Author:  Rayan Rafeeq, 
Christ( Deemed to be University), 
studying 3rd year of law.
1.    Aim: To make a detailed analysis of the Carlos Ghosn Fraud and comparison of the same with the Indian regulations on Company Laws
2.    Limitations: Owing to the relative newness of the case, only documents regarding the petition before the American Courts are present although he was imprisoned in Japan

3.    Facts
From 2001 through 2018, Carlos Ghosn served as Chairman of the Board of Directors and/or Chief Executive Officer (CEO) of Nissan Motor Co., Ltd. (“Nissan”). Nissan is a Japanese automobile manufacturer with securities that trade on the Tokyo Stock Exchange. Nissan’s sponsored American Depositary Receipts (“ADRs”) trade in the United States in the over-the-counter (“OTC”) market and through brokerage firms. Nissan’s ADRs are exempted from registration in the United States, in part, because Nissan publishes English versions of its Japanese securities filings for review by investors trading in the United States. From fiscal year 2004 through 2018, Nissan’s Board of Directors delegated to Ghosn the authority to set individual director and executive compensation, including his own compensation, within certain aggregate limits. Although the delegation in certain years contemplated that Ghosn would consult with certain other directors about compensation decisions, in practice, Ghosn set the amount of his compensation without oversight. Kelly was a long-serving human resources executive with Nissan who Ghosn appointed to the Board of Directors in June 2012 as a “representative director,” a position Kelly held through November 2018. Kelly was one of Ghosn’s trusted subordinates and worked with two other senior Nissan employees in connection with certain of the conduct described herein.
 In or around March 2010, Japan’s Financial Services Agency (“JFSA”) amended its disclosure rules to require publicly-traded companies such as Nissan to disclose the total compensation of each individual officer and director whose total compensation equals or exceeds 100 million Japanese yen (¥), roughly equal to $1 million in U.S. dollars at the time of the amendment. These new rules were first applicable to Nissan’s disclosures for fiscal year 2009 which ended March 31, 2010, and individual director compensation was first included in the annual report for fiscal year 2009 that Nissan filed in or around June 2010 and made available in English on its website at the same time.
 Beginning in fiscal year 2009 and continuing until fiscal year 2018, Ghosn, with substantial assistance from his Nissan subordinates, took part in a scheme to conceal from public disclosure more than $90 million in compensation to be paid to Ghosn. Although this undisclosed compensation was in fact not paid to Ghosn, his total compensation was fixed and certain in each fiscal year, with a paid portion that was disclosed by Nissan and a significant portion that was unpaid and undisclosed.
Ghosn, with substantial assistance from his subordinates, including Kelly, considered multiple ways to pay the undisclosed portion of his compensation through Nissan-related entities without public disclosure. Ghosn and his subordinates abandoned those plans when disclosure appeared unavoidable, and instead crafted different ways to structure payment after Ghosn’s retirement without disclosure in the periods when the compensation had been earned and fixed. Among other schemes, Ghosn entered into secret contracts countersigned by a senior employee who worked directly for Ghosn in Nissan’s Secretariat’s Office, and executed backdated letters granting himself cash awards under Nissan’s annual Long Term Incentive Plan(“LTIP”) in the amount of his undisclosed compensation.
 In addition to the more than $90 million in undisclosed and unpaid compensation, Ghosn and his subordinates knowingly or recklessly made, or caused to be made, false and misleading statements regarding more than $50 million of additional pension benefits for Ghosn. These included misleading Nissan’s CFO and other Nissan executives regarding the accounting for the additional pension amounts, and creating a false disclosure to support how Nissan accounted for them.
These actions caused Nissan’s failure to disclose the full amount of Ghosn’s compensation in certain annual reports that were certified by Ghosn and filed with Japanese regulators. These misrepresentations and omissions violated Japanese disclosure requirements, and they were published in English on Nissan’s website for U.S. investors.
Through the conduct alleged herein, Ghosn violated Section 10(b) of the Securities  Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and SEC Rule 10b-5 [17 C.F.R. §240.10b-5], and also aided and abetted Nissan’s violations of Section 10(b) and SEC Rule 10b-5.Kelly aided and abetted Ghosn’s and Nissan’s violations of the same.
4.    Issues
1.     Whether there is violation of section 10(b) of the exchange act?
2.     Whether there is Aiding and abetting violations of section 10(b) of the Exchange act?
3.     Whether the Auditing Firm E and Y were negligent in performance of their duty in particular reference to related party company’s?
4.     Whether the Indian norms are strong enough to handle cases of fraud as mentioned above?
5.     Laws involved
1.     Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”)
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange. To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
2.     SEC Rule 10b-5, Rules and Regulations promulgated under the Securities Exchange Act of 1934
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
a. To employ any device, scheme, or artifice to defraud,
b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
3.     Section 21(d)(3) of the Exchange Act of 1934.
Money Penalties in Civil Actions.
4.     Aiding and Abetting Violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and SEC Rule 10b-5 [17 C.F.R. § 240.10b-5]
6.     Analysis
According to the SEC’s orders and complaint, beginning in 2004 Nissan’s Board delegated to Ghosn the authority to set individual director and executive compensation levels, including his own. From 2009 until his arrest in Tokyo in November 2018, Ghosn, with substantial assistance from Kelly and subordinates at Nissan, engaged in a scheme to conceal more than $90 million of compensation from public disclosure, while also taking steps to increase Ghosn’s retirement allowance by more than $50 million. Each year, Ghosn fixed a total amount of compensation for himself, with a certain amount paid and disclosed and an additional amount that was unpaid and undisclosed. Ghosn and his subordinates, including Kelly, crafted various ways to structure payment of the undisclosed compensation after Ghosn’s retirement, such as entering into secret contracts, backdating letters to grant Ghosn interests in Nissan’s Long-Term Incentive Plan, and changing the calculation of Ghosn’s pension allowance to provide more than $50 million in additional benefits. Kelly and Ghosn’s Nissan subordinates misled Nissan’s CFO, and Nissan issued a misleading disclosure in connection with the increased pension allowance. The $140 million in undisclosed compensation and retirement benefits was never paid out to Ghosn.
In an administrative proceeding, the Commission charged Nissan with violating the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Nissan settled the
charges, agreeing to pay a $15 million civil penalty and to cease and desist from committing or causing violations of the anti-fraud provisions. The SEC’s complaint filed in district court charges Ghosn with violating the same anti-fraud provisions and Kelly with aiding and abetting Ghosn’s and Nissan’s violations. To settle the charges, Ghosn and Kelly agreed to be permanently enjoined from violating or aiding and abetting violations of the anti-fraud provisions. Ghosn also agreed to a $1 million civil penalty and a 10-year officer and director bar. Kelly agreed to a $100,000 penalty, a five-year officer and director bar and a five-year suspension from practicing or appearing before the Commission as an attorney. Nissan, Ghosn, and Kelly settled without admitting or denying the SEC’s allegations and findings.

