In Re Key Energy Services, Inc. Securities Litigation 14...

Case 4:14-cv-02368 Document 37 Filed in TXSD on 02/13/15 of 113

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

) )

IN RE KEY ENERGY SERVICES, INC. ) C.A. No.: 4:14-cv-2368 SECURITIES LITIGATION )

) )

CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS


TABLE OF CONTENTS

I. NATURE OF THE ACTION ..............................................................................................2

II. JURISDICTION AND VENUE ..........................................................................................7

III. PARTIES .............................................................................................................................7

IV. SUBSTANTIVE ALLEGATIONS .....................................................................................8

A. Leading up to the Class Period, Key aggressively expanded its international operations, particularly in Mexico and Russia, as part of its growth strategy.........................................................................................................8

B. Mexico is critical to Key’s International segment .................................................11

C. Key acquires a company in Russia to gain a foothold in the world’s second largestwell service market .....................................................................................14

D. Key’s push to grow internationally exposed the Company to larger FCPA risks ........................................................................................................................17

E. Applicable provisions of the FCPA and Key’s purported compliance with the law ....................................................................................................................22

1. The anti-bribery provisions of the FCPA...................................................22

2. The FCPA’s auditing and accounting provisions ......................................25

3. Affirmative defenses and exceptions to the FCPA ....................................27

4. Penalties for violating the FCPA ...............................................................28

5. Key knew its FCPA compliance operations were wholly inadequate for conducting business in Mexico and Russia given the U.S. government’s well-known crackdown on FCPA violations ..............30

6. Key’s Code of Business Conduct ..............................................................33

7. Key’s Foreign Corrupt Practices Act Compliance Manual .......................35

8. The U.S. government has provided companies with clear guidelines on how to design and implement effective FCPA compliance programs .................................................................................41

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F. Key’s failure to implement and follow an effective FCPA compliance program exposed the Company to multiple FCPA-related investigations and financial harm..................................................................................................48

V. MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD ......................................................................................55

A. Key’s FCPA Compliance Manual .........................................................................55

B. Key’s Code of Business Conduct ..........................................................................57

C. September 4, 2012—Barclayes Capital CEO Power Energy Conference .............58

D. October 2, 2012—Johnson Rice Energy Conference ............................................59

E. Third Quarter 2012 Form 10-Q..............................................................................60

F. November 1, 2012 Earnings Call ...........................................................................63

G. December 4, 2012—Dahlman Rose & Co. Ultimate Oil Services and E&P Conference .............................................................................................................63

H. Fourth Quarter and Full Year 2012 Results and Earnings Call .............................66

I. 2012 Form 10-K .....................................................................................................67

J. March 5, 2013—Raymond James Institutional Investors Conference ..................69

K. First Quarter 2013 Press Release and Earnings Call .............................................71

L. First Quarter 2013 Form 10-Q ...............................................................................73

M. June 26, 2013—Global Hunter Securities GHS 100 Conference ..........................74

N. Second Quarter 2013 Earnings Call and Form 10-Q .............................................75

O. Third Quarter 2013 Press Release and Earnings Call ............................................76

P. Third Quarter 2013 Form 10-Q..............................................................................78

Q. January 6, 2014—Press Release ............................................................................78

R. Fourth Quarter and Full Year 2013 Press Release and Earnings Call ...................79

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S. 2013 Form 10-K .....................................................................................................80

T. First Quarter 2014 Press Release and Earnings Call .............................................82

VI. THE TRUTH BEGINS TO EMERGE ..............................................................................83

VII. SCIENTER ALLEGATIONS ............................................................................................86

A. Key designed FCPA policies and procedures that were either recklessly or deliberately ignored ...............................................................................................86

B. Key pushed into notoriously corrupt countries, including Mexico and Russia, with non-existent FCPA policies and procedures, significantly raising the Company’s exposure to FCPA violations ............................................93

VIII. INAPPLICABILITY OF STATUTORY SAFE HARBOR ..............................................95

IX. CONTROL PERSON ALLEGATIONS/GROUP PLEADING ........................................97

X. LEAD PLAINTIFF’S CLASS ACTION ALLEGATIONS ..............................................99

XI. LOSS CAUSATION ........................................................................................................101

XII. APPLICABILITY OF THE PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE ...........................................................................................101

COUNTS......................................................................................................................................103

PRAYER FOR RELIEF ..............................................................................................................107

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Lead Plaintiff Inter-Local Pension Fund of the Graphic Communications Conference of

the International Brotherhood of Teamsters (“Lead Plaintiff”), individually and on behalf of all

other persons similarly situated, by its undersigned attorneys, alleges the following based on

personal knowledge as to itself and its own acts, and information and belief as to all other

matters, based upon, among other things, the investigation conducted by and through its

attorneys, which included, among other things, a review of the Defendants’ public documents,

conference calls and announcements made by Defendants, United States Securities and

Exchange Commission (“SEC”) filings, wire and press releases published by and regarding Key

Energy Services, Inc. (“Key” or the “Company”), analysts’ reports and advisories about the

Company, and information readily obtainable on the Internet. Lead Plaintiff believes that

substantial evidentiary support will exist for the allegations set forth in this complaint after a

reasonable opportunity for discovery.

Lead Plaintiff’s allegations are also based, in part, on interviews with former employees

of Key and others who have knowledge of the relevant aspects of the Company’s operations,

including:

• Confidential Witness 1 (“CW1”), a former Vice President of International Human Resources at Key who worked in that position from 2010 to October 2013, and whose tenure at Key began in 2008. CW1’s responsibilities included creating and managing the Company’s human resources infrastructure (including policies and procedures, compensation, benefits, recruitment, talent management, and leadership development), both domestically and internationally. This CW reported to Kim Clarke, Senior Vice President of Administration, and Guillermo Capacho, Senior Vice President of International, Global Business Development and Technology;

• Confidential Witness 2 (“CW2”), who worked at Key as a Senior Internal Auditor from May 2012 to July 2013. CW2 has extensive experience conducting audits, both in the U.S. and in foreign countries, including countries known for corrupt business practices, and has specific experience with Sarbanes-Oxley and FCPA compliance reviews. CW2 reported to

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William Tobey, Director of Internal Audit, who reported to defendant Whichard, Key’s CFO, and then defendant Dodson, who replaced defendant Whichard as CFO;

Confidential Witness 3 (“CW3”), a former Accounting Manager at Key who oversaw accounting for the Company’s operations in Russia and Mexico;

Confidential Witness 4 (“CW4”), who worked at Key as a Senior Director, Global Marketplace Performance Improvement, from April 2012 to July 2014. Prior to that position, CW4 was Senior Director, West Coast Marketplace Business Development at Key from August 2009 to March 2012. As Senior Director, Global Marketplace Performance Improvement, CW4 worked in a leadership role for the Company’s strategic, enterprise-wide business development initiatives. In that role, CW4 reported to: Guillermo Capacho, Senior Vice President of International, Global Business Development and Technology; Kim Clarke, Senior Vice President of Administration; and Jeff Skelly, Senior Vice President of Rig Services and Operations Support;

Confidential Witness 5 (“CW5”), a former Director, International Accounting at Key who worked in that position from May 2010 to November 2013. In that position, CW5 developed and organized all of Key’s finance and accounting functions across all of its international entities, including Russia and Mexico, oversaw the consolidation process and financial reporting of the International segment, and performed due diligence in relation to Key’s joint ventures and acquisitions, among other responsibilities; and

Confidential Witness 6 (“CW6”), a former Corporate Auditor at Key from May 2011 to May 2013. In that position, CW6 was charged with heading operational and business process audits. CW6 also assisted in fraud investigations and expense reimbursement reviews. CW6 was also responsible for conducting control tests to confirm that the Company complied with internal controls over financial reporting.

I. NATURE OF THE ACTION

This is a federal securities class action brought on behalf of a class consisting of all

persons or entities, excluding Defendants (as defined herein) and their affiliates, who purchased

or acquired the common stock of Key between September 4, 2012, and July 17, 2014, inclusive

(the “Class Period”). Lead Plaintiff seeks to pursue remedies against Key and certain of its

officers and directors for violations of the Securities Exchange Act of 1934 (the “Exchange

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Act”).

2. Key is a Houston-based well servicing contractor that provides the full range of well

intervention services in all major onshore oil- and gas-producing regions of the United States, as

well as in Mexico, Colombia, Ecuador, the Middle East, and Russia.

3. Throughout the Class Period, with flagging growth in the domestic market, Defendants

touted to investors Key’s ability to seize opportunities for expansion in critical non-U.S. markets,

such as Russia and Mexico. While lucrative, such opportunities, particularly in these countries,

were, at all relevant times, laden with risks. As the National Law Journal reported, “corruption

poses substantial obstacles to doing business in Mexico, outranked only by inefficient

bureaucracy.” One expert advises that in Latin American markets, including Mexico,

“‘opportunity with impunity’ remains the guiding principle for doing business.”

Correspondingly, the U.S. Commercial Service identifies several challenges in Russia, notably

among them, “widespread corruption and inadequate rule of law,” “lack of transparency,” and

the “continued presence of large state-owned, or state-controlled, enterprises in strategic sectors

of the economy.” And another authority warned that “[t]he prevalence of official corruption is

the dominant risk to a company once it has entered the Russian market.” Accordingly, Key

needed to be aware of and on high alert for corruption and other illicit practices in those regions

that could compromise the integrity of its business operations.

