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The Danger of Internal Controls Enforcement: The Andeavor SEC Settlement

The internal controls provision in the FCPA statute has broad application to a variety of situations beyond foreign bribery.  The Securities and Exchange Commission knows full well the power of the internal controls provision and has readily applied it in a variety of circumstances.

One recent example is the SEC’s settlement with Andeavor LLC for failure to publicly disclose the status of its negotiations to sell the company to Marathon Petroleum Corporation in 2018. Andeavor is an energy company based in Texas. 

Andeavor agreed to pay a $20 million penalty to settle the SEC’s allegations.

In 2015 and 2016, Andeavor’s Board of Directors authorized the stock repurchase of $2 billion in stock. This action required Andeavor to comply with a policy prohibiting the repurchase of stock when the company was in possession of material non-public information.

The timeline of key events is instructive.

In 2017, Marathon and Andeavor engaged in confidential negotiations for Marathon to acquire Andeavor.  In October 2017, Andeavor’s Chairman and CEO agreed to suspend then-ongoing negotiations, and then resulted the negotiations in January 2018.

On January 30, 2018, Marathon’s CEO asked Andeavor’s CEO to resume negotiations.  They planned their next meeting for February 23, 2018. 

On February 11, 2018, Andeavor’s CEO informed its Board of Directors that “significant progress” was made on the acquisition during the second half of 2017, and that they are positioned to advance this opportunity in 2018. 

On February 14, 2018, the Board of Directors expressed support for resuming discussions with Marathon. 

On February 21, 2018, Andeavor’s CEO directed the CEO to initiate a share buyback program to repurchase $250 million of shares.

Andeavor’s legal department approved the stock repurchase plan on February 22, 2018.  Andeavor’s approval was based on a deficient understanding of all relevant facts and circumstances regarding the two companies’ discussions and whether it was in possession of material, non-public information.

Instead of subjecting the buyback program to a more robust review process as contemplated under the existing policy, Andeavor applied an informal analysis and procedure to evaluate compliance with its existing policy for review and approval of the proposed buyback program.  Andeavor made no attempt to calculate the probability that it would be acquired.  Nor did Andeavor interview or review information from the CEO and senior managers to assess the likelihood that the acquisition will occur.

After its cursory analysis, Andeavor concluded that it was not in possession of material, non-public information. 

Later in February and March 2018, Andeavor repurchased 2.6 million shares of its stock from investors at an average price of $97 per share.  One month after the stock repurchase plan was executed, Andeavor publicly announced that Marathon would acquire Andeavor and pay over $150 per share.

Two SEC commissioners dissented from the settlement. Their statement is interesting for their interpretation of the internal controls requirement.

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