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U.S. Securities and Exchange Commission

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION


SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

v.

DOUGLAS A. MURPHY, DAVID G. KAY,

and LAWRENCE H. THERIOT,

Defendants.


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Civil Action

No.

COMPLAINT

Plaintiff, Securities and Exchange Commission ("Commission"), alleges as follows:

NATURE OF THE ACTION

1. This is an action against certain officers and agents of American Rice, Inc. who violated and aided and abetted violations of the Foreign Corrupt Practices Act by bribing Haitian government officials, by failing to accurately record those bribes in American Rice's books and records, and by failing to maintain an adequate system of internal accounting controls to prevent or detect such illegal payments. From January 1998 to October 1999, David G. Kay, an American Rice vice president, authorized numerous bribery payments to Haitian customs officials in order to illegally reduce American Rice's import taxes. The bribery payments assisted American Rice in obtaining or retaining its business of selling rice to Haitian rice merchants and consumers. American Rice's president, Douglas A. Murphy, was aware of or recklessly ignored the bribery payments. American Rice's Caribbean consultant, Lawrence H. Theriot, knowingly provided substantial assistance to Kay and Murphy by periodically reporting on the existing bribery arrangements and exploring alternative schemes. Kay directed American Rice's controller in Haiti to conceal the bribery payments in American Rice's books and records as a cost of sales.

2. By in engaging in such conduct, defendant Kay violated Sections 30A and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 13b2-1 promulgated thereunder [15 U.S.C. §§ 78dd-1 and 78m(b)(5) and 17 C.F.R. § 240.13b2-1] and aided and abetted American Rice's violations of Sections 13(b)(2)(A) and (B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and (B)].

3. By engaging in such conduct, defendant Murphy directly violated Section 30A of the Exchange Act. Defendant Murphy, as a control person under Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], also is liable for Kay's violations of Sections 30A and 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1 promulgated thereunder [15 U.S.C. §§ 78dd-1 and 78m(b)(5) and 17 C.F.R. § 240.13b2-1].

4. Defendant Theriot aided and abetted Kay and Murphy's violations of Section 30A of the Exchange Act.

5. The defendants will, unless restrained and enjoined, continue to engage in the acts and practices set forth in this complaint and in acts and practices of similar purport and object.

6. The acts and practices constituting the violations herein have occurred within the Southern District of Texas, and elsewhere.

7. The Commission brings this action pursuant to Sections 20(e), 21(d) and 32 of the Exchange Act [15 U.S.C. §§ 78t(e), 78u(d) and 78ff] seeking injunctions and civil monetary penalties against Murphy, Kay and Theriot.

JURISDICTION

8. This court has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa].

9. The defendants, directly or indirectly, used the means and instrumentalities of interstate commerce or of the mails in furtherance of the acts alleged herein.

DEFENDANTS

10. Defendant Douglas A. Murphy was American Rice's president and one of its directors from 1993 until he was fired on October 4, 1999. At all relevant times, by virtue of his position in the company and as Kay and Theriot's direct supervisor, Murphy had actual power and influence over Kay, Theriot and other American Rice employees. Murphy also had the ability to cause Kay, Theriot and other employees to engage in the wrongful conduct alleged herein. Murphy is a U.S. citizen and currently resides in Kingwood, Texas.

11. Defendant David G. Kay was American Rice's vice president of Caribbean operations and reported directly to Murphy at all relevant times. American Rice terminated Kay's employment in January 2002. Kay is a U.S. citizen and currently resides in or around Houston, Texas.

12. Defendant Lawrence H. Theriot was American Rice's Caribbean operations consultant from 1989 until he resigned in October 1999. Theriot reported directly to Murphy and Kay. Theriot is a U.S. citizen and currently resides in Reston, Virginia.

OTHER RELEVANT PERSONS AND ENTITIES

13. 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" as that term is defined in Section 3(a)(8) of the Exchange Act [15 U.S.C. § 78c(a)(8)] with a class of securities registered with the Commission pursuant to Section 12(g) of the Exchange Act [15 U.S.C. § 78l(g)]. American Rice processed and marketed rice in international and domestic markets under a variety of brand names.

14. On August 11, 1998, American Rice filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On October 1, 1999, pursuant to the company's confirmed Plan of Reorganization, American Rice cancelled all of its existing classes of preferred and common stock, and issued new common stock to its Bondholder creditors without registration. The stockholders of American Rice prior to October 1, 1999, did not retain or receive any equity interest in the reorganized company.

15. 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.

16. Joseph Schwartz, Jr. was American Rice's controller in Haiti. At all relevant times, Schwartz supervised the financial activities of American Rice in Haiti. Schwartz reported to Kay and other American Rice employees. Schwartz currently resides in Houston, Texas.