4. At the same time, the Foreign Corrupt Practices Act (the “FCPA”) prohibits U.S.

companies doing business abroad from bribing foreign officials so as to obtain contracts or

business and from engaging in deceptive accounting to conceal such practices. The FCPA

contains severe civil and criminal penalties for individual violations, which, on their own or

compounded, can have devastating financial consequences. The last decade has seen a dramatic

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escalation of both FCPA enforcement actions by the SEC and the Department of Justice (the

“DOJ”) and penalties recovered, with a near record $1.5 billion collected in 2014.

5. In light of these enforcement trends and the well-publicized risks of doing business in

Mexico and Russia, investors reasonably expected that Key would have been especially vigilant

and would have ensured that its internal controls were sufficiently robust to protect the Company

from the threat of FCPA violations. To attract and maintain investor interest despite doing

business in areas known for corruption, Defendants went out of their way to assure investors that

Key’s internal controls were more than sufficient. Key touted its FCPA Compliance Manual and

the principle boasted therein that “[i]t is the policy of [Key], its subsidiaries and affiliates . . . that

the Company and each person or entity acting as a representative or advisor to the Company

shall fully comply with all applicable provisions of the [FCPA].” Likewise, in a letter prefacing

the Company’s Code of Business Conduct, Key’s CEO insisted that all employees “must commit

to always acting lawfully, ethically and with integrity,” concluding: “‘Do the right thing,

without exception.’”

6. Notwithstanding these representations, Key’s internal controls were anything but

robust. Indeed, so deficient were these “controls” that Defendants could not have made these

representations in good faith. The wide divergence between Key’s internal controls as

represented by Defendants and these controls as they actually were underscores, at a minimum,

the gross recklessness with which Defendants misled investors. In fact, had Key’s compliance

machinery been as developed and stringent as Defendants represented, it would have been

impossible for Defendants not to know that its success in certain international markets was, at

least in part, the result of rampant FCPA violations.

7. A slew of former Key employees—all of whom were in a position to know—have

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come forward to document the woeful inadequacy of Key’s internal controls. For instance,

CW6, a former Corporate Auditor at Key, undermined senior management’s assurances by

revealing that, at Key, “[i]nternal controls are non-existent. . . . There’s no support from the

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fiscal year 2014, Key announced that the SEC was investigating the Company for possible FCPA

violations in its Russian operations. Because investors bought Key shares in part due to

Defendants’ promise that the Company had robust internal controls to protect it from the threat

of FCPA violations, this news caused a dramatic reaction: Key’s share price dropped more than

7%, or $0.64, over the next two days.

10. The story evolved approximately one month later when, on June 4, 2014, Key filed

with the SEC a Form 8-K disclosing that it had become aware of additional potential FCPA

violations, this time involving its operations in Mexico. The Company stated that it had formed

a special committee to conduct an internal investigation into the matter, and that it had notified

the SEC and the DOJ.

11. Then, on July 17, 2014, Key shocked the market when it revealed the significant

economic impact that questions about its FCPA compliance were having on the Company.

Specifically, in a press release providing updated guidance for the second quarter of 2014, the

Company disclosed that it expected to record a pre-tax charge for goodwill and other assets

impairments related to its operations in Russia in the amount of $30 million to $35 million.

Additionally, the Company had incurred approximately $5 million in pre-tax expenses associated

with its investigation into violations of the FCPA (and which, according to the Company’s most

recent Form 10-Q, filed November 4, 2014, had ballooned to $21.5 million , and continues to

grow). After these charges, Key expected to report a loss for the quarter in the range of $0.35 to

$0.38 per share.

12. The market reaction was swift and severe, sending Key’s share price plummeting 16%,

or $1.34 per share, to close at $7.03 on July 18, 2014, on unusually high volume of more than

16 million shares.

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13. The Company’s July 17, 2014 revelations demonstrate that the value of its operations in

Russia had diminished substantially as a consequence of the same conduct that triggered

governmental scrutiny into Key’s FCPA compliance. By concealing from the public that the

Company was engaging in conduct in Russia and Mexico that would subject it to costly and

damaging investigations, including those by U.S. regulators, Defendants misled the market and

ultimately caused significant harm to investors.

II. JURISDICTION AND VENUE

14. The claims asserted in this action arise under §§ 10(b) and 20(a) of the Exchange Act,

15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5.

15. This Court has jurisdiction over the subject matter of this action under 28 U.S.C.

§ 1331 and § 27 of the Exchange Act, 15 U.S.C. § 78aa.

16. Venue is proper in this District under § 27 of the Exchange Act and 28 U.S.C.

§ 1391(b), as Key is headquartered within this District and a significant portion of the

Defendants’ actions, and the subsequent damages, occurred in this District.

17. In connection with the acts, conduct, and other wrongs alleged in this Complaint, the

Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce

including, but not limited to, the United States mail, interstate telephone communications, and

the facilities of a national securities exchange.

III. PARTIES

18. Lead Plaintiff purchased Key’s common stock at artificially inflated prices during the

Class Period and was damaged upon the revelation of the alleged corrective disclosures.

19. Defendant Key is a Maryland corporation with its principal executive offices at 1301

McKinney Street, Suite 1800, Houston, Texas 77010. Key’s common stock trades on the New

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York Stock Exchange under the ticker “KEG.”

20. Defendant Richard J. Alario (“Alario”) has served at all relevant times as the

Company’s Chairman, President, and Chief Executive Officer.

21. Defendant Taylor M. “Trey” Whichard, III (“Whichard”) served as Key’s Senior Vice

President and Chief Financial Officer from March 2009 until his retirement in March 2013.

22. Defendant Newton W. “Trey” Wilson, III (“Wilson”) served at all relevant times as

Key’s Executive Vice President and Chief Operating Officer. Effective May 20, 2014, Wilson

was named Key’s Executive Vice President with responsibility for international operations,

technology development, and corporate strategy.

23. Defendant J. Marshall Dodson (“Dodson”) succeeded defendant Whichard as Key’s

Senior Vice President and Chief Financial Officer on March 25, 2013. From 2009 until his

appointment as CFO, Dodson served as the Company’s Vice President and Treasurer.

24. Defendants Alario, Whichard, Wilson, and Dodson are referred to in this Complaint

collectively as the “Individual Defendants.”

25. Defendant Key and the Individual Defendants are referred to in this Complaint

collectively as the “Defendants.”

IV. SUBSTANTIVE ALLEGATIONS

A. Leading up to the Class Period, Key aggressively expanded its international operations, particularly in Mexico and Russia, as part of its growth strategy

26. Key, headquartered in Houston, is an onshore, rig-based well servicing contractor. It

provides the full range of well intervention services, including the completion of newly-drilled

wells, workover of existing oil and natural gas wells, well maintenance, and specialty drilling

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services, among other things. Key operates in all major onshore oil- and gas-producing regions

of the United States, as well as in Mexico, Colombia, Ecuador, the Middle East, and Russia.

27. According to Key’s 2013 Form 10-K, filed with the SEC on February 25, 2014, the

Company maintains two primary reportable segments: U.S. and International. There is also a

“Functional Support” segment associated with overhead costs in support of its reportable

segments.

28. The U.S. reporting segment includes Key’s domestic rig-based services, fluid

management services, fishing and rental services, and coiled tubing services. For the full year

2013, Key’s U.S. operations reported revenue of $1.38 billion, a decrease of 15.4% from the

prior year, which Key attributed in its 2013 Form 10-K to “reduced customer spending, lower

activity in natural gas markets and increased competition.” In light of such declining domestic

revenues, Key opted to explore opportunities for international growth.

29. Key’s International reporting segment includes operations in Mexico, Colombia,

Ecuador, Russia, Bahrain, and Oman. It provides rig-based services, such as the maintenance,

workover, and recompletion of existing oil wells, completion of newly-drilled wells, and

plugging and abandonment of wells at the end of their useful lives in each international market.

30. As demonstrated by Defendants’ statements, Key was intensely focused on

international expansion leading up to the Class Period. For example, on January 4, 2012,

defendant Whichard, then Key’s Senior Vice President and Chief Financial Officer, while

presenting at the Pritchard Capital Energize Conference in San Francisco, California, stated that

“[i]nternationally our presence continues to grow. . . . And as we exit Q4, we’ll have 24 rigs

operating in Mexico with PEMEX demanding more equipment.”

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31. In relation to market conditions experienced during 2011, Key’s 2011 Form 10-K , filed

with the SEC on February 29, 2012, explained Key’s international expansion strategy that year:

We also expanded our position in Mexico, Colombia, and the Middle East during 2011. In Mexico, we were awarded two $90 million contracts for work in the Aceite Terciario del Golfo (“ATG”) field. The contracts led us to increase our rig count in the country during 2011 with additional rigs planned for the country in 2012, doubling our rig count in the country. In Colombia and Bahrain, we increased our rig count during our first full year of operations in these markets with opportunities for further increases during 2012. In Argentina, our focus remains on improving overall asset utilization and profitability. However, we have begun the process of selling our Argentina operations and expect to close this transaction during 2012. In Russia, we continue to grow our customer base and a stable backlog of projects to improve asset utilization.

32. Similarly, in “Management’s Discussion and Analysis of Financial Condition and

Results of Operations” in Key’s 2012 Form 10-K, filed on February 25, 2013, the Company

identified continued expansion in international markets as part of its business and growth

strategies: “[w]e presently operate internationally in Mexico, Colombia, the Middle East and

Russia, particularly in regions of those countries with large mature oilfields facing production

declines. We believe that our experience with domestic mature oilfields and our proprietary

technologies, including our KeyView® system, provides us with the opportunity to compete for

new business in foreign markets.” 2 The Company acknowledged that it “continue[s] to evaluate

international expansion opportunities in the regions where we already have a presence as well as

other regions.”

