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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 47286 / January 30, 2003

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1710 / January 30, 2003

ADMINISTRATIVE PROCEEDING
File No. 3-11024


In the Matter of

American Rice, Inc.,
Joseph A. Schwartz, Jr.,
Joel R. Malebranche
and Allen W. Sturdivant

Respondents.


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ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING A CEASE-AND- DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against American Rice, Inc. ("American Rice"), Joseph A. Schwartz, Jr. ("Schwartz"), Joel R. Malebranche ("Malebranche") and Allen W. Sturdivant ("Sturdivant") (collectively, "Respondents").

II.

In anticipation of the institution of these proceedings, Respondents have submitted Offers of Settlement ("Offers") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, the Respondents, without admitting or denying the findings contained herein, except that Respondents admit that the Commission has jurisdiction over them and over the subject matter of this proceeding, consent to the entry of this Order Instituting Public Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order").

III.

On the basis of this Order and the Respondents' Offers of Settlement, the Commission makes the following findings:1

A. Respondents

American Rice, Inc. is a Texas corporation with its principal place of business in Houston, Texas. At all relevant times, American Rice was an issuer with a class of securities registered with the Commission pursuant to Section 12(g) of the Exchange Act. American Rice processed and marketed rice in international and domestic markets under a variety of brand names.

Joseph A. Schwartz, Jr., 45, was employed as an American Rice controller in Haiti. At all relevant times, Schwartz supervised the financial activities of American Rice in Haiti. Schwartz remains employed by American Rice, but is no longer a controller. Schwartz resides in Houston, Texas.

Joel R. Malebranche, 56, was employed by American Rice in Haiti. At all relevant times, Malebranche was responsible for facilitating the prompt clearance of American Rice shipments through Haitian customs. Malebranche is no longer employed by American Rice. Malebranche resides in Haiti and Jamaica, New York.

Allen W. Sturdivant, 38, was employed by American Rice in Houston, Texas. At all relevant times, Sturdivant supervised the preparation of American Rice's shipping documents for rice shipments to Haiti. Sturdivant is no longer employed by American Rice. Sturdivant resides in Beaumont, Texas.

B. Other Relevant Persons and Entities

Rice Corporation of Haiti, S.A. ("RCH") was a Haitian corporation with its principal place of business in and around Port-au-Prince, Haiti. RCH leased a rice mill and packaging plant in Laffiteau, Haiti. RCH processed, packaged and marketed rice for American Rice in Haiti under an at-will service agreement. American Rice treated RCH as a wholly owned subsidiary and included the operations of RCH in its consolidated financial statements.

David G. Kay ("Kay"), 51, was an American Rice vice president. At all relevant times, Kay supervised American Rice's business activities in Haiti. American Rice terminated Kay's employment in January, 2002. Kay is a citizen of the United States and resides in Houston, Texas.

C. Summary

From at least January 1998 to August 1999, American Rice employees, at the direction of an American Rice vice president, made numerous bribery payments to Haitian customs officials to illegally reduce American Rice's import taxes. The payments assisted American Rice to obtain or retain its business of selling rice in Haiti at a favorable price in violation of the Foreign Corrupt Practices Act ("FCPA"), Section 30A of the Exchange Act. Other employees helped carry out the bribery scheme by preparing fake shipping documents. American Rice inaccurately recorded the bribery payments in its consolidated books and records as routine business expenditures. American Rice also failed to devise and maintain an adequate system of internal accounting controls to detect and prevent improper payments to foreign government officials and to provide reasonable assurance that transactions were recorded as necessary to permit the preparation of financial statements in conformity with Generally Accepted Accounting Principles in violation of Sections 13(b)(2)(A) and (B) of the Exchange Act.

D. American Rice Made Bribery Payments To Haitian Customs Officials and Concealed Those Payments as Routine Business Expenditures

1. American Rice's Haitian Operations

In 1992, RCH leased a rice mill and packaging plant in Laffiteau, Haiti. American Rice provided the necessary capital to renovate the facility and commence operations. Under the terms of an at-will service agreement, RCH processed, packaged and marketed rice in Haiti for American Rice. American Rice retained ownership of its rice and the proceeds from the sale of its rice. American Rice also paid the import taxes on its shipments of rice to Haiti. Employees of American Rice, including Schwartz and Malebranche, lived and worked at the RCH facilities in Haiti.