17. Allen Sturdivant was a manager at American Rice's Houston shipping office. At all relevant times, Sturdivant supervised the preparation of American Rice's shipping documents for rice shipments to Haiti. Sturdivant reported to Kay. Sturdivant currently resides in Houston, Texas.

18. Joel Malebranche was an employee of American Rice in Haiti. At all relevant times, Malebranche was responsible for facilitating the prompt clearance of American Rice shipments through Haitian customs. Malebranche reported to Kay. Malebranche resides in Haiti and Jamaica, New York.

COMMON ALLEGATIONS

American Rice's Haitian Operations

19. 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's Competition in Haiti

20. 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 price 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.

21. However, competition from rice smugglers, who paid no import taxes, corruption among customs officials, who allegedly cut improper deals with other competitors, and escalating import taxes eventually eroded American Rice's competitive price advantage.

American Rice Employees Bribed Haitian Customs Officials

22. In January 1998, American Rice employees and agents in Haiti entered into an illicit arrangement with certain Haitian government officials in Port-au-Prince to enable American Rice to retain its business in Haiti. In exchange for bribery payments, the 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 avoided paying import taxes on thousands of metric tons of rice. American Rice employees made the bribes because they believed that the tax reductions were essential to American Rice being able to continue to conduct business in Haiti. In any event, the bribes were designed to result in cost reductions that would enable American Rice to maintain or increase the volume of rice it sold in Haiti. The bribery payments, therefore, were made in order to assist American Rice in obtaining or retaining its business of selling rice to Haitian rice merchants and consumers.

23. 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.

24. 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, at Kay's direction, negotiated the amount of the bribe with the customs officials directly or through an intermediary. The amount negotiated was $25,000.

25. 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. Kay, Schwartz and Malebranche believed the intermediary gave all or a part of the money to Haitian customs officials.

26. 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 and Theriot 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!"

27. Kay continued to authorize bribery payments in connection with at least 11 subsequent rice shipments to Haiti from February 1998 to September 1999. The bribery scheme remained essentially the same for each shipment of rice, except the amount of the bribe and the percentage of undeclared rice increased over time. Murphy was aware of the bribery payments. The bribery payments did not stop until American Rice fired Murphy in October 1999.

28. 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, and the net savings obtained by American Rice:

Vessel Departure
Date
Undeclared
Product (MT)
Import Tax
Savings ($)
Bribery
Payment
Net
Savings ($)
LaurieKristie 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-
LaurieKristie 04/19/98 2,092.28 105,450.91 36,000 69,450.91
LaurieKristie 05/30/98 2,397.19 120,818.38 37,000 83,818.38
LaurieKristie 06/27/98 1,648.26 83,072.30 36,000 47,072.30
Andreas P 08/13/98 -0- -0- -0- -0-
LaurieKristie 10/03/98 3,298.35 166,236.84 41,000 125,236.84
Frines 11/01/98 -0- -0- -0- -0-
LaurieKristie 12/07/98 2,882.05 145,255.32 Unknown 145,255.32
LaurieKristie 02/16/99 2757.89 138,997.66 48,607.53 90,390.13
LaurieKristie 03/19/99 Unknown Unknown 47,996.66 Unknown
LaurieKristie 04/14/99 2,763.75 139,293.00 48,238.39 91,054.61
LaurieKristie 05/27/99 3,137.66 158,138.06 59,615.00 98,523.06
LaurieKristie 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

Schwartz and Kay Hid the Bribery Payments

29. Schwartz concealed each of the bribery payments by falsely recording them 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 Kay did not direct Schwartz to accurately record the bribery payments. American Rice subsequently incorporated the false entries in the Haitian Division's financial statements into its consolidated financial statements.

Theriot Provided Substantial Assistance to Murphy and Kay

30. Theriot provided substantial assistance to Murphy and Kay by periodically reporting on the existing bribery arrangements, exploring alternative schemes, and assessing each of the participants. He was the "eyes and ears" of management in Haiti.

31. On or about January 1998, Theriot secured Murphy's authorization to explore alternative customs arrangements. Theriot required Murphy's intervention because Kay was concerned that Theriot's efforts might jeopardize the company's existing bribery arrangement. On March 17, 1998, Theriot sent a detailed memo to Kay regarding his progress. In that March 17 memo, Theriot told Kay that he broke off negotiations for an alternative customs arrangement because his contacts requested a "reduced quantity document." Theriot, therefore, concluded that his alternative was no different than the existing bribery scheme.