33. Thus, international growth was a theme broadcast to investors by Defendants before

and during the Class Period. Defendants repeatedly portrayed the Company’s international

operations, particularly in Russia and Mexico, as important to Key’s growth and a material factor

2 KeyView® is Key’s patented rig-data capture system, which “provide[s] decision quality information using sensors incorporated throughout each rig to monitor certain operational parameters.”

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in its financial health. And given the decline in revenues leading up to the Class Period,

Defendants were motivated to secure business at any cost.

B. Mexico is critical to Key’s International segment

34. Key’s business in Mexico is vital to the growth of the Company’s International

segment, contributing a substantial portion of that segment’s revenue. Given its importance, Key

often discussed in detail its Mexican operations leading up to and throughout the Class Period.

35. For instance, in its 2009 Form 10-K, filed with the SEC on February 26, 2010, Key

stated that “[f]or 2009, we had 1.8 million rig hours and 1.7 million trucking hours, which was a

decrease of 35.2% and 28.2%, respectively, from 2008 activity levels and 28.1% and 24.8%,

respectively, from 2007 activity levels.” However, the Company’s decline in rig hours was

partially offset by “our expansion into Mexico and Russia during 2009, and the full year effect of

acquisitions completed during 2008.” Looking forward, Key stated that it expected that

Petroleos Mexicanos (“PEMEX”), the state-owned Mexican oil company, and Key’s largest

international client, “will maintain their level of workover activity and that the rigs we have

currently operating in Mexico will be utilized for all of 2010.”

36. Likewise, Key’s 2010 Form 10-K, filed on February 28, 2011, further highlighted the

importance of its international expansion, noting that yearly revenues for the Company’s Well

Servicing segment increased 14% over the prior year, attributable to “international expansion,

improved pricing and additional revenues from 2010 acquisitions, offset by lower revenues

attributable to our operations in Mexico due to a decrease in work for [PEMEX].” The 10-K also

noted that, in 2009, revenues in the same segment had fallen substantially as a result of

commodity prices and the financial crisis, but that this downturn had been partially offset by “the

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expansion of our operations in Mexico and incremental rig hours from our Russian joint venture

in 2009.”

37. Despite a slowdown in its Mexican business that year stemming from budget issues at

PEMEX, Key anticipated continued growth in Mexico during 2011. For instance, in its 2010

Form 10-K, Key Energy stated that “[i]n Mexico, [PEMEX] has begun operating under its 2011

capital budget, and our activity levels have begun to increase from the depressed levels in 2010.”

As a result, the Company “anticipate[d] strong demand through most of 2011 for our rigs

currently deployed in Mexico, primarily in the Chicontepec region.”

38. Likewise, on January 4, 2012, defendant Whichard, while presenting at the Pritchard

Capital Energize Conference in San Francisco, California, stated that “[i]nternationally our

presence continues to grow. . . . And as we exit Q4, we’ll have 24 rigs operating in Mexico with

PEMEX demanding more equipment.”

39. Along the same lines, on February 16, 2012, in a press release announcing the

Company’s financial results for the fourth quarter and full year 2011, the Company stated that

“[t]he strong improvement in international results in 2011 was driven by higher rig activity in

Mexico . . . .” During a conference call for analysts and investors the following day, defendant

Alario further touted the Company’s successes in Mexico: “When we first entered the Mexico

market back in 2007 with three rigs, we believed then that it could become a 40 to 50 rig market

for Key. I'm pleased to report that our activity in Mexico should more than double in 2012 with

at least 40 rigs for the year compared to an average of 18 rigs in 2011.”

40. Key’s Form 10-K for full year 2011, filed with the SEC on February 29, 2012, further

described the significance of its Mexico operations, noting that “[w]e generate significant

revenue from our contracts with the Mexican national oil company [PEMEX].”

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41. Similarly, in that same Form 10-K, the Company noted that “[i]n Mexico, we were

awarded two $90 million contracts for work in the Aceite Terciario del Golfo (‘ATG’) field. The

contracts led us to increase our rig count in the country during 2011 with additional rigs planned

for the country in 2012, doubling our rig count in the country.”

42. Other metrics reported in Key’s 2011 Form 10-K further demonstrated the importance

to the Company’s business of expansion into Mexico. For instance, the Company noted that

although “no single customer accounted for more than 10% of our consolidated revenues” in

2010 or 2011, “[d]uring the year ended December 31, 2009, [PEMEX] accounted for

approximately 11% of our consolidated revenues. No other customer accounted for more than

10% of our consolidated revenues for the year ended December 31, 2009.” At the same time,

“[r]eceivables outstanding from [PEMEX] were approximately 10% of our total accounts

receivable as of December 31, 2011. No single customer accounted for more than 10% of our

total accounts receivable as of December 31, 2010. [PEMEX] accounted for approximately 25%

of our total accounts receivable as of December 31, 2009. No other customers accounted for

more than 10% of our total accounts receivable as of December 31, 2011 and 2009.”

43. Defendant Whichard continued to extol the virtues of Key’s Mexico business on March

6, 2012, at the Raymond James Institutional Investors Conference in Orlando, Florida. During

his presentation, defendant Whichard stated that “[o]ur international revenue doubled year-over-

year, if you pull Argentina out of the mix. And 80% of our increase came from Mexico and

increases in the Middle East, as well as Columbia . . . . PEMEX has a strong demand for

additional workovers. They’ve asked us to double our presence there. We did. ”

44. On June 26, 2012, the Company issued a press release announcing second quarter 2012

financial results and noting that “[t]he revenue and margin improvement was driven primarily

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by higher activity in Mexico .” The release also quoted defendant Alario as stating that

“[i]nternationally, our second quarter results improved considerably driven primarily by the full

deployment of assets in Mexico where demand for our services continues to grow.”

45. Thus, it is clear that Key premised its growth in large measure on optimistic trends

occurring in its Mexico operations, portraying to investors the notion that Mexico was—and was

likely to continue—driving Key’s fortunes to a considerable degree. Notwithstanding these

representations, Key’s internal controls were anything but robust. Indeed, so deficient were

these “controls” that Defendants could not have made these representations in good faith. The

wide divergence between Key’s internal controls as represented by Defendants and these

controls as they actually were underscores, at a minimum, the gross recklessness with which

Defendants misled investors. In fact, had Key’s compliance machinery been as developed and

stringent as Defendants represented, it would have been impossible for Defendants not to know

that its success in certain international markets was, at least in part, the result of rampant FCPA

violations.

C. Key acquires a company in Russia to gain a foothold in the world’s second largest well service market

46. On October 31, 2008, Key acquired for $17.4 million a 26% interest in OOO

Geostream Services Group (“Geostream”), a limited liability company incorporated in the

Russian Federation that provides a wide range of drilling, workover, and reservoir engineering

services. As part of this deal, Key was contractually required to purchase an additional 24% of

Geostream. Key also had the option to increase its ownership of Geostream to 100% by

approximately October 31, 2014. However, if the Company did not acquire 100% of Geostream

by that date, Key would be required to arrange an initial public offering for those shares.

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47. In connection with its first investment, three Key officers became board members of

Geostream, representing 50% of the board membership. Because of this, in its 2008 Form 10-K,

filed with the SEC on February 27, 2009, Key noted that it “can exert influence over the

operations of Geostream, but do[es] not control it[.]”

48. Approximately one year after this first investment, on September 1, 2009, Key

increased its holdings in Geostream, purchasing an additional 24% interest for $16.4 million.

This brought Key’s total investment in Geostream up to 50% and provided the Company with a

controlling interest in the entity, with representation on Geostream’s board of directors.

Following the second investment in Geostream, Key stated in its 2009 Form 10-K that it

“expect[ed] to expand our international presence, specifically in Russia where the wells are

shallow and suited to the services we perform.”

49. In its 2009 Form 10-K, Key stated that “[f]or 2009, we had 1.8 million rig hours and

1.7 million trucking hours, which was a decrease of 35.2% and 28.2%, respectively, from 2008

activity levels and 28.1% and 24.8%, respectively, from 2007 activity levels.” However, the

Company’s decline in rig hours was partially offset by “our expansion into Mexico and Russia

during 2009, and the full year effect of acquisitions completed during 2008.” In fact, in 2010,

Key anticipated that its “activity levels in Russia will increase significantly as the equipment we

have sold to the joint venture [Geostream] is deployed and begins working.”

50. And in its February 16, 2012 press release announcing financial results for the fourth

quarter and full year 2012, Key stated that, in Russia, it “anticipate[d] better activity and

financial performance in 2011 compared to 2010, as we expect the two new purpose-built, 1,000-

HP drilling rigs and the two new purpose-built, 500-HP heavy workover rigs, for our joint

venture in Russia, to contribute nearly a full year of operations in 2011.”

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51. Significantly, Key reported in its 2011 10-K that, in conducting its yearly goodwill

impairment analysis, the Company’s review of its Russian reporting unit indicated a fair value

exceeding the Russian business’s carrying value by approximately 13%, and that the Company

recorded no assets impairments during 2011.

