Back in May, when lottery operator GTECH Holdings (NYSE:GTK) filed a 10-K explaining an investigation for alleged bribery by the SEC and Brazil's Public Ministry, I made the rather obvious prediction that if "the U.S. investigations do develop into prosecutions, the company's share price will likely continue to suffer." That is exactly what took place last week when the SEC opened a formal investigation and subpoenaed certain documents from the company. News that the SEC was turning up the heat sent the company's shares tumbling as low as $39.90 before they began recovering.
By Friday, the stock had made up most of those losses and was back up to $42.37. That's still more than one-third off its 52-week high of $64.95, but why are the shares rebounding at all?
There's no denying that the situation is serious. Brazil wants to recoup $650 million in fees already paid to GTECH. And if the prosecution proves its case, the company will be tarred with a "bribe-giver" label that could severely complicate its ability to win further work in Brazil -- which currently accounts for about 10% of GTECH's worldwide $1.1 billion in annual revenues.
But from the developments to date, it seems at least possible that GTECH will be cleared of wrongdoing in this case. Back in May, GTECH feared that the president and marketing director of its Brazilian subsidiary, as well as a former senior vice president of GTECH Holdings itself, would be indicted by Brazilian authorities. In June, however, a Brazilian judge refused to approve indictments for these persons.
That kind of development does not suggest that the Brazilian case against GTECH is particularly strong. Corporations act through their employees, after all. If the suspect employees cannot be proven guilty, then this clearly makes it tougher to prove the case against the employer.
Sure, the Brazilian investigation is still ongoing. And now the SEC is gearing up as well. But the trend in this case -- to date at least -- does not appear to be as dire for GTECH shareholders as are the trends in other recent bribery cases against Lucent (NYSE:LU), IBM (NYSE:IBM), and former Lockheed Martin (NYSE:LMT) acquisition target Titan (NYSE:TTN), for example. The trend, in fact, is downright positive in Brazil and not particularly worrisome in the U.S., where GTECH says it is cooperating with the SEC, the SEC is satisfied with that cooperation, and GTECH's own internal investigation is turning up no signs of bad acts on its part.
Foolish lawyer Rich Smith advises companies on complying with the Foreign Corrupt Practices Act as part of his day job. His advice generally boils down to "you better do it." He owns no shares in any of the companies mentioned in this article.