32. Theriot also summarized the roles of the participants in connection with the first two bribery payments under the existing scheme. He told Kay:

[I]n the first boat, Joe [Schwartz] delivered a check made to cash for $25,000 to Joel [Malebranche] who was in the office with Fritz [Richardson, American Rice's customs broker]. . . . Joel said he handed the cash to Mario's [a customs official] emissaries in the sales office and watched through the window as they delivered the cash to Mario who was waiting in a car in front of the office.

Theriot advised Kay to be careful in selecting who makes the bribery payments. "[T]he issue of who makes payments is always critical since only that person knows how much is actually transferred to the next level contact."

33. At Murphy's direction, Theriot devoted an entire memo to the subject of American Rice intermediaries in 1998. Theriot defined "intermediary" as "the person who has ongoing direct contact with the operators inside the sleazy, corrupt business environment of Haiti." Theriot told Kay and Murphy:

[O]ver time LHT [Theriot], operating as a "white hat guy," concentrated on the public PR effort [to eliminate smuggling]. Joel [Malebranche], working directly with DGK [Kay], was developed as an "inside" guy to handle what became the company's most important "gray" operation inside customs.

* * *

As a Haitian-American, with ethics sensitized by his lengthy stay in the USA, Joel understands and worries constantly about the risks of operating in the gray areas. As a Haitian national, he has become disgusted with his growing insider knowledge of the sleaze involved in the network of Haitians at and around Customs. When we first discussed survival techniques required at Customs, I recall Joel's obvious personal sense of shock at the size of the $ numbers involved.

34. Theriot continued to provide guidance to Murphy and Kay until he resigned as an American Rice consultant shortly after Murphy was fired.

Murphy Knew About the Bribery Scheme

35. By virtue of his position in the company and frequent communications with Kay and Theriot, Murphy knew about or recklessly ignored the bribery scheme in 1998 and 1999.

36. In 1998 and 1999, Murphy became increasingly involved in the day-to-day business operations in Haiti. He traveled to Haiti frequently. On those visits, he met with American Rice employees and others, including Theriot and Kay. Murphy also received numerous memos and other communications from Theriot alluding to the bribery scheme. Nevertheless, Murphy did not conduct any investigation, demand an explanation or prohibit his employees and agents from participating in improper activities.

American Rice Agents Made other Improper Payments

37. In 1998, RCH had tax problems. The company was required to file monthly tax reports with DGI, the Haitian tax authorities, reflecting its monthly sales activity. However, rice sales figures exceeded the amount of rice reflected in documents filed with customs. DGI also claimed that RCH owed back corporate income taxes on American Rice's sales, not merely on RCH's services fees from American Rice. Theriot and others negotiated a deal with two DGI employees to facilitate the filing of understated sales figures, to avoid an audit of those figures, and to forgive a portion of the back taxes in exchange for one or more payments of approximately $2,500 U.S. dollars. Murphy directly authorized at least one of those payments in September 1999.

COUNT I

(Violations of Exchange Act Sections 30A(a) and/or (g)
Against Murphy and Kay)

38. Paragraphs 1 to 37 are realleged and incorporated herein by reference.

39. Defendants Murphy and Kay, acting on behalf of American Rice, used the means or instrumentalities of interstate commerce or acted outside the United States, corruptly in furtherance of authorizing at least 12 bribery payments, totaling approximately $500,000, to Haitian government officials for the purposes of influencing acts or decisions of such foreign officials in their official capacity, inducing such foreign officials to do or omit to do acts in violation of the lawful duties of such officials or securing improper advantages, in order to assist American Rice in obtaining or retaining its business of selling rice to Haitian rice merchants and consumers.

40. Defendants Murphy and Kay, acting on behalf of American Rice, used the means or instrumentalities of interstate commerce or acted outside the United States, corruptly in furtherance of authorizing at least 12 payments, totaling approximately $500,000, to Malebranche or others, while knowing that all or a portion of such money would be given, directly or indirectly, to Haitian government officials for the purposes of influencing acts or decisions of such foreign officials in their official capacity, inducing such foreign officials to do or omit to do acts in violation of the lawful duties of such officials or securing improper advantages, in order to assist American Rice in obtaining or retaining its business of selling rice to Haitian rice merchants and consumers.

41. By reason of their foregoing conduct, defendants Murphy and Kay violated Section 30A(a) and/or (g) of the Exchange Act [15 U.S.C. § 78dd-1(a) and (g)].

42. As a result of the conduct described above, defendant Murphy, as a control person under Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], also is liable for Kay's violations of Section 30A(a) and/or (g) of the Exchange Act [15 U.S.C. § 78dd-1(a) and (g)].

