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DOJ brings first criminal charges related to HSR filing
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DOJ brings first criminal charges related to HSR filing

Executive allegedly altered documents submitted to FTC for premerger approval

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) amended U.S. antitrust laws to require preliminary approval by the Federal Trade Commission (FTC) and Department of Justice (DOJ) of mergers and acquisitions of a certain size. It was a response to the difficulty of challenging and remedying transactions that raise competitive issues once the parties have already consummated a deal and begun integrating their operations.

From time to time, companies have run afoul of its rules and faced civil fines, usually because they omitted documents or jumped the gun by proceeding with a transaction before government approval. However, no company or executive had ever faced criminal charges related to HSR filings—until the case of Nautilus Hyosung Inc. (NHI) and the actions of what appears to have been one rogue executive, who now faces a prison sentence.

The DOJ has charged that Kyoungwon Pyo, a senior vice president for corporate strategy for Hyosung Corp., a South Korea-based affiliate of Nautilus Hyosung, altered corporate documents before they were submitted to the DOJ and FTC in connection to the HSR premerger process, ostensibly in an effort to make the transaction appear less problematic with respect to competition and to clear the proposed acquisition through the HSR process.

Pyo agreed to serve a five-month prison sentence after pleading guilty to two felony counts of obstruction of justice, according to information the DOJ filed May 3 in U.S. District Court in Washington, D.C.

In October, Nautilus Hyosung pleaded guilty and paid a criminal fine for its role in the obstruction of justice charges. The fine was discounted based on the company’s cooperation with the investigation—notably, the company had alerted the DOJ to the falsified documents.

None of the attorneys who spoke on the record for this story had heard of another example of a criminal prosecution connected to the HSR process.

“Usually criminal antitrust charges are reserved for hardcore price-fixing, so the fact that they chose to bring criminal charges here suggests that the conduct was egregious,” says Ryan Thomas, a partner at Jones Day who practices competition law with a focus on mergers and acquisitions.

Corrupting the Process

Given the severity of the punishment it lobbed at Pyo and Nautilus Hyosung, the DOJ is sending a clear message, one that it reiterated in its release announcing the Pyo settlement.

“Maintaining the integrity of the merger review and investigation process is one of our highest priorities,” said Acting Assistant Attorney General Joseph Wayland, who is in charge of the DOJ’s Antitrust Division. “Senior corporate executives should understand that anyone who attempts to corrupt the process by falsifying materials submitted to the U.S. government will be held accountable for their actions.”

Nautilus Hyosung produces automated teller machines (ATMs) for sale in the U.S. and elsewhere. In the summer of 2008 it announced plans to acquire a competitor, Triton Systems of Delaware, based in Long Beach, Miss., and it put Pyo in charge of managerial duties connected to the proposed acquisition.

His duties included putting together the documents required for the HSR filing. Under the act’s Premerger Notification Rules, these so-called 4(c) documents encompass all “studies, surveys, and analyses and reports” prepared for any officer or director within one year before the premerger filing “for the purpose of evaluating or analyzing the acquisition with respect to market share, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.”

(Since the Nautilus Hyosung proposed merger, the HSR rules have been amended to require the filing of a broader set of submissions as part of the premerger investigation process.)

Shocking Conduct

In August 2008, Nautilus Hyosung made HSR filings with the FTC and DOJ related to the proposed Triton acquisition. Prior to the filing, in the DOJ’s words, Pyo corruptly altered, destroyed, mutilated and concealed records and documents related to that filing and directed others to do the same. As it tends to do in premerger investigations, the DOJ made a request to NHI for additional documents related to the company’s business and strategic plans and sales information.

Again, Pyo altered the documents and directed others to do the same.

Nautilus Hyosung voluntarily disclosed the altered documents to the DOJ in 2009. Because of its cooperation with the government, it agreed to pay a $200,000 criminal fine, well short of the maximum $500,000 fine it faced. It subsequently abandoned its proposed acquisition of Triton.

“I see [Pyo’s] actions as shocking,” says Tom Hughes, a partner in the business litigation group at Thompson Hine. “Prosecuting this kind of conduct is so rare because the conduct itself is so rare.”

Given the conduct involved, Hughes isn’t surprised the DOJ sought to criminally prosecute or seek a prison sentence.

“There’s no doubt that the DOJ and the FTC are going to defend the integrity of the HSR process and the investigative process that they use,” he says.

Gray Areas

In the HSR process, there are some gray areas. Some documents clearly should be categorized as 4(c) and submitted to the antitrust agencies, and others clearly do not need to be submitted. It may be unclear where other documents fall, and companies have to make reasonable judgments as to whether they should be submitted under the HSR requirements.

Hartmut Schneider, a partner in the antitrust and competition and practice group at WilmerHale, says the DOJ’s enforcement action here likely does not signal any change in how the DOJ or FTC views reasonable disagreement on what constitutes a 4(c) document.

“The agencies would continue to accept that there is a gray area sometimes, and that as long as a company makes a reasonable judgment, that’s probably OK,” he says.

Rather, practitioners say, the case of Nautilus Hyosung and Pyo should be viewed as a warning that the government has no tolerance for misconduct surrounding the HSR filing process, particularly an egregious example such as this one.

“It’s an outlier,” Thomas says, “but it’s a good reminder to companies and their executives that any time you produce documents to a government agency in an official proceeding, you are subject to the obstruction statutes, and you need to tread very carefully.”

Associate Editor

Melissa Maleske

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