American Rice competed with several large importers and a host of small importers for a share of the rice market in and around Port-au-Prince, Haiti. In the mid-1990s, American Rice captured a large share of that rice market because it was able to sell its rice at very competitive prices. American Rice had a built-in pricing advantage because it finished and bagged its rice in Haiti. By shipping bulk rice, instead of bagged rice, American Rice paid a lower import tax rate and operated more efficiently than its competitors. However, competition from rice smugglers, who paid no import taxes, corruption among customs officials, who allegedly cut illicit deals with other competitors, and escalating import taxes steadily eroded American Rice's competitive advantage.

2. American Rice Employees Bribed Haitian Customs Officials

In January 1998, American Rice employees and agents in Haiti entered into an illicit arrangement with certain Haitian customs officials in Port-au-Prince to maintain American Rice's competitive advantage. In exchange for bribery payments, customs officials permitted American Rice to declare less than the full tonnage of rice it shipped to Haiti. By declaring less than the full tonnage of rice on at least 12 rice shipments to Haiti during 1998 and 1999, American Rice improperly avoided paying import taxes on thousands of metric tons of rice, and sold its rice at more favorable prices.

In January 1998, Kay authorized the first bribery payment to Haitian customs officials in furtherance of the bribery scheme. On January 2, 1998, American Rice shipped 8,039 metric tons of bulk rice to Haiti on the company's ocean-going barge, LaurieKristie. In connection with the January shipment, Kay instructed Sturdivant to prepare a fake set of shipping records. The fake set of shipping records listed only 6,218 metric tons of rice. Sturdivant sent an accurate set of shipping records and a fake set of shipping records to Malebranche in Haiti prior to the arrival of the vessel.

Malebranche gave the shipping records to American Rice's customs broker in Haiti. The customs broker presented the fake set of shipping records to Haitian customs officials. Haitian customs officials calculated American Rice's import taxes based on 6,218 metric tons of bulk rice instead of 8,039 metric tons. At or about the same time, Malebranche negotiated the amount of the bribery payment with the customs officials directly or through an intermediary. The amount negotiated was $25,000.

After the LaurieKristie cleared customs, Kay authorized the $25,000 bribery payment. Kay directed Schwartz to write a check payable to cash from American Rice's Citibank Haiti checking account in the amount of $25,000. Schwartz wrote the check and handed it to Malebranche. Malebranche or one of his associates cashed the check and passed the $25,000 in cash to an intermediary. Schwartz and Malebranche firmly believed that the intermediary gave all or a part of the cash to Haitian customs officials.

As a result of the bribery scheme, American Rice saved approximately $82,000 in import taxes on the January 1998 rice shipment. On January 20, 1998, Kay sent an e-mail to Schwartz to confirm the savings. Kay wrote that import taxes on the actual tonnage of rice would have been $406,275, but American Rice paid only $323,435. According to Kay:

Savings is therefore: $ 82,839 USD
Less Commissions: $(25,000) USD
Net Savings: $ 57,839 USD

Kay twice instructed Schwartz to discuss the e-mail with Malebranche and then "destroy this message!"

Kay, Schwartz, Malebranche and Sturdivant participated in the bribery scheme in connection with at least 11 subsequent rice shipments to Haiti from February 1998 to September 1999. Their roles remained essentially the same for each shipment of rice, except that the amount of the bribe and the percentage of undeclared rice increased over time. The following chart summarizes each of American Rice's 16 rice shipments to Haiti from January 1998 to September 1999, the amount of undeclared rice per shipment in metric tons, the amount of import tax savings per shipment in U.S. dollars, the amount of the bribery payment, if any, and the net savings obtained by American Rice:

