“International news organization follow Cisco story! Biggest American papers ignore the case!” Not. I read about it in the New York Times myself, which did not make much of a big deal of it, is all. As it probably sort of isn’t, in the scheme of things. At least not yet.
The involvement of the SEC in the Siemens investigation underscores a point that The D & O Diary has made in several prior posts relating to investigations involving the Foreign Corrupt Practices Act (most recent posts here and here). That is, these investigations can give rise to follow[-]on securities claims. This is the reason that I have often cited the FCPA as a threatening potential new source of D & O exposure. The threat is not so much from the corrupt practices investigation itself, but from the follow-on claims that could arise in which it is claimed that the corrupt practices caused a misrepresentation of the company’s financial condition – which presumably is the question the SEC is examining in connection with the Siemens probe. –Kevin LaCroix, D&O Diary, February 2007
Cisco Systems is hastening to add that its Brazilian sales represent some 1% of its total results. Which may be why the story is not hotter than it is, north of the border.
Época NEGÓCIOS (Editora Globo) “blogs” G1 (Globo) blogging the Cisco case. The tag line for the glossy business weekly: “Inspiration for Innovation.” On which more later, in another edition of Current Content Downloads on NMM(-TV)SNB(B)CNN(P)BS.
Além da Cisco Systems, gigante norte-americana do ramo de informática atingida pela operação “Persona”, outras multinacionais instaladas no Brasil também são alvo de investigações da Receita Federal e da Polícia Federal pela prática de subfaturamento nas importações, publicou o G1.
Besides Cisco Systems, the North American IT giant hit by the joint federal police and federal revenue operation, Operation Persona, other multinationals doing business in Brazil are under investigation for the practice of undervaluing import goods, G1 has reported.
Headline in O Globo: “Cisco Affair Will Drive Up Equipment Prices!”
Meanwhile, the Gazeta Mercantil has this page 1 teaser for an inside story (page B4) that I cannot seem to find. I may have to go buy a copy today:
É hora de varredura para ver se há irregularidade, diz um executivo de telecomunicações, sobre empresas que compraram produtos da Cisco. O caso da multinacional, acusada de sonegação de impostos, pode ser o primeiro grave pós lei Sarbanes-Oxley, criada para evitar fraude contábil.
Its time to clean house to see if there are any irregularities, says a telecom executive, at companies that buy equipment. The case of the multinational, accused of tax evasion, could be the first serious case after Sarbanes-Oxley, created to avoid accounting fraud.
Anonymous Brazilian sector executives — presumably from firms belonging to competing “business ecosystems” — screaming “The Cisco case is another Enron!” seem to be dominating the coverage.
I think this is nonsense. I suspect that from the Tupi point of view, one of the fundamental aspects of this case is actually the bribery of tax officials. No matter who does it. I think risk managers should probably focus on that aspect. I think that is probably what has the rest of the sector — and other sectors as well — quaking in its boots, more than anything else.
Back to Época (Globo):
Essas empresas, segundo fontes envolvidas nas investigações, têm funcionamento de operação semelhante ao flagrado no caso que envolve a Cisco, incluindo o uso de laranjas para ocultar as irregularidades. Segundo a Agência Estado, as investigações trouxeram indícios contundentes do envolvimento no esquema de fraude não só da filial da Cisco no Brasil como também da matriz da empresa nos Estados Unidos.
These companies, according to sources close to the investigations, run operations similar to the one busted in the Cisco case, including the use of fronts and shell corporations to conceal irregularities. According to the Agência Estado news agency, the investigations turned up conclusive evidence that not only was the Brazilian subsidiary involved, but also its corporate parent in the United States.
As grandes empresas clientes da Cisco no Brasil, de acordo com o Último Segundo, serão investigadas a partir de agora, mas os investigadores afirmam que será muito difícil provar a participação delas no esquema para que respondam criminalmente pela fraude. O escândalo alcançou grandes proporções. Importantes publicações estão repercutindo o caso. Clique para ler. The New York Times (leia texto em inglês), Forbes (leia texto em inglês), Financial Times (leia texto em inglês), The Wall Street Journal (leia texto em inglês).
Major corporations that are clients of Cisco in Brazil, according to Último Segundo, will be investgated starting now, but investigators say it will be very difficult to prove their participation in the scheme to the extent that they will be charged criminally. The scandal has assumed great proportions: The New York Times, Forbes, Financial Times, The Wall Street Journal.
Did I not read, just a few hours ago, in G1 that the story had hardly gotten any coverage at all from the U.S. press? The New York Times simply published a short note from the Dow Jones Newswires, for example.
Again, I think the most significant part of the case, from a local perspective, is the arrest of tax inspectors who were taking bribes to look the other way.
If that turns out to be true, then Sarbanes-Oxley may turn out be beside the point — signs have already been emitted that criminal liability will not attach to corporate executives not directly involved in the dealings in question — and the Foreign Corrupt Practices Act more to the point. See
I will have to look and see how that Siemens case came out. It has been a while since I read D&O Diary, which is always informative.
Also surprising: The complete lack of coverage of the central actor named in the federal indictment — a “renowned multinational law firm,” headquartered in Panama, which the feds say “is involved in numerous irregular transactions around the region.”
What if this case is not really about Cisco, but about the entire sector? Not really about Brasil, but about the entire region? With cooperation and coordination among the Mercosul and Andean economies? What if it is strategic and not merely tactical?
And just what lawfirm is that?
Selective attention is a very familiar pattern in Brazilian scandal coverage: Shine the spotlight on peripheral figures (the PT 4, who face 28 counts) and ignore the central figures, the wheeling and dealing Abramoffs of the affair (Belo Horizonte Baldy & Co., who face 730 counts).
I will say it again: I think the real point of the case, from the point of view of Tupi feds, is that you simply cannot manage your balance of trade properly when your tax men are engaged in, ahem, quaint Customs.
The downside is that if you have been paying off funky despachantes, you could be in a certain amount of tax and reputational trouble.
The upside might be that if the feds get these disloyal servants of the common weal mopped up, you may no longer have to pay off funky despachantes. Which might be a good thing all around.
And this is far from being a problem that is unique to Brazil.
Just look at Mexico, for example. Ye gods: Ye Gon.
Will all subequatorial Cisco boxes go dark, bringing an abrupt and catastrophic end to the tropical Information Age? There are those who say so, but none of them seem willing to stake their credibility on the prediction by signing their name to it.