52. On January 4, 2012, while presenting at the Pritchard Capital Energize Conference,

defendant Whichard stated that, with respect to Russia, “[w]e are now seeing full utilization of

our assets. . . . And utilization rates today are more fulsome than they have been and we’ve

got—we’re optimistic about 2012 in that market certainly.”

53. During a June 26, 2012 presentation at the Global Hunter Securities LLC Energy

Conference in San Francisco, defendant Alario discussed Key’s steady progress in Russia,

stating:

In Russia, we continue to improve our market position, gradually converting more and more customers to the virtues of our reliable equipment; and we’re dispatching those capabilities to a broader footprint of customers.

54. On August 14, 2012, Gary Russell, Key’s then-Vice President of Investor Relations,

spoke at the Enercom Oil and Gas Conference in Denver, Colorado. Russell made a number of

statements touting the Company’s success and opportunities internationally, including with

regard to Russia. For instance, Russell stated: “And in Russia, we continue to improve our

market position, gradually gaining traction with more customers as we demonstrate the benefits

of our reliable equipment and the world’s second largest well maintenance market.”

55. As discussed further below, on April 9, 2013, Key Energy acquired the remaining 50%

noncontrolling interest in Geostream for $14.6 million—making Geostream Key’s wholly-owned

subsidiary. Although Key, at times, characterized its operations in Russia as a “small

investment,” it was a significant development for Key as it represented expansion into the

16


“second largest well service market in the world.” And a market that is recognized as highly

corrupt.

D. Key’s push to grow internationally exposed the Company to larger FCPA risks

56. Key intentionally and/or recklessly disregarded its obligations under the FCPA in its

hunt to boost its revenues in Mexico and Russia. Key failed to develop, implement, and monitor

internal controls in “high risk” international markets, such as Latin America and Russia, despite

the well-known prevalence of corruption in cross-border business dealings in those countries and

the severe ramifications of violating the FCPA. Since its inception, the FCPA has been a critical

consideration for U.S. companies conducting business internationally, 3 but critically, numerous

prominent sources raised red flags prior to and during the Class Period about these risks such that

Defendants were—or recklessly failed to be—on high alert for unlawful conduct.

57. For example, on November 16, 2010, at the 24th National Conference on the Foreign

Corrupt Practices Act, Assistant Attorney General Lanny A. Breuer issued a stark warning to

U.S. businesses operating abroad: “FCPA enforcement is stronger than it’s ever been—and

getting stronger. We are in a new era of FCPA enforcement; and we are here to stay.”

58. Likewise, in recent years, the number of DOJ and SEC enforcement actions has

mushroomed and the severity of the penalties imposed for violations has skyrocketed.

“Companies throughout the world are now well aware of the increasingly severe criminal and

civil penalties imposed by the DOJ and SEC in FCPA cases.” 4

3 See, e.g. , Zach Harmon, Foreign Corrupt Practices Act Compliance Issues, Aspatore (July 2010), available at 2010 WL 2828302 (For companies operating in the global marketplace, the U.S. Foreign Corrupt Practices Act . . . is no longer an obscure law. Increasingly, personnel working at all levels in multinational companies—even companies not based in the U.S.—are aware of the FCPA and the general obligation it imposes.”). 4 Id. at *4.

17


59. These perils were even greater for businesses operating in Mexico. Despite enacting a

new Federal Anti-Corruption Law for Government Procurement in 2012, “Mexico still struggles

with a negative track record where lack of transparency, undue political influence and fraud have

unfortunately created a negative framework. There are significant rule of law issues and gaps

not because there is an inappropriate legal framework, but because the state energy monopoly

that existed until very recently came from decades of inefficient operation, lack of transparency,

corruption and fraud.” 5 The inevitable result is that a push to do business in Mexico and other

Latin American countries exponentially increases a company’s FCPA-related risks.

60. Such risks were highly publicized at the time Key was pushing further into international

markets. According to a 2009 article in the International Trade Law Journal, “[a]s U.S.

Companies move more aggressively into Latin America markets, they quickly learn bribery is

often seen as a normal part of the business; however, operating with a ‘when in Rome’ mentality

can easily lead to violations of the [FCPA] and associated sanctions.” 6 Consequently, “[a]

number of FCPA enforcement actions have recently focused on U.S. business conduct in Brazil,

Costa Rica, Argentina, Venezuela, Mexico and Ecuador.” 7

61. In 2008, the National Law Journal reported that, “[a]s never before, U.S. companies

engaged in cross-border business in Latin America face significant risk when it comes to

avoiding entanglement with the Foreign Corrupt Practices Act.” The article continues that,

“Latin America as a whole, and certain countries in particular—including those with the three

largest economies, Mexico, Brazil and Argentina—suffer from entrenched public corruption and

5 Juan Carlos Luna, Due Diligence in Working with the Mexican Energy Industry , SHALE Oil & Gas Business Magazine, May 7, 2014, available at http://shalemag.com/eyes-wide-open/. 6 Veronica Foley & Catina Haynes, The FCPA and Its Impacts in Latin America , Int’l Trade L.J. 27, 27 (Summer 2009). 7 Id.

18


weak law enforcement.” 8 While Mexico remains “attractive to foreign business” for many

reasons, among them its pro-free market policies and proximity to the U.S., “corruption poses

substantial obstacles to doing business in Mexico, outranked only by inefficient bureaucracy.” 9

62. Michael Diaz, Jr., the global managing partner of Diaz, Reus & Targ, a law firm that

focuses on international financial fraud and, in particular, investigating high-profile Latin

American money-laundering and public corruption cases, cautions U.S. companies about doing

business in Latin America. This is because “[b]usiness practices considered unethical, fraudulent

and illegal in the United States, such as bribery and financial ‘favors,’ are largely tolerated and

thriving in the developing regions of the Western Hemisphere, with little risk to the

perpetrators.” 10 He has noted that despite “U.S. pressure [] leading to greater scrutiny of foreign

investments in Latin America, it has not halted public entities and private corporations from

seeking ‘opportunities with impunity.’” 11 Mr. Diaz admonishes that “any company doing

business in Latin America needs to analyze the risks associated with a new investment,

acquisition, joint venture or business transaction. There’s no substitute for due diligence at every

step, including a thorough investigation of potential partners in the region. Otherwise, the U.S.

company could be exposed to significant legal, financial and public relations risks if past bribery

or corruption charges come to light.” 12 Mr. Diaz identifies “[t]he bottom line: Know your

customer, know your partner and know the risks of operating in a region where ‘opportunity with

impunity’ remains the guiding principle for doing business.” 13

8 Iris E. Bennett, Cross Border Issues – Corruption remains a business risk, Nat’l L.J. (Mar. 31, 2008), available at http://jenner.com/system/assets/assets/1119/original/NLJ_03.31.08_Bennett.pdf?1317312825. 9 Id. 10 Michael Diaz Jr., Asian and Middle Eastern Business Ethics Hit Latin America (July 20, 2010), available at http://www.michaeldiazjr.com/2010/07/asian-and-middle-eastern-business-ethics-hit-latin-america/. 11 Id. 12 Id. 13 Id.

19


63. Russia fares no better when it comes to corruption. Whereas, in 2013, Mexico was

ranked 106th out of 177 countries on the Corruption Perceptions Index (the “CPI”) 14—with 1

being perceived as the least corrupt and 177 the most corrupt—Russia tied for 127th with several

other countries, including Mali, Nicaragua, and Pakistan, and barely edged out notoriously

corrupt countries such as Bangladesh and the Ivory Coast. On the CPI, Russia collected a rating

of 28 on a scale where 0 means that a country is perceived as highly corrupt and 100 means that

it is perceived as very ethical. Comparatively, the U.S. was ranked 19th out of 177 in 2013, with

a score of 76. In fact, noting Russia’s poor placement on the 2010 CPI, on March 16, 2011,

Assistant Attorney General Breuer, speaking at the 3rd Russia and Commonwealth of

Independent States Summit on Anti-Corruption, stated that: “[i]n Russia today, nearly 20 years

after the dissolution of the Soviet Union, corruption is a significant problem. . . . As Vice

President Biden noted last week, in 2008 President Medvedev called Russia ‘a country of legal

nihilism.’” This led Assistant Attorney General Breuer to issue a rebuke to U.S. companies

doing business in Russia: “the FCPA is a strong enforcement mechanism, and we are not shy

about using it.”

64. The U.S. Commercial Service’s 15 “Doing Business in Russia: 2013 Country

Commercial Guide for U.S. Companies” 16 acknowledged several challenges that impede doing

business in Russia, notably among them, “widespread corruption and inadequate rule of law,”

14 The CPI is published by the global corruption watchdog Transparency International, a non-profit, non-governmental organization that is primarily funded through donations by governmental development agency budgets and foundations. 15 The U.S. Commercial Service is the trade promotion arm of the U.S. Department of Commerce’s International Trade Administration. Its Country Commercial Guide “presents an overview of Russia’s commercial climate, including economic, political, and market analyses” that is prepared annually “through the combined efforts of several U.S. Government agencies at the U.S. Embassy in Moscow, and the U.S. Commercial Service offices in Moscow and St. Petersburg.” 16 Available at http://buyusainfo.net/docs/x_8347046.pdf.

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“lack of transparency,” and the “continued presence of large state-owned, or state-controlled,

enterprises in strategic sectors of the economy.”

65. In fact, “[t]he prevalence of official corruption is the dominant risk to a company once

it has entered the Russian market.” 17 Gallo suggests that companies should avoid “‘off the shelf’

country corruption assessments” and instead “conduct sector- or activity-specific corruption

threat assessments that identify how corruption manifests itself in particular business situations.

