This HERO's Tale Unfortunately Common

By Stephen D. Simpson, CFA | April 07, 2011 AAA

Shares of offshore driller and liftboat operator Hercules Offshore (Nasdaq:HERO) took a beating on news that the company was under investigation by the U.S. government for possible violations of the Foreign Corrupt Practices Act. While history suggests that the actual punishments for the company (if it is in fact proven guilty) will not be crippling, the issue represents a distraction for management, a black hole for company resources that will now be directed towards legal matters and a significant embarrassment in a world that seems increasingly concerned about company conduct.

What HERO's tale highlights, though, is just how common this issue is among companies great and small in a variety of industries. It also raises a dilemma for investors - should companies toe a high moral line, even if their competitors do not (and lose business), or should companies be allowed to act according to the notion of, "When in Rome ..."?

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Few Details at This Point
At this point, it is impossible to say what specific allegations are in play against Hercules Offshore, to say nothing of whether the company is actually guilty. The company does operate in overseas markets like Saudi Arabia, Malaysia, India, Mexico and Nigeria - and Nigeria in particular has long been a hotbed of corruption, especially so in the energy and energy services sectors.

It seems regrettable, though, that investors had to learn about this matter through an 8-K filing, instead of a company-issued press release. True, the information gets out either way, but management whiffed on an opportunity to deal with this matter in as forward and open a fashion as possible.

All of this being said, investors should remember an important point: Investigation is not proof of wrong-doing. Many (if not most) investigations end with no charges, and Hercules will have its opportunity to explain itself in due time. (To learn about other investigations, check out The Biggest SEC Investigations Of 2010.)

An Unfortunate "Tradition"
If Hercules did in fact violate the Foreign Corrupt Practices Act, they are hardly alone. In relatively recent memory Tyson Foods (NYSE:TSN) settled charges related to bribery incidents in Mexico, while Transocean (NYSE:RIG) settled charges related to its conduct in Nigeria.

Beyond that, similar allegations have been made against a host of major corporations. Allegations had representatives of IBM (NYSE:IBM) delivering "shopping bags of cash" to South Korean government officials, while Haliburton (NYSE:HAL) allegedly went to some effort to route payments through Switzerland and Monaco to secure business in Nigeria. Continuing the Nigeria theme, there are stories out there that Italian energy giant ENI (NYSE:E) handed over briefcases containing millions of U.S. dollars to Nigerian government officials, but had to resort to entire carloads of bills to pay part of the bribes in local currency. (For more information in investing in oil and Nigeria, see A Guide To Investing In Oil Markets.)

The list goes on and on. General Electric (NYSE:GE), Daimler, Boeing (NYSE:BA), Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP); all of these companies have been accused of bribery in recent years.

A Renewed Focus on Morals?
What is interesting about the recent increase in bribery investigations is how it compares to the activity level only a short time ago. There were reportedly 48 Justice Department actions involving corporate bribery in 2010 and 26 SEC actions. That compares to "2" and "3", respectively, in 2004. Perhaps that is simply a coincidence, or perhaps it reflects a difference in the current administration's attitude about American business and the role of the U.S. as a setter of standards. (To find out what happens when fines are collected, check out What happens to the fines collected by the Securities and Exchange Commission?)

A Small Price to Pay ... and Large Stakes
What is noteworthy about these cases is the frequently light punishments companies get. Tyson's settlement cost the company just a bit over $5 million, while Transocean paid $21 million. In fact, it seems relatively uncommon for bribery settlements to cost much above the $20 million mark, even though "successful" bribery can mean hundreds of millions of dollars in business.

But then again, maybe things are changing. Siemens (NYSE:SI) was rung up to the tune of $1.3 billion in settlements for its bribery scandal, while Britain's BAE Systems faced $450 million in total fines. Likewise, it is not unreasonable to speculate that the size of the fines correlates with the extent of the corruption and the degree of upper management involvement.

The Bottom Line
Whatever the case may be, it seems probable that Hercules Offshore will not face crippling punishments (if the company is guilty). Likewise, it seems probable that however serious the current administration may be about pursuing these cases, companies will continue to do what they feel they must so long as the rewards of success significantly outweigh the costs of failure. (For more on corporate fines, see Corporate Fines: How Much Do They Hurt?)

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