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U.S. Securities and Exchange Commission

SEC Charges RAE Systems for Illegal Payments Made Through Joint Ventures to Win Chinese Government Contracts


Washington, D.C., Dec. 10, 2010 — The Securities and Exchange Commission today charged San Jose-based RAE Systems Inc. with violations of the Foreign Corrupt Practices Act (FCPA) for making improper payments through two of its Chinese joint venture entities to Chinese officials in order to obtain significant government contracts for their gas and chemical detection products.

The SEC alleges that the $400,000 in improper payments resulted in contracts worth approximately $3 million in revenue and garnered more than $1.1 million in illicit profits.

RAE agreed to pay approximately $1.25 million to settle the SEC's charges. In a related criminal case, the U.S. Department of Justice announced today that RAE agreed to pay an additional $1.7 million criminal fine.

"RAE Systems develops products to detect harmful emissions, yet it did not have adequate measures in place to detect and root out internal wrongdoing," said Cheryl J. Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit. "Companies that fail to respond to red flags can be held liable for the acts of their joint venture partners."

According to the SEC's complaint filed in U.S. District Court for the District of Columbia, the payments — which occurred from 2004 to 2008 — were made primarily by the direct sales force utilized by RAE at the two joint venture entities: RAE-KLH (Beijing) Co., Limited (RAE-KLH) and RAE Coal Mine Safety Instruments (Fushun) Co., Ltd. (RAE-Fushun).

The SEC alleges that RAE-KLH and RAE-Fushun sales personnel typically made the illicit payments by obtaining cash advances from accounting personnel, and that RAE did not impose sufficient internal controls or make any meaningful changes to sales personnel practices. Expenses associated with these payments were improperly recorded on the books of RAE-KLH and RAE-Fushun as "business fees" or "travel and entertainment" expenses. Moreover, while the payments were made exclusively in China and by Chinese employees of RAE-KLH and RAE-Fushun, RAE failed to act on red flags indicating this activity, which allowed, at least in part, the misconduct to continue at RAE-KLH.

The SEC's complaint charges RAE with violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. Without admitting or denying the allegations, RAE consented to the entry of a permanent injunction against FCPA violations and agreed to pay $1,147,800 in disgorgement and $109,212 in prejudgment interest. RAE also agreed to comply with certain undertakings regarding its FCPA compliance program. The settlement is subject to court approval.

Ricky Sachar and C. Joshua Felker conducted the SEC's investigation. The Commission acknowledges the assistance of the Department of Justice's Criminal Division-Fraud Section.

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For more information about this enforcement action, contact:

Cheryl J. Scarboro
Chief, Foreign Corrupt Practices Act Unit, SEC Division of Enforcement

C. Joshua Felker
Assistant Director, SEC Division of Enforcement



Modified: 12/10/2010