of directors, including the filling of four of the six Telefonia board seats by BSI personnel.
In October 1998, Telefonia retained the wife of the chairman of the Nicaraguan legislative committee ("Committee") with oversight of Nicaraguan telecommunications. Pursuant to their agreement, the wife was to be responsible for providing various regulatory and legislative services, including lobbying for repeal of the foreign ownership restriction. Although the wife ("lobbyist") had prior financial and operations experience in the telecommunications area, she had no prior legislative experience. Telefonia and the lobbyist agreed that she would provide services to Telefonia over a three-month trial period for a monthly fee of $6,500, making her the second most highly paid individual compensated by Telefonia.
Ultimately, the lobbyist worked predominantly on the repeal of the foreign ownership restriction. Because the lobbyist's husband chaired the legislative committee with jurisdiction over the foreign ownership restriction, BSI knew that its payments to the lobbyist could implicate the Foreign Corrupt Practices Act ("FCPA"). Although a former in-house BSI attorney approved the wife's retention, BSI officials knew, or should have known, that the counsel lacked sufficient experience or training to enable him properly to opine on the matter.
During the lobbyist's retention, the legislator/husband drafted the text of the proposed repeal of the foreign ownership restriction and enlisted support for the proposed repeal from other Committee members. The husband scheduled and presided at a hearing in April 1999, during which his Committee heard arguments from BSI and others advocating repeal of the foreign ownership restriction.
In May 1999, Telefonia terminated the lobbyist. In June 1999, Telefonia made a severance payment to her. Telefonia recorded the total sum of $60,000 paid to the lobbyist as consulting services and as a severance payment. In September 1999, the Committee referred the proposed amendment for approval by the Nicaraguan National Assembly. In December 1999, the National Assembly voted to repeal the foreign ownership restriction. BellSouth exercised its 40 percent option and increased its ownership interest in Telefonia to 89 percent in June 2000.
Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, commonly referred to as the "books and records" and "internal controls" provisions, respectively, of the FCPA, require generally that issuers with a class of securities registered pursuant to Section 12 of the Exchange Act ("Section 12 issuers") make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect their transaction and disposition of assets, and devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements and to maintain accountability for assets; access to assets is permitted only in accordance with management's general or specific authorization; and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
Telcel created false books and records by improperly recording the falsely documented, unsubstantiated payments to the offshore companies as bona fide services. In addition, Telcel's internal controls failed to detect the unsubstantiated payments for a period of at least two years. This control deficiency has further prevented BellSouth from being able to reconstruct the circumstances of the payments, or the identity of the ultimate recipients of the payments.
Pursuant to Section 13(b)(6) of the Exchange Act, Section 12 issuers are required, with respect to entities of which they hold 50 percent or less of the voting power, to proceed in good faith to use their influence, to the extent reasonable under the circumstances, to cause the entity to comply with the FCPA's "books and records" and "internal controls" provisions. BellSouth, during the relevant period, held less than 50 percent of the voting power of Telefonia, but through its operational control, had the ability to cause Telefonia to comply with the FCPA's books and records and internal controls provisions. Despite BellSouth's ability to cause Telefonia's compliance, Telefonia created false books and records by improperly recording payments to the wife of the Nicaraguan legislator as "consulting services." BellSouth failed to devise and maintain a system of internal accounting controls at Telefonia sufficient to detect and prevent FCPA violations.
As a result of the conduct described above, the Commission finds that BellSouth violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
In determining to accept BellSouth's Offer, the Commission considered BellSouth's cooperation with the Commission staff after BellSouth was advised of the staff's investigation. The Commission also considered remedial actions BellSouth has undertaken, including the disciplining and termination of various employees. Finally, the Commission considered the steps BellSouth has taken to enhance its FCPA compliance program, which currently consists of a number of components, including corporate governance, policies and procedures, training, internal auditing, and corrective action and discipline.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that BellSouth cease and desist from committing or causing any violation, and any future violation, of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
By the Commission.
Jonathan G. Katz
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