## Facts

- Oil States International, Inc., a Delaware corporation with Exchange Act § 12(b)-registered common stock, operated through wholly owned subsidiary Hydraulic Well Control, LLC (HWC).
- From December 2003 to November 2004, HWC employees provided approximately $348,350 in improper payments to employees of Petróleos de Venezuela, S.A. (PDVSA), a Venezuelan state-owned energy company.
- The payments were facilitated through a consultant retained to assist HWC with PDVSA matters; the consultant submitted inflated invoices and passed excess amounts to PDVSA employees.
- HWC also billed PDVSA for charges that were not legitimate, including “lost rig time” and materials (including “gel”) not actually used on PDVSA jobs.
- HWC recorded the improper payments in its books and records as ordinary business expenses, and those records were consolidated into Oil States’ financial reporting.
- Oil States’ internal accounting controls did not ensure that HWC’s books and records accurately reflected the nature and purpose of the payments, including weaknesses in oversight of third-party consultants and invoice review.
- The SEC instituted a settled administrative cease-and-desist proceeding; Oil States consented to the order without admitting or denying the findings (except jurisdiction).

## Issues

1. Whether Oil States violated Exchange Act § 13(b)(2)(A) by failing to keep books, records, and accounts that, in reasonable detail, accurately and fairly reflected transactions and dispositions of assets.
2. Whether Oil States violated Exchange Act § 13(b)(2)(B) by failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were executed and recorded appropriately.

## Decision

- The SEC found that Oil States violated Exchange Act §§ 13(b)(2)(A) and 13(b)(2)(B) (FCPA accounting provisions).
- The SEC ordered Oil States to cease and desist from committing or causing any violations, and any future violations, of those provisions.
- In accepting the settlement, the SEC considered remedial measures undertaken by Oil States and cooperation provided to the SEC staff.
- The order did not include findings charging violations of the FCPA’s anti-bribery provisions.

## Legal Principles

- An issuer violates Exchange Act § 13(b)(2)(A) when improper payments are inaccurately recorded (including being booked as ordinary business expenses) such that books and records do not, in reasonable detail, accurately and fairly reflect transactions.
- An issuer violates Exchange Act § 13(b)(2)(B) when internal accounting controls are not sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and reflected in financial reporting.
- Internal controls obligations extend to consolidated subsidiaries; subsidiary-level misrecording and control failures can result in issuer-level liability when the subsidiary’s accounts roll into the issuer’s books and records.
- Controls over third-party intermediaries and invoice/payment review are part of the accounting-controls framework where third parties interact with employees of state-owned enterprises.

## Conclusion

The SEC imposed a cease-and-desist order against Oil States for FCPA accounting violations after its subsidiary made improper payments to employees of a state-owned enterprise, misrecorded the payments as routine expenses, and operated with internal controls that did not reasonably prevent or detect inaccurate recording of the payments and related billing practices.


In re Oil States Int’l, Inc., Exchange Act Release No. 53,732 (Apr. 27, 2006)