This type of assessment will then allow a company to focus its attention and spending on due

diligence and background checks on agents, partners, employees and associates in high-risk parts

of the business.” 18

66. While Russia passed national legislation in 2011 and 2012 to improve its compliance

with the OECD Anti-Bribery Convention and the United Nations Convention Against

Corruption, just recently, in June 2014, the U.S. State Department continued to warn companies

that conducting business in Russia is still hazardous:

Some analysts have expressed concern that lack of depth in the compliance culture in Russia will render the law a formality that does not function in reality. The implementation and enforcement of the many measures required by these conventions have not yet been fully tested. In recent years, there appears to be a greater number of prosecutions and convictions of midlevel bureaucrats for corruption, but real numbers were difficult to obtain and high-ranking officials were rarely prosecuted. . . .

It is important for U.S. companies, irrespective of size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance programs or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in Russia should take the time to become familiar with the relevant anticorruption laws of both Russia and the United States in order to properly

17 Carlo Gallo, Russia: business risk in 2013 in M ANAGING B USINESS R ISK : A PRACTICAL GUIDE TO PROTECTING YOUR B USINESS 189, 192 (Jonathan Reuvid consulting ed., 9th ed. 2013). 18 Id. at 193.

21


comply with them, and where appropriate, they should seek the advice of legal counsel. 19

67. It is clear that both Mexico and Russia were rife with political corruption at the time

Key was ramping up its efforts there, creating a compliance minefield for the Company and

increasing its exposure to significant FCPA risks. Yet the lure of these developing markets

proved too difficult for Key to resist and provided it countless opportunities for unlawful

conduct. Indeed, Key gave short shrift to these risks, while at the same time portraying itself as

well equipped to navigate doing business in the notoriously corrupt Russian and Mexican

markets. Thus, as the Class Period began, the market was conditioned to believe that operations

in Russia and Mexico played a material role in Key’s fortunes while being lulled into the false

understanding that the Company was advancing these operations in a lawful manner and that it

had the infrastructure and policies to do so.

E. Applicable provisions of the FCPA and Key’s purported compliance with the law

1. The anti-bribery provisions of the FCPA

68. The FCPA’s anti-bribery provisions prohibit U.S. persons or businesses, U.S. and

foreign public companies listed on stock exchanges in the U.S., and certain foreign persons and

businesses acting while in the territory of the U.S. from making corrupt payments to foreign

officials to obtain or retain business. 20

69. The FCPA prohibits both direct and indirect payments to foreign officials. Thus, a

company can face liability under the FCPA based on illegal payments made through third parties

or intermediaries. “Although these foreign agents may provide entirely legitimate advice

19 Department of State: 2014 Investment Climate Statement, June 2014, 18-19, available at http://www.state.gov/documents/organization/228199.pdf. 20 See A Resource Guide to the U.S. Foreign Corrupt Practices Act , 2, available at http://www.justice.gov/criminal/fraud/fcpa/guidance/guide.pdf (the “DOJ/SEC Resource Guide ”) .

22


regarding local customs and procedures and may help facilitate business transactions, companies

should be aware of the risks involved in engaging third-party agents or intermediaries. The fact

that a bribe is paid by a third party does not eliminate the potential for criminal or civil FCPA

liability.”21 In fact, in 1998, Congress amended the FCPA to expand the definition of “foreign

official” and extend the statute’s reach beyond U.S. borders by eliminating the requirement of a

territorial nexus between the bribery and the U.S. 22

70. As mentioned above, the FCPA prohibits the bribery of “any officer or employee of a

foreign government or any department, agency, or instrumentality thereof, or of a public

international organization, or any person acting in an official capacity for or on behalf of any

such government or department, agency, or instrumentality, or for or on behalf of any such

public international organization.” 23 Both the DOJ and SEC broadly construe the description of

this position and, in fact, the DOJ “has noted that it is entirely possible, under certain

circumstances and in certain countries, that nearly every aspect of the approval, manufacture,

import, export, pricing, sale and marketing of a . . . product in a foreign country will involve a

‘foreign official’ within the meaning of the FCPA.” 24 Under the FCPA, the term “foreign

official” is not limited to just high-ranking government officials, but also includes employees of

state-owned enterprises. For instance, the DOJ and SEC “have worked on enforcement actions

involving improper payments to employees of a company where the state owned as little as 43%

21 Id. at 21-22.

22 D. Michael Crites, The Foreign Corrupt Practices Act at Thirty-Five: A Practitioner's Guide, 73 Ohio St. L.J. 1049, 1053 (2012). 23 15 U.S.C.§ 78dd-1(f)(1)(A). 24 Crites, supra note 22, at 1053.

23


of the company’s shares, had veto power, and made operational decisions, despite the company

describing itself as privatized.” 25

71. While the most obvious form of corrupt payment is cash, bribes prohibited by the

FCPA are not solely limited to monetary payments, but rather offering or paying “anything of

value” to a foreign official. 26 The term “anything of value” has been broadly interpreted to

include, among other things, gifts, travel and entertainment expenses, charitable contributions,

meals, transportation, and household maintenance expenses. 27 There “has been no stated de

minimis exception to define ‘anything of value.’” 28

72. Lastly, the anti-bribery provisions of the FCPA expressly prohibit a business from

engaging in the above-described conduct through third parties or intermediaries “while knowing

that all or a portion of such money or thing of value will be offered, given, or promised, directly

or indirectly, to a foreign official.” 29 Thus, “a person has the requisite knowledge when he is

aware of a high probability of the existence of such circumstance, unless the person actually

believes that such circumstance does not exist. As Congress made clear, it meant to impose

liability not only on those with actual knowledge of wrongdoing, but also on those who

purposefully avoid actual knowledge . . . .” 30

73. Taken together, the anti-bribery provisions of the FCPA charge senior management

with the responsibility of knowing who its company is doing business with, to conduct due

diligence before entering into business agreements, and scrutinizing the actions of employees,

agents, and third parties conducting business outside of the U.S. As discussed below, the fact

25 Id. 26 15 U.S.C. § 78dd-1(a)(1). 27 See DOJ/SEC Resource Guide at 15-17. 28 Crites, supra note 22, at 1055. 29 DOJ/SEC Resource Guide at 21. 30 Id. at 22.

24


that the SEC opened an investigation into Key’s Russia operations for violating the FCPA, Key

discovered potential FCPA violations in Mexico that required self-disclosure to both the DOJ

and SEC, and that Key recorded a massive impairment to goodwill and other assets at its Russia

reporting unit demonstrated that Key failed in this regard.

2. The FCPA’s auditing and accounting provisions

74. In addition to its anti-bribery provisions, the FCPA also includes auditing and

accounting provisions that apply to publicly traded companies such as Key. The FCPA’s

accounting provisions were designed to operate in tandem with the anti-bribery provisions and

prohibit deceptive accounting.

75. The accounting provisions consist of two primary components—the “books and

records” provision and the “internal controls” provision. 31

76. The “books and records” provision requires issuers 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.” 32 The objective of these record-keeping provisions is to

avoid three types of wrongdoing: “(1) failing to record illegal transactions; (2) falsifying records

to conceal illegal transactions; and (3) creating records that are monetarily accurate but fail to

specify qualitative aspects of the transaction.” 33 The DOJ and SEC have stated that bribes have

been mischaracterized by false or misleading entries such as “Commissions or Royalties;

Consulting Fees; Sales and Marketing Expenses; Scientific Incentives or Studies; Travel and

Entertainment Expenses; Rebates or Discounts; After Sales Service Fees; Miscellaneous

31 15 U.S.C. § 78m(b)(2). 32 DOJ/SEC Resource Guide at 39. 33 Crites, supra note 22, at 1056-57.

25


Expenses; Petty Cash Withdrawals; Free Goods; Intercompany Accounts; Supplier / Vendor

Payments; Write-offs; and ‘Customs Intervention’ Payments.” 34

77. The books and records provision can be enforced whether or not bribery is actually

involved. Thus, “[i]n instances where all the elements of a violation of the anti-bribery

provisions are not met—where, for example, there was no use of interstate commerce—

companies nonetheless may be liable if the improper payments are inaccurately recorded.” 35 Just

like the FCPA’s anti-bribery provisions, the books and records provisions extend to a covered

company’s agents and distributors, so the actions of an agent or third party may constitute a

violation of the FCPA by the company.

78. The “internal controls” provision requires issuers 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; (ii) transactions are

recorded as necessary (I) to permit preparation of financial statements in conformity with

generally accepted accounting principles or any other criteria applicable to such statements, and

(II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance

with management’s general or specific authorization; and (iv) the recorded accountability for

assets is compared with the existing assets at reasonable intervals and appropriate action is taken

with respect to any differences . . . .” 36

34 DOJ/SEC Resource Guide at 39. 35 Id. 36 15 U.S.C. § 78(m)(b)(2)(B).

26


79. Like the “reasonable detail” requirement in the books and records provision, the FCPA

defines “reasonable assurances” as “such level of detail and degree of assurance as would satisfy

prudent officials in the conduct of their own affairs.” 37

80. Although the FCPA’s accounting requirements are directed at “issuers,” an issuer’s

books and records include those of its consolidated subsidiaries and affiliates. Thus, an issuer’s

responsibility extends to ensuring that subsidiaries or affiliates under its control, including

foreign subsidiaries and joint ventures, comply with the accounting provisions. 38

3. Affirmative defenses and exceptions to the FCPA

81. There are affirmative defenses and exceptions to the anti-bribery and accounting

provisions of the FCPA, but, as discussed below, they are narrowly construed and likely do not

apply to the circumstances alleged herein.