Nissan’s disclosures about Ghosn’s compensation were false. Through these disclosures, Nissan advanced Ghosn and Kelly’s deceptions and misled investors, including US investors.” Following the introduction of rules that forced Japanese companies to disclose executive pay, Mr Ghosn and Mr Kelly allegedly set aside $90m of pay to be given to Mr Ghosn on his retirement, as well as increasing the value of his pension allowances by a further $50m. None of the money was ever paid to him. Recommended Analysis Nissan Motor Co Ltd Who can fix Nissan? These included awarding remuneration to him in future years labelled as “consultant fees”, which were to be paid when he stepped down from the board. Two letters, in 2011 and 2013, signed by Mr Ghosn and another unnamed Nissan employee set up the arrangement, the SEC charges state. In addition, Mr Ghosn was to be allowed to choose the currency of his retirement allowance, in yen or dollars, in a move that would increase the value of his total
7.     Conclusion
Executive renumeration is an important aspect with respect to investors; using the data the investors can make effective better decision as to the performance of the directors as it is seen that[1]” excessive remuneration and stock options provide incentives to the management to focus too much on the short term, and in this regard it is important to strengthen the accountability regarding how executive compensation is determined. Therefore, companies should disclose their existing executive remuneration policies, and also improve disclosures of pay, with a breakdown according to the type of incentives provided to executives, including stock options.”. Thus, the importance of executive renumeration and its disclosure is now widely realised across the globe. However, such determination policy if left in the hand of the top-tier management such as that of the CEO, CFO etc it would result in a greater chance for fraud. This stand to be the exact position in the Carlos Ghosn case[2]where the determination of executive renumeration was directly in the hands of the accused. Abusing this power, the accused determined their own formulas for determining executive renumeration. The determination of such remuneration was largely in the hand Ghosn which he used for personal gains owing to the poor implementation[3]and Lack of stringent corporate Governance mechanisms. In the Indian scenario however the company Laws are stringent and there exist efficient methods to calculate the calculate the executive renumerations which are laid down in section 198 of the Companies Act[4]. The section limits the extent to which renumeration can be given. A Public Company can pay remuneration to its directors including Managing Director s and Whole-time Directors, and its managers which shall not exceed 11% of the net profit as calculated in a manner laid down in section 198 of the Companies Act, 2013[5].Wherein a Company in which there is one Managing Director; Whole-time Director or manager the remuneration to be payable shall not exceed 5% of net profits and where there are more than one of such Directors remuneration payable shall not exceed 11 % of the net profit. However, in the case of Japanese norm only a limit for which disclosure must be made is mentioned which leads to greater chances for manipulation and fraud
In the Indian Company law, it can be seen that there exist provision making the Independent director responsibility regarding the control of the functions of the company. This is achieved by virtue of formation of the Audit Committee[6]mandated by the Act (Act referred herein as the Companies Act, 2013) which requires more than 50% of the quorum to be Independent directors with the ability to understand the financial statements of the Company. The fundamental function of the Committee is to monitor the audit of the company and its formation is regulated under rule 6 of Companies (Meetings of Board and its powers) Rules[7]are followed. This allows the company to have a more decentralized regulation of the power of the High-level Managerial posts such as that of CEO. In the instant case it is seen that Ghosn along with his associates manipulated the accounts of the company, writing dated letters regarding the and gave order to convey it to the auditing firm E and Y as a mistake of the office of the Secretary of the Company. Thus, vigilance on the part of the accounting firm could have unravelled the case however the auditing firm was negligent in doing so. Further the SEBI regulation of 2015 state that the Board of Directors must determine the renumeration of the directors. Further it is to be noted that notes on Disclosure of Accounting Policies[8]mandates that certain disclosures such as that of managerial renumeration must be mentioned with the financial statement of the company after the auditor has audited the same. This contains disclosures regarding the accounting policy and that of the. Another major issue is with regard to regulation of related party companies. The shell companies created d Zi-A Capital B.V. (Netherlands) and Zi-A Capital Ltd. (Dubai) were funded and were to be added as unconsolidated subsidiary’s were not mentioned in the company’s audit which the Auditing firm E and Y failed to take account for even after it was evident that Ghosn was using such funds of the company to make personal investments[9].

[1] tosin/20090617.html
[4] Section 198 of the Companies Act, 2013
[6] Section 177 of the Companies Act,2013 and Rule 6 and 7 of Companies (Meetings of Board and its Powers) Rules,2014.
[7] See Rule 6 of Companies (Meetings of Board and its powers) Rules

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