COUNT II

(Violations of Exchange Act Section 13(b)(5) and
Exchange Act Rule 13b2-1 Against Kay)

43. Paragraphs 1 to 37 are realleged and incorporated by reference.

44. Defendant Kay knowingly circumvented or knowingly failed to implement a system of internal accounting controls described in Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], and/or knowingly falsified or caused to be falsified a book, record or account described in Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)] by directing Schwartz to conceal the bribery payments as a cost of sales.

45. By reason of his foregoing conduct, defendant Kay violated, directly or indirectly, Section 13(b)(5) of the Exchange Act and Rule 13b2-1 promulgated thereunder [15 U.S.C. § 78m(b)(5) and 17 C.F.R. § 240.13b2-1].

46. As a result of the conduct described above, defendant Murphy, as a control person under Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], is also liable for Kay's violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 promulgated thereunder [15 U.S.C. § 78m(b)(5) and 17 C.F.R. § 240.13b2-1].

COUNTS III-IV

(Aiding and Abetting Violations of Exchange Act
Sections 13(b)(2)(A) and (B) Against Kay)

47. Paragraphs 1 to 37 are realleged and incorporated by reference.

48. American Rice inaccurately recorded the bribery payments as costs of sales in its consolidated books and records in violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A) and 15 U.S.C. § 78(b)(2)(B)]. Kay knowingly provided substantial assistance to American Rice and thereby aided and abetted American Rice's violations of the books and records and internal control provisions of the Exchange Act, Sections 13(b)(2)(A) and (B).

COUNT V

(Aiding and Abetting Violations of Exchange Act
Sections 30A(a) or (g) Against Theriot)

49. Paragraphs 1 to 37 are realleged and incorporated by reference.

50. By reason of their foregoing conduct, defendants Murphy and Kay violated Section 30A(a) and/or (g) of the Exchange Act [15 U.S.C. § 78dd-1(a) and (g)].

51. Defendant Theriot was aware of his role in the bribery scheme and knowingly provided substantial assistance to Murphy and Kay. Theriot thereby aided and abetted Murphy and Kay's violations of Sections 30A(a) and/or (g) of the Exchange Act [15 U.S.C. § 78dd-1(a) and (g)].

RELIEF REQUESTED

WHEREFORE, the Commission respectfully requests that this Court enter a judgment:

A. Permanently enjoining defendant Kay from violating Sections 30A and 13(b)(5) of the Exchange Act, and Exchange Act Rule 13b2-1 promulgated thereunder [15 U.S.C. § 78dd-1, 15 U.S.C. § 78m(b)(5) and 17 C.F.R. § 240.13b2-1] and, with respect to any issuer which has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] or any other issuer which is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)], aiding and abetting the issuer's violation of the books and records and internal controls provisions of the Exchange Act, Sections 13(b)(2)(A) and 13(b)(2)(B) [15 U.S.C. § 78m(b)(2)(A) and 15 U.S.C. 78m(b)(2)(B)];

B. Ordering defendant Kay to pay civil penalties pursuant to Sections 32 and 21(d)(3) of the Exchange Act [15 U.S.C. § 78ff and 15 U.S.C. § 78u(d)(3)] in the amount of $187,000;

C. Permanently enjoining defendant Murphy from violating Sections 30A and 13(b)(5) of the Exchange Act, and Exchange Act Rule 13b2-1 promulgated thereunder [15 U.S.C. § 78dd-1, 15 U.S.C. § 78m(b)(5) and 17 C.F.R. § 240.13b2-1];

D. Ordering defendant Murphy to pay civil penalties pursuant to Sections 32 and 21(d)(3) of the Exchange Act [15 U.S.C. § 78ff and 15 U.S.C. § 78u(d)(3)] in the amount of $187,000;

E. Permanently enjoining defendant Theriot from violating or aiding and abetting any violation of Sections 30A of the Exchange Act [15 U.S.C. § 78dd-1];

F. Ordering defendant Theriot to pay a civil penalty pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)] in the amount of $11,000; and

G. Granting such other and further relief as this Court deems just and appropriate.

Dated: July 29, 2002

Respectfully submitted,

/s/___________________
Thomas J. Meier (Attorney-in-Charge)
Illinois Bar No. 6225621

David J. Medow
Illinois Bar No. 6192840

Attorneys for Plaintiff
Securities and Exchange Commission
175 West Jackson Blvd., Suite 900
Chicago, Illinois 60604
(312) 353-7426 (Meier)
(312) 353-7398 (Fax)


http://www.sec.gov/litigation/complaints/comp17651.htm

Modified: 08/02/2002