82. The FCPA’s anti-bribery provisions contain two affirmative defenses: (1) that the

payment was lawful under the written laws of the foreign country (the “local law” defense), and

(2) that the money was spent as part of demonstrating a product or performing a contractual

obligation (the “reasonable and bona fide business expenditure” defense). 39

83. The “local law” defense, however, “arises infrequently, as the written laws and

regulations of countries rarely, if ever, permit corrupt payments.” 40 In fact, “it is worth noting

that FCPA experts have never found such a law that explicitly permits such a payment.” 41

84. The FCPA allows companies to provide reasonable and bona fide travel and lodging

expenses to a foreign official, and it is an affirmative defense where expenses are directly related

37 15 U.S.C. § 78m(b)(7). 38 DOJ/SEC Resource Guide at 43. 39 Crites, supra note 22, at 1057-58. 40 DOJ/SEC Resource Guide at 23. 41 Crites, supra note 22, at 1057.

27


to the promotion, demonstration, or explanation of a company’s products or services, or are

related to a company’s execution or performance of a contract with a foreign government or

agency.42 The DOJ has opined that certain types of expenditures on behalf of foreign officials

typically do not warrant FCPA enforcement action: (i) travel and expenses to visit company

facilities or operations; (ii) travel and expenses for training; and (iii) product demonstration or

promotional activities, including travel and expenses for meetings. However, whether any

particular payment is a bona fide expenditure requires a fact-specific analysis. 43

85. Lastly, the FCPA’s anti-bribery provisions include a “narrow” exception for

“facilitating and expediting” payments if the purpose is to “expedite or to secure the performance

of a routine governmental action by a foreign official, political party, or party official.” 44 The

facilitating payments exception applies only when a payment is made to further routine

governmental action that involves non-discretionary action. Examples of “routine governmental

action” include “processing visas, providing police protection or mail service, and supplying

utilities like phone service, power, and water. Routine government action does not include a

decision to award new business or to continue business with a particular party. Nor does it

include acts that are within an official’s discretion or that would constitute misuse of an official’s

office.”45 Thus, the exclusion is quite narrow and has no application to the events and

circumstances alleged herein.

4. Penalties for violating the FCPA

86. Typically, the DOJ conducts all criminal enforcement of the FCPA and civil

enforcement of the anti-bribery provisions over U.S. concerns and, correspondingly, the SEC

42 Crites, supra note 22, at 1057-58. 43 DOJ/SEC Resource Guide at 24. 44 15 U.S.C. § 78dd-1(b); see also DOJ/SEC Resource Guide at 25. 45 DOJ/SEC Resource Guide at 25.

28


carries out all civil enforcement of the accounting provisions and also civil enforcement of the

anti-bribery provisions. 46

87. The criminal penalties that may be imposed for violating the FCPA’s anti-bribery

provisions are severe. Under the FCPA’s criminal provisions, corporations and other business

entities are subject to a fine of up to $25 million for each violation of the accounting provisions 47

and $2 million for each violation of the anti-bribery provisions. 48 Likewise, individuals,

including officers, directors, stockholders, and agents of companies, are subject to a fine of up to

$5 million and imprisonment for up to 20 years for violating the accounting provisions, 49 and up

to $250,000 and imprisonment for up to five years for violating the FCPA’s anti-bribery

provisions.50 Under the Alternative Fines Act, however, courts may impose significantly higher

fines than those provided by the FCPA—up to twice the benefit that the defendant obtained by

making the corrupt payment. 51 Fines imposed on individuals may not be paid by their employer

or principal. 52

88. In addition to the FCPA’s criminal penalties, the Attorney General or the SEC may

bring a civil action seeking a fine of up to $100,000 against any firm—as well as any officer,

director, employee, or agent of a firm, or stockholder acting on behalf of the firm—who violates

the anti-bribery provisions of the FCPA. In an SEC enforcement action, the court may impose

an additional fine not to exceed the greater of the gross amount of the pecuniary gain to the

defendant as a result of the violation, or a specified dollar limitation, which is based on the

46 Id. at 4, 5; see also Crites, supra note 22, at 1058. 47 15 U.S.C. § 78ff(a). 48 15 U.S.C. §§ 78dd-2(g)(1)(A); 78dd-3(e)(1)(A); 78ff(c)(1)(A). 49 15 U.S.C. § 78ff(a). 50 15 U.S.C. §§ 78dd-2(g)(2)(A), 78dd-3(e)(2)(A), 78ff(c)(2)(A). 51 18 U.S.C. § 3571(d). 52 15 U.S.C. §§ 78dd-2(g)(3); 78ff(c)(3).

29


egregiousness of the violation—ranging from $7,500 to $150,000 for an individual and $75,000

to $250,000 for a company. 53 Moreover, the Attorney General or the SEC may also seek to

enjoin any act or practice of the firm if it appears that it, or an officer, director, employee, agent,

or stockholder acting on behalf of the firm, is, or is about to be, in violation of the FCPA’s anti-

bribery provisions.

89. In addition to the criminal and civil penalties described above, individuals and

companies who violate the FCPA may face significant collateral consequences, including

suspension or debarment from contracting with the federal government, cross-debarment by

multilateral development banks, and the suspension or revocation of certain export privileges. 54

5. Key knew its FCPA compliance operations were wholly inadequate for conducting business in Mexico and Russia given the U.S. government’s well-known crackdown on FCPA violations

90. In the years leading up to and including the Class Period, enforcement of the FCPA had

been ratcheted up by U.S. regulators—a fact of which Defendants were no doubt well aware.

According to one commentator, “2004 served as a turning point in the enforcement of FCPA

violations (or potential violations).” 55 In the FCPA’s first twenty-five years, the DOJ and SEC

pursued only around sixty cases against companies under the FCPA, but “[i]n 2009, the Deputy

Chief of the Fraud Section in DOJ’s Criminal Division . . . noted that at least 120 companies

were the current subjects of ongoing FCPA investigations.” 56

53 15 U.S.C. §§ 78dd-2(g)(1)(B) (for domestic concerns), 78dd-2(g)(2)(B) (for employees of domestic concerns), 78dd-3(e)(1)(B) (for defendant corporation that is neither a domestic concern nor an issuer), 78dd-3(e)(2)(B) (for defendant individual working for a company that is neither a domestic concern nor an issuer), 78ff(c)(1)(B) (for issuers), and 78ff(c)(2)(B) (for employees of issuers). 54 DOJ/SEC Resource Guide at 69-70. 55 Crites, supra note 22, at 1060. 56 Id.

30


91. These trends have continued. For instance, in 2010, the DOJ brought forty-eight

enforcement actions and the SEC brought twenty-six actions. 57 While the number of

enforcement actions against companies dipped in 2014, the U.S. Government collected over

$1.5 billion in financial penalties that year—the second highest total on record. 58 Shearman &

Sterling’s “FCPA Digest” indicated that:

As a result of the relatively low number of corporate enforcement actions and high corporate penalties, by all measures, the 2014 average corporate penalties are the highest on record. While several of the 2014 corporate enforcement actions have been in the works for a number of years, the trend suggests that the agencies are focusing their resources on closing the most significant cases, marking a distinct shift from the enforcement patterns witnessed in 2011, 2010, and earlier, when the government showed a greater willingness to cast a wider net in favor of lower value cases .

92. In light of these enforcement trends, which focused on corruption in high-risk

countries, Key should have been especially vigilant about doing business abroad. Indeed, SEC

and DOJ enforcement actions relating to FCPA violations in Russia and Mexico have increased

substantially in the past decade, giving ample warning to Key about the dangers it was facing

and the necessity of maintaining an effective infrastructure to eliminate conduct that would

violate the FCPA. By way of example:

• On November 3, 2014, the DOJ announced that it had entered into a non-prosecution agreement with Bio-Rad Laboratories to settle violations of the FCPA’s books-and-records and internal controls provisions related to operations in Russia, Thailand, and Vietnam. As part of the settlement, Bio-Rad agreed to pay a criminal penalty of $14.3 million. Bio-Rad also paid an additional $40.7 million sanction to the SEC.

57 Covington & Burling LLP, Trends and Developments in Anti-Corruption Enforcement , at 2 (Jan. 2014), available at http://www.cov.com/files/Publication/7633f525-4806-4170-bcfd- d53c00a5130a/Presentation/PublicationAttachment/e666785a-6427-40a5-9eef- da30ed5cb601/Trends_and_Developments_in_Anti-Corruption_Enforcement_2014.pdf. 58 Shearman & Sterling LLP, FCPA Digest , at v. (Jan. 2015), available at http://shearman.symplicity.com/files/2f3/2f30049866e8ca718af1f40b4cf120b7.pdf.

31


• On April 9, 2014, the DOJ announced that it had settled FCPA-related charges against three Hewlett-Packard Co. (“HP”) subsidiaries in Russia, Poland, and Mexico. HP Russia entered into a plea agreement with the DOJ, agreeing to pay a criminal fine of over $58 million. HP Mexico also entered into a non-prosecution agreement with the DOJ, agreeing to pay criminal penalties of over $2.5 million.

