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Ericsson Resolves Corruption Probe With $1.1B Settlement

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Ericsson (ERIC - Free Report) recently resolved the long-running U.S. corruption probe against alleged bribery and illicit payments for securing prime contracts in five countries with a combined payment of $1.06 billion. With the historic settlement, the company aims to focus its resources to better compete with industry rivals like Nokia Corporation NOK and fill the void created by the trade restrictions on China-based firm Huawei.

The U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) conducted separate investigations against Ericsson, with the former pursuing criminal charges and the latter civil charges related to violations of the Foreign Corrupt Practices Act (FCPA). The charges, pertaining to a period spanning 2000-2016, relate to offering bribes, falsifying books and records through sophisticated schemes and failing to implement reasonable internal accounting controls to safeguard the ethical business policies of the company.

The company accepted the charges stating that the moves were aimed to strengthen its grip on the telecommunications business across geographical territories, and duly cooperated with the authorities in the investigation procedure. This, in turn, led the Stockholm-based company to gain a 15% reduction in penalties. However, Ericsson failed to receive full credit for cooperation as it could not act in time to take adequate disciplinary actions against some employees who resigned beforehand, sensing trouble.

The settlement charges include a $520 million penalty imposed by the DOJ and about $540 million by the SEC. In addition, Ericsson has agreed to enter into a Deferred Prosecution Agreement (DPA) with the DOJ to put an end to the criminal charges pertaining to violation of bribery provision of the FCPA in Djibouti and accounting provisions in China, Djibouti, Indonesia, Kuwait, and Vietnam. As part of the DPA, an Egyptian subsidiary of the company pleaded guilty to a conspiracy charge. The SEC settlement resolves FCPA’s accounting provision violations in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam and bribery provisions in Djibouti, China and Saudi Arabia.

At the same time, Ericsson has pledged to enhance its internal controls and compliance program to regain trust of its clients and prevent repetition of such activities in accordance with its entrenched ethics and compliance culture.

The stock has gained 4% year to date compared with the industry’s rise of 20.3%.

Ericsson is increasingly focusing on 5G system development to capitalize on market opportunities. The company believes that standardization of 5G is the cornerstone for digitization of industries and broadband. Moreover, Ericsson foresees mainstream 4G offerings to give way to 5G technology in the future. Meanwhile, the impending deployment of 5G networks is expected to boost the adoption of IoT devices with technologies like network slicing gaining more prominence.

Ericsson currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Qualcomm Incorporated QCOM and Ubiquiti Inc. UI, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Qualcomm has long-term earnings growth expectation of 14%. It delivered an average positive earnings surprise of 8.7% in the trailing four quarters, beating estimates on each occasion.

Ubiquiti has long-term earnings growth expectation of 9.4%. It delivered an average positive earnings surprise of 16.1% in the trailing four quarters, beating estimates thrice.

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