Vessel Depar-
ture

Date
Unde-
clared

Product
(MT)
Import Tax
Savings ($)
Bribery
Payment
Net
Savings ($)
Laurie-
Kristie
01/02/98 1,820.92 82,839 25,000 57,839
Balsa 51 02/20/98 1,296.06 65,321.42 26,000 39,321.42
Balsa 57 03/15/98 -0- -0- -0- -0-
Laurie-
Kristie
04/19/98 2,092.28 105,450.91 36,000 69,450.91
Laurie-
Kristie
05/30/98 2,397.19 120,818.38 37,000 83,818.38
Laurie-
Kristie
06/27/98 1,648.26 83,072.30 36,000 47,072.30
Andreas P 08/13/98 -0- -0- -0- -0-
Laurie-
Kristie
10/03/98 3,298.35 166,236.84 41,0002 125,236.84
Frines 11/01/98 -0- -0- -0- -0-
Laurie-
Kristie
12/07/98 2,882.05 145,255.32 Unknown 145,255.32
Laurie-
Kristie
02/16/99 2757.89 138,997.66 48,607.53 90,390.13
Laurie-
Kristie
03/19/99 Unknown Unknown 47,996.66 Unknown
Laurie-
Kristie
04/14/99 2,763.75 139,293.00 48,238.39 91,054.61
Laurie-
Kristie
05/27/99 3,137.66 158,138.06 59,615.00 98,523.06
Laurie-
Kristie
06/26/99 2,673.58 134,748.43 49,995.94 84,752.49
Bluemarlin 08/03/99 3,900.01 196,560.50 72,930.00 123,630.50
           
  TOTALS: 30,668 MT $1,536,731.82 $528,383.52 $1,056,344.96

3. American Rice Employees Improperly Concealed the Bribery Payments

Schwartz concealed the bribery payments by falsely recording them as routine business expenditures, such as a cost of sales, in the books and records of American Rice's Haitian Division. Schwartz prepared periodic financial statements for the Haitian Division that incorporated the false entries. Kay reviewed the periodic financial statements prepared by Schwartz. Kay knew that the financial statements incorporated false entries, but he did not direct Schwartz to record the bribery payments accurately. American Rice subsequently incorporated the false entries from the Haitian Division's financial statements into its consolidated financial statements.

E. American Rice Lacked Adequate Accounting Controls

American Rice did not have any internal accounting controls that were reasonably designed to prevent or detect FCPA violations. American Rice had no procedures in place to (a) review the business purpose for checks payable to cash; (b) review payments for "consulting fees" or "commissions" to third parties before or after entering into such purported business relationships; or (c) empower employees to report suspicious payments. While American Rice did have a policy statement regarding FCPA compliance, it merely summarized the provisions of the FCPA, and was not communicated to key personnel, such as Schwartz and Malebranche.

F. American Rice's New Board of Directors Took Corrective Action

On August 11, 1998, American Rice filed for bankruptcy. Under the company's Plan of Reorganization, approved on October 1, 1999, all shares of common and preferred stock were cancelled. New common stock was issued to American Rice's former bondholder creditors without registration in reliance upon the exemption set forth in Section 1145 of the Bankruptcy Code. The company's former stockholders did not retain or receive any equity interest in the reorganized company. The bondholders appointed a new Board of Directors, none of whom had worked at American Rice. The new Board retained a business consultant to serve as President and Chief Executive Officer and as a Director of the reorganized company.

Upon learning of allegations that prior management had bribed Haitian customs officials, the new Board took corrective action. The Board hired outside counsel to conduct an internal investigation, voluntarily disclosed the improper conduct to the Commission, and cooperated with the Commission's and the Department of Justice's investigations. American Rice also took disciplinary action against Kay, Schwartz, and Sturdivant. Malebranche was no longer with the company. In addition, American Rice substantially enhanced its FCPA compliance program, which currently includes revised principles of corporate governance, a training program for all employees, improved internal auditing practices, and procedures for corrective action and discipline. This Order relates to events that occurred prior to American Rice emerging from bankruptcy.

IV.

LEGAL DISCUSSION

A. Applicable Law

Section 30A(a) of the Exchange Act, the antibribery provision of the FCPA, prohibits an issuer or any officer, director, employee, or agent of an issuer from corruptly offering payment, promising to pay, or authorizing the payment of any money to any person, while "knowing" that all or a portion of such money "will be offered or given, directly or indirectly, to any foreign official" for purposes of, among other things, "inducing such foreign official . . . to do or omit to do any act in violation of the lawful duty of such official . . . in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person." Section 30A(g) of the Exchange Act expands the prohibitions of Section 30A(a) to the acts of U.S. officers, directors, employees or agents outside the United States.

Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act require a reporting company to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect its transactions and disposition of assets, and to devise and maintain a reasonable system of internal accounting controls. Sections 13(b)(2)(A) and 13(b)(2)(B) do not require that the amount involved be "material," nor is it necessary to prove "scienter" under these provisions. SEC v. World-Wide Coin Invs. Ltd., 567 F. Supp. 724, 749-51 (N.D. Ga. 1983).

Section 13(b)(5) of the Exchange Act provides that "[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account" subject to Section 13(b)(2). Rule 13b2-1 promulgated under Section 13(b)(2)(A) of the Exchange Act provides that "[n]o person shall, directly or indirectly falsify or cause to be falsified, any book, record or account subject to Section 13(b)(2)(A) of the . . . Exchange Act."

B. Violations by American Rice

American Rice, through its officers and employees, authorized 12 bribery payments to Haitian customs officials in order to illegally reduce its import taxes. The payments assisted American Rice to obtain or retain business with Haitian rice merchants and consumers. American Rice recorded the bribery payments in its consolidated books and records as routine business expenditures. Those entries did not accurately and fairly reflect the disposition of its assets. American Rice also failed to devise and maintain an internal system of accounting controls reasonably designed to prevent or detect the bribery payments and other improper payments. Accordingly, American Rice violated Sections 30A(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

C. Violations by Schwartz

Schwartz, American Rice's controller in Haiti, authorized 12 bribery payments to Haitian customs officials in order to illegally reduce American Rice's import taxes. The payments assisted American Rice to obtain or retain business with Haitian rice merchants and consumers. Schwartz thereafter knowingly falsified the books and records of American Rice by recording the bribery payments as routine business expenditures. Those entries did not accurately and fairly reflect the disposition of American Rice's assets. Accordingly, Schwartz violated Sections 30A(a), 30A(g) and 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 promulgated thereunder.

D. Violations by Malebranche

Malebranche, an American Rice employee in Haiti, made 12 bribery payments, directly or indirectly, to Haitian customs officials in order to illegally reduce American Rice's import taxes. The payments assisted American Rice to obtain or retain business with Haitian rice merchants and consumers. Accordingly, Malebranche violated Section 30A(g) of the Exchange Act.

E. Violations Caused by Sturdivant

Sturdivant participated in the bribery scheme by preparing fake shipping records and sending those records to Malebranche in Haiti. Accordingly, Sturdivant caused American Rice to violate Section 30A(a) of the Exchange Act.

V.

As a result of the conduct described above, the Commission finds that American Rice committed violations of Sections 30A(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, Schwartz committed violations of Sections 30A(a), 30A(g) and 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 promulgated thereunder, Malebranche committed violations of Section 30A(g) of the Exchange Act, and Sturdivant caused violations of Section 30A(a) of the Exchange Act by American Rice. In determining to accept the Respondents' Offers of Settlement, the Commission considered the remedial acts promptly undertaken by American Rice and cooperation afforded to the Commission staff by all of the Respondents.

VI.

ORDER

Based on the foregoing, the Commission deems it appropriate to accept Respondents' offers of settlement and to impose the sanctions therein. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that:

1) American Rice cease and desist from committing or causing any violation and any future violation of Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

2) Schwartz cease and desist from committing or causing any violation and any future violation of Sections 30A and 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 promulgated thereunder.

3) Malebranche cease and desist from committing or causing any violation

and any future violation of Section 30A of the Exchange Act.

4) Sturdivant cease and desist from causing any violation and any future violation of Section 30A of the Exchange Act.

By the Commission.

_______________________
Jonathan G. Katz
Secretary

Footnotes

1 The findings herein are made pursuant to Respondents' Offers of Settlement and are not binding on any other person or entity in this or any other proceeding.

2 Another check payable to cash for $25,000 was drafted shortly before the arrival of the vessel. It is not clear whether this was an additional bribe for the October 3, 1998 shipment or used for some other purpose.

 

http://www.sec.gov/litigation/admin/34-47286.htm


Modified: 02/24/2003