• In a DOJ filed criminal Information, Diebold, Inc., among other things, was charged with entering into false contracts with a distributor in Russia for services that the distributor was not performing. The distributor, in turn, used those funds to pay bribes to employees of Diebold’s privately-owned bank customers in Russia to obtain and retain contracts with those customers. On October 22, 2013, Diebold settled with the DOJ, agreeing to pay a $25.2 million penalty for violations of the anti-bribery and books and records provisions of the FCPA (involving Russia, China, and Indonesia). Diebold also agreed to pay the SEC approximately $23 million in disgorgement and prejudgment interest.

• On July 10, 2012, the DOJ charged Orthofix International and its Mexican subsidiary Promeca, S.A de C.V. with looking to secure certain agreements from Mexican officials employed by, among others, state-owned hospitals that guaranteed the sale of Orthofix products for a percentage of the collected revenue generated as a result of the sales and other gifts. The company settled these charges and agreed to pay over $2 million in penalties. The company also agreed to pay the SEC approximately $5.2 million.

• From 1994 to 2004, Tyson de Mexico placed the wives of Mexican government-employed veterinarians on its payroll, even though the wives did not perform any services, to obtain certification of Tyson De Mexico products for export under a federally administered inspection program. On February 10, 2011, Tyson resolved these charges, paying a $4 million penalty. Tyson agreed to pay the SEC more than $1.2 million in disgorgement of profits and prejudgment interest.

93. Based on these clear regulatory and enforcement trends, Key should have been well

aware that U.S. businesses operating abroad, particularly in Russia and Mexico, face the prospect

of significant penalties for violating the FCPA. Despite having these enforcement results in

hand, Key failed to implement what it knew were the necessary FCPA compliance controls.

Indeed, so deficient were these “controls” that Defendants could not have made these

representations in good faith. The wide divergence between Key’s internal controls as

represented by Defendants and these controls as they actually were underscores, at a minimum,

32


the gross recklessness with which Defendants misled investors. In fact, had Key’s compliance

machinery been as developed and stringent as Defendants represented, it would have been

impossible for Defendants not to know that its success in certain international markets was, at

least in part, the result of rampant FCPA violations.

6. Key’s Code of Business Conduct

94. During the Class Period, Defendants publicly touted that they created a corporate

culture and employed procedural mechanisms that ensured Key’s compliance with applicable

laws, including the FCPA. For example, Key’s Code of Business Conduct (the “Code”), which

became effective in April 2006 and was revised in April 2009, was posted on Key’s publicly

accessible website throughout the Class Period. The Code includes an introductory letter signed

by defendant Alario, in which he states that all Key employees “must commit to always acting

lawfully, ethically and with integrity,” and provides a “simple translation” of the Code: “‘Do the

right thing, without exception.’”

95. The Code was adopted by Key’s Board of Directors and establishes “high standards of

ethical and legal behavior for all employees and officers.” The Code provides that it not only

“applies to the Company and its subsidiaries and affiliates[,] . . . including all business units in

all of our offices and locations around the world[, but] [a]ll employees and officers in all

business units are expected to be familiar with the Code and to apply it in the daily performance

of their work-related responsibilities.”

96. Further, in the “Monitoring and Oversight” section of the Code, Key touts the

importance of its Ethics Committee and the Board of Directors’ Audit Committee in ensuring

compliance with “applicable laws and regulations.” With regard to the Ethics Committee—

comprising representatives from the Company’s Internal Audit, Legal, HR [Human Resources],

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and Operations departments, all of whom were appointed to the Ethics Committee by Defendant

Alario—the Code notes that the Ethics Committee “assists in monitoring compliance with the

Code, Company policies and procedures, and applicable laws and regulations.” The Code also

notes the extensive role in compliance oversight played by the Audit Committee:

The Audit Committee . . . shall have oversight of the administration of the Code and responsibility for the Ethics & Compliance program within the Company. Significant or material events related to the Company’s Ethics & Compliance program shall be reported immediately to the chair of the Audit Committee. At least once a year, the Ethics Committee or Director-Internal Audit shall report to the Audit Committee regarding the Company’s Ethics & Compliance program activities, and of the occurrence of all significant events relating to the Code.

97. The Code advises Key’s employees on limitations on gifts given to, among others,

government officials, stating that “[i]n the U.S., an employee may not give gifts of more than

nominal value ($100.00) to an actual or prospective customer, supplier, or contractor of the

Company, or any governmental official, in an attempt to establish dealings with the Company by

providing such gifts, without the written approval of the employee’s supervisor.” The Code also

provides that Key employees must “[n]ot offer bribes or accept kickbacks from our suppliers,

contractors, or customers for any reason.”

98. The Code also addresses the FCPA directly, and unequivocally instructs Key’s

personnel that the FCPA “prohibits payments to foreign officials for the purpose of obtaining or

keeping business.” Notably, the Code emphasizes what is considered a “foreign official” under

the FCPA and ominously singles out Mexico’s state-owned oil company as an example: “For

purposes of the FCPA, a ‘foreign official’ is any officer or employee of an instrumentality of a

foreign government, including state-owned or controlled energy companies, such as Petroleos

Mexicanos, SA (‘PEMEX’), as well as political officers and candidates for political office.

Further description and examples, as well as instructions for proper transaction of business

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outside the U.S., are found on-line in the Company’s FCPA Compliance Manual.” The Code

then summarizes relevant portions of Key’s FCPA Compliance Manual (discussed below).

7. Key’s Foreign Corrupt Practices Act Compliance Manual

99. Defendants directly promoted Key’s commitment to compliance with the FCPA

through publication of its Foreign Corrupt Practices Act Compliance Manual, effective June 6,

2008 (the “FCPA Compliance Manual”) on its publicly available website throughout the Class

Period. The FCPA Compliance Manual includes an introductory letter signed by defendant

Alario, in which he underscores that:

It is our policy that the Company, as well as each person or entity acting as a representative or advisor to the Company, shall fully comply with all applicable provisions of the FCPA. Employees, officers, directors, agents, and representatives who transact business for the Company internationally are expected to understand and comply with the provisions in this Compliance Manual, to avoid inadvertent violations, and to recognize potential issues in time for them to be appropriately addressed.

100. Following the introductory letter, the FCPA Compliance Manual is divided into two

parts (excluding a certificate of compliance and exhibits): the “FCPA Policy” and “FCPA

Procedures.”

101. The FCPA Compliance Manual acknowledges that “[i]t is the policy of [Key], its

subsidiaries and affiliates . . . that the Company and each person or entity acting as a

representative or advisor to the Company shall fully comply with all applicable provisions of the

[FCPA].” Thus, Key’s FCPA Policy specifically prohibits “[t]he use of Company funds or assets

for any unlawful, improper or unethical purpose[,]” and recognizes that any “[i]mproper gifts,

payments or offerings of anything of value to foreign officials could jeopardize the growth and

reputation of the Company, and will not be tolerated.”

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102. The reach of Key’s FCPA Policy and Procedures extends “worldwide to all of Key’s

domestic and foreign operations and majority-owned affiliates, including joint-ventures,

regardless of department or function, and operations conducted by subsidiaries, agents,

consultants and other representatives. All of the Company’s employees, officers, [and]

directors[,] . . . as well as its agents and representatives are expected to comply with the

provisions in the FCPA Compliance Manual to avoid inadvertent violations, and to recognize

potential issues in time for them to be appropriately addressed.” And the FCPA Compliance

Manual governs “all financial record-keeping activities to which Key is subject by virtue of the

federal and state securities laws, including the U.S. Securities and (sic) Exchange Act of 1934.”

103. The FCPA Policy then identifies the responsibility of different categories of personnel

and third parties:

Employees . All Company employees who are involved in any way in transactions in foreign countries, or who work temporarily outside the United States, as well as all employees located in the corporate offices in Midland and Houston, Texas, are required to read and comply with the FCPA Compliance Manual. All international employees who are authorized to expend funds on behalf of the Company (not assigned in field positions) are required to read and comply with the FCPA Compliance Manual.

Third Parties. Agents and representatives of the Company who are involved in any way in transactions in foreign countries, or who work outside the United States are required to read and comply with the FCPA Compliance Manual.

Accounting Department . The Accounting Department shall maintain accounting procedures to ensure that no false or misleading entry is made in the Company’s books and records for any reason. The Accounting Department should also maintain financial reporting and controls to prevent FCPA violations.

Audit Department . The Internal Audit Department, in conjunction with the FCPA Compliance Officer, will develop an annual FCPA audit plan, as approved by the Audit Committee. Internal Audit will implement the audit plan and also perform other random compliance audits as may be requested from time to time by management, the Audit Committee or the FCPA Compliance Officer.

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FCPA Compliance Officer . Appointed by the Company’s General Counsel, the FCPA Compliance Officer will be responsible for the FCPA Compliance Manual, implementing and monitoring the Company’s FCPA compliance program, including compliance certifications, and providing training to employees and third parties concerning the FCPA. The FCPA Compliance officer [sic] shall also investigate and approve the employment of all foreign agents, any gifts or entertainment with foreign officials, and the commencement of significant business operations outside the United States. The FCPA Compliance Officer shall also investigate any allegation of misconduct.

104. In addition to identifying acts that are specifically prohibited by the FCPA, Key’s

FCPA Policy emphasizes that “[g]enerally, no gifts of any value can be given to a foreign

official. If the situation warrants a token gift of other than nominal value, the employee must

consult with the FCPA Compliance Officer prior to offering such a gift. The approval of the

FCPA Compliance Officer is required to ensure that the gift is consistent with the FCPA, and

that the gift is lawful, customary, and necessary to the conduct of business in the country where

it is made.” In addition, the FCPA Policy mandates that “[e]mployment of a foreign agent,

commencement of significant business operations outside the United States, gifts, or

entertainment of a foreign official must all be approved in advance by the FCPA Compliance

Officer.”

