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SCHNITZER STEEL AND-DESIST ORDER PURSUANT to INDUSTRIES, INC., SECTION 21C of the SECURITIES EXCHANGE ACT of 1934 Respondent

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SCHNITZER STEEL AND-DESIST ORDER PURSUANT to INDUSTRIES, INC., SECTION 21C of the SECURITIES EXCHANGE ACT of 1934 Respondent UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 54606 / October 16, 2006 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 2493 / October 16, 2006 ADMINISTRATIVE PROCEEDING File No. 3-12456 ORDER INSTITUTING CEASE-AND- In the Matter of DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE- SCHNITZER STEEL AND-DESIST ORDER PURSUANT TO INDUSTRIES, INC., SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 Respondent. I. The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Schnitzer Steel Industries, Inc. (“Schnitzer” or “Respondent”). II. In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 (“Order”), as set forth below. III. On the basis of this Order and Respondent’s Offer, the Commission finds1 that: Summary 1. This matter involves violations of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by Schnitzer Steel Industries, an Oregon-based steel company that sells scrap metal. From at least 1999 through 2004, Schnitzer has paid cash kickbacks or made gifts to managers of government-controlled steel mills in China to induce those managers to purchase scrap metal from Schnitzer. Schnitzer made the payments on its own behalf and as a broker for Japanese steel companies. During this period, Schnitzer also paid bribes to managers of private steel mills in China and South Korea, and improperly concealed those payments in its books and records. Facts 2. Schnitzer, incorporated in Oregon and headquartered in Portland, Oregon, operates three business segments that include a steel manufacturer, a metals recycling business and an auto parts business. Schnitzer reported revenue of $853 million for its fiscal year ended August 31, 2005. At the time of the conduct described below, Schnitzer’s common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was listed on the NASDAQ National Market. Schnitzer filed reports with the Commission pursuant to Section 13 of the Exchange Act. 3. As part of its metals recycling business, Schnitzer buys and resells metal, including selling scrap metal to steel mills in Asia. In 1995, Schnitzer acquired an entity with two subsidiaries: a subsidiary in South Korea that it renamed SSI International Far East Ltd. (“SSI Korea”), and a U.S. subsidiary in Tacoma, Washington that it renamed SSI International, Inc. (“SSI International”). Thereafter, Schnitzer used these subsidiaries to facilitate its Asian scrap metal sales. A. Sales to Government-owned Steel Mills in China 4. From at least 1999 through 2004, employees and agents of SSI International and SSI Korea made improper cash payments to managers of scrap metal customers owned, in whole or in part, by the Chinese government. These payments were intended to induce those managers to purchase scrap metal from Schnitzer. 5. During the period 1999 through 2004, Schnitzer paid over $205,000 in improper payments to managers of its government-owned customers in China in connection with 30 sales transactions. Schnitzer’s gross revenue for those transactions totaled approximately $96 million, and Schnitzer earned $6,259,104 in net profits on the sales. 1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. 2 6. Schnitzer paid two types of kickbacks to the general managers of its scrap metal customers. For the first type, Schnitzer paid a “standard” kickback, which was generally $3,000 to $6,000 per shipment. Schnitzer paid these kickbacks out of the revenue it earned on the scrap metal sale. Schnitzer also paid the general managers of Chinese customers a second kickback that Schnitzer referred to internally as a “refund” or “rebate.” To pay the “refunds,” Schnitzer participated in a scheme whereby the general manager of a steel mill would cause the steel mill to overpay Schnitzer for the steel purchase, and would then personally recover the “overpayment” from Schnitzer, in amounts ranging from $3,000 to $15,000. 7. Schnitzer wired the money for the improper payments to secret bank accounts in South Korea opened by the head of SSI Korea specifically for receiving these payments. The head of SSI International and the head of SSI Korea would then use funds from the secret accounts to make improper cash payments to managers of Schnitzer’s customers. In addition to the cash payments, the Schnitzer officers gave gifts to the managers of the government-owned customers. A Schnitzer senior official was aware of and authorized the wire transfers to the secret bank accounts. 8. Separate from SSI Korea’s role as a seller of Schnitzer’s metals, SSI Korea also acted as a broker for Japanese scrap metal companies that sold scrap metal in China, receiving brokerage commissions for locating scrap metal buyers in China. Since at least 1999, Japanese companies provided SSI Korea with funds to make improper payments to managers of the Chinese steel mills similar to the payments made by Schnitzer for scrap metal it sold. On behalf of Schnitzer, the funds were delivered to the managers of the Japanese steel mill customers. 9. From 1999 to 2004, Schnitzer made improper payments on behalf of its Japanese customers to managers of steel mills owned, in whole or in part, by the Chinese government in approximately eight scrap metal transactions. SSI Korea earned $58,610 in brokerage commissions and realized $19,991 in net profits from those eight transactions. 10. In order to conceal the improper payments, Schnitzer falsely described those payments to the foreign officials as “sales commissions,” “commission to the customer,” “refunds,” or “rebates” in Schnitzer’s books and records. B. Sales to Privately Owned Steel Mills in China and South Korea 11. In addition to making improper payments for scrap metal sales to government- owned steel mills in China, Schnitzer paid bribes to managers of privately owned steel mills in China and South Korea. Schnitzer falsely described the payments as “sales commissions,” “commission to the customer,” “refunds,” or “rebates” in Schnitzer’s books and records. 12. From 1999 to 2004, Schnitzer made over $420,000 in improper payments to managers of privately owned Chinese steel mills to induce them to purchase scrap metal from Schnitzer. Schnitzer paid managers of the privately owned South Korean steel mills approximately $1,273,000 in bribes from 1999 to 2004 to induce them to purchase scrap metal from Schnitzer. From 1999 to 2004, SSI Korea also earned $1,513,097 in commissions for brokered sales on 3 behalf of Japanese companies in which such kickbacks were paid. Schnitzer also provided non- cash gifts to general managers of Korean customers. C. Schnitzer’s Lack of Internal Controls 13. During the period of the foreign transactions described above, Schnitzer provided no training or education to any of its employees, agents or subsidiaries regarding the requirements of the FCPA. Schnitzer also failed to establish a program to monitor its employees, agents and subsidiaries for compliance with the FCPA. D. Schnitzer’s Investigation and Subsequent Events 14. In May 2004, Schnitzer’s compliance department uncovered the improper payments and Schnitzer began to investigate the potential FCPA violations. At that time, a senior executive of Schnitzer prohibited any further payments, but nonetheless authorized Schnitzer employees to pay at least two additional bribes that Schnitzer previously had promised private customers. The same senior executive also authorized Schnitzer employees to increase entertainment expenses in lieu of cash payments to its private and government-owned scrap metal customers. In response, Schnitzer employees gave managers of Schnitzer’s scrap metal customers additional gifts, including gift certificates worth $10,000 and a watch worth $2,400. 15. After Schnitzer began its internal investigation, but before it had issued a directive to its employees to preserve documents related to the scrap metal transactions, SSI Korea employees destroyed documents concerning the improper payments. Legal Analysis 16. The FCPA, enacted in 1977, added Section 30A to the Exchange Act to prohibit public companies from, among other things, making improper payments to foreign officials for the purpose of influencing their decisions in order to obtain or retain business. See 15 U.S.C. § 78dd-1. 17. The FCPA also added Exchange Act Section 13(b)(2)(A) to require public companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer, and Exchange Act Section 13(b)(2)(B) to require such companies to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; and (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets. See 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B).
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