105. Finally, the FCPA Policy advises that the training of Key’s employees on FCPA

compliance is vital to the Company’s foreign operations and discloses penalties that Key may

impose on any employee that violates the FCPA or its FCPA Policy. With respect to training,

Key’s FCPA Policy “recognizes and emphasizes the importance of anti-corruption training as an

essential component of an FCPA compliance program. To that end, Key will provide FCPA and

Anti-corruption training, both in person and through web-based programs, periodically at times

to be determined by the Company’s General Counsel.” If a Key employee violates the FCPA or

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the Company’s FCPA Policy, he or she “will be disciplined and may be terminated. Intentional

violations of the FCPA will result in termination.”

106. The second part of Key’s FCPA Compliance Manual sets out the procedures by which

the Company and its employees must comply with the FCPA. For example, Key’s FCPA

Procedures identify who is a “foreign official” under the FCPA and recognize that “[c]ritical to

Key’s business is the very broad definition under U.S. law of foreign ‘instrumentalities,’ which

include state-owned or controlled energy companies and other such companies, such as

[PEMEX] and Petroleo Brasileiro (‘Petrobras’).” Indeed, Key acknowledges that “[i]n many

instances, employees of such companies are not treated or thought of as government officials in

their home country. Under the FCPA, however, they are ‘foreign officials.’”

107. Likewise, Key acknowledges that requests from foreign officials “can be much more

subtle than a direct request for a kickback or bribe,” and may include “‘anything of value’ to a

foreign official for improper services,” including gifts, gift or sale of stock or other investment

opportunities in other than an arm’s length transaction for demonstrated fair market value,

contracts or other business opportunities to a Key entity in which a foreign official holds a

beneficial interest, medical expenses, educational or living expenses, travel expenses or meals,

shopping or entertainment expenses, or contributions to any foreign charity.

108. With respect to third-party payments, Key’s FCPA Procedures recognize “that there are

circumstances where participation in the market is conditioned upon partnership with local

companies.” In these instances, Key requires that “prior to entering into an agreement with any

agent, consultant, joint venture partner or other representative who will act on behalf of the

Company with regard to foreign governments on international business development or

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retention, we will perform appropriate FCPA-related due diligence, and impose prudent

safeguards against improper payments.”

109. Similarly, when the Company expects to engage an agent, sponsor, or other third party

in connection with any non-U.S. business, “an investigation of the prospective Representative

must be conducted by the FCPA Compliance Officer in order to determine the reputation,

beneficial ownership, professional capability and experience, financial standing and credibility of

the prospective Representative and the history of such prospective Representative’s compliance

with applicable provisions of the FCPA or similar applicable legislation in other countries.”

110. Key’s FCPA Procedures also address due diligence required for acquisitions and joint

ventures. For an acquisition, “the due diligence process associated with the proposed acquisition

shall be performed by the FCPA Compliance Officer, the Legal Department and Internal Audit,

and include an investigation of the acquisition target’s compliance with the FCPA.” For joint

ventures, “a review of the prospective joint venture partner or partners must be conducted by the

Compliance Officer in order to determine the reputation, beneficial ownership, professional

capability and experience, financial standing and credibility of the prospective joint venture

partner or partners and the history of such prospective joint venture partner’s or partners’

compliance with applicable provisions of the FCPA or similar applicable legislation in other

countries.”

111. Equally as important, Key also understands that the “record-keeping provisions of the

FCPA require publicly held U.S. companies such as Key to establish and maintain a system of

internal controls that ensures that all transactions and dispositions of assets occur only in a

manner consistent with management’s authorizations, and that all such transactions are recorded

accurately and in reasonable detail in the company’s books, records and accounts.” Accordingly,

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“Key’s Accounting Department is responsible for maintaining and enforcing Key’s accounting

and recordkeeping policies, and maintaining Key’s system of internal controls to ensure that

assets of Key are disbursed only as authorized by management, as set forth in this Policy.” Not

only is the Accounting Department charged with complying with the record-keeping provisions

of the FCPA, but Key’s Internal Audit Department “is responsible for auditing Key’s compliance

with the policies outlined in this Compliance Manual and the related policies and procedures that

comprise Key’s internal control system.”

112. Key’s FCPA Procedures also require the Company to “maintain a system of internal

accounting controls sufficient to provide reasonable assurances” that:

a. transactions are executed in accordance with management’s general or specific authorization; b. transactions are recorded as necessary: (i) to permit preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) or any other criteria applicable to such statements; and (ii) to maintain accountability for assets; c. transactions are recorded in the books in accordance and compliance with GAAP, as well as applicable laws and regulations; d. access to Key assets is permitted only in accordance with management’s general or specific authorization; and e. the recorded accountability for corporate assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

113. Key’s FCPA Procedures also direct that “[m]onitoring and auditing systems must be in

place to detect violations of Key policy and of applicable U.S. and international laws and

regulations. In particular, Key should monitor and review the records of personnel who have

discretionary authority over Key assets, who are likely to come into contact with government

officials, who engage into contracts directly or indirectly with active or former government

officials, or who submit financial data that affects Key financial statements or reports.”

Likewise, Key’s Internal Audit Department will conduct FCPA audits based on an annual FCPA

audit plan that “will include interviews of persons who are responsible for administering,

40


implementing, and monitoring Key’s compliance program.” The FCPA Procedures state that, in

conducting these audits, the “Internal Audit Department will focus on FCPA compliance files, as

well as the personnel files, due diligence information, and agreements with international

representatives, agents, or consultants, international mergers or acquisitions, international joint

ventures or other international equity investment transactions that may be material. The Internal

Audit Department will also review Key’s FCPA policy, procedures and other published materials

(such as training materials) pertaining to the FCPA.”

114. With the accounting and audit controls purportedly in place at Key through its Code of

Business Conduct and FCPA Compliance Manual, any illegal payments made from Key’s

Russian or Mexican operations—which Key has not quantified publicly yet—could not have

been made without the knowledge and approval of its senior management. Indeed, any illicit

expenditures would have been detected by Key’s Accounting Department, or if missed, certainly

Key’s Internal Audit Department. Moreover, if anyone in Key’s Russia or Mexico operations

engaged an agent, sponsor, or other third party in connection with any non-U.S. business, a

review of that third party should have been conducted by the Company’s FCPA Compliance

Officer.

8. The U.S. government has provided companies with clear guidelines on how to design and implement effective FCPA compliance programs

115. U.S. regulatory and enforcement agencies have published clear instructions on how to

implement FCPA compliance and ethics programs, which, when “well-constructed, thoughtfully

implemented, and consistently enforced . . . help[] prevent, detect, remediate, and report

misconduct, including FCPA violations.” 59

59 41


116. Apart from Key’s statements regarding FCPA compliance, the FCPA itself imposes

obligations on companies to “devise and maintain an adequate system of internal accounting

controls” and strict adherence to the anti-bribery provisions by prohibiting “corrupt payments to

foreign officials to obtain or retain business.” 60 Thus, “[i]n a global marketplace, an effective

compliance program is a critical component of a company’s internal controls and is essential to

detecting and preventing FCPA violations.” 61

117. Since 2005, the U.S. Sentencing Commission has included in the Federal Sentencing

Guidelines practices and policies that, if followed, can mitigate the sentences imposed on an

organization convicted of criminal conduct, including violations of the FCPA. Chapter Eight of

the 2014 Federal Sentencing Guidelines sets forth certain mitigating factors that can reduce or

eliminate the liability of a company found to have violated, among other federal laws, the FCPA.

118. Under the Federal Sentencing Guidelines, “[t]o have an effective compliance and ethics

program . . . an organization shall—(1) exercise due diligence to prevent and detect criminal

conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and

a commitment to compliance with the law.” 62

119. Moreover, the Federal Sentencing Guidelines dictate that “[d]ue diligence and the

promotion of an organizational culture that encourages ethical conduct and a commitment to

compliance with the law . . . require[s] . . . [h]igh level personnel of the organization [to] ensure

that the organization has an effective compliance and ethics program, as described in this

60 DOJ/SEC Resource Guide at 56. 61 Id. at 56. 62 See 2014 Federal Sentencing Guidelines, § 8B2.1(a)(1)&(2), available at http://www.ussc.gov/guidelines-manual/2014/2014-chapter-8.

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guideline. Specific individual(s) within high-level personnel shall be assigned overall

responsibility for the compliance and ethics program.” 63

120. Moreover, the Federal Sentencing Guidelines not only require that “[s]pecific

individual(s) within the organization [] be delegated day-to-day operational responsibility for the

compliance and ethics program,” but that person must be provided “adequate resources,

appropriate authority, and direct access to the governing authority or an appropriate subgroup of

the governing authority” of the company. 64

121. Once the compliance and ethics program is staffed and funded, the Federal Sentencing

Guidelines require a company like Key to “conduct[] effective training programs” and

“communicate periodically and in a practical manner its standards and procedures, and other

aspects of the compliance and ethics program” to “members of the governing authority, high-

level personnel, substantial authority personnel, the organization’s employees, and, as

appropriate, the organization's agents.” 65

122. However, under the Federal Sentencing Guidelines, establishing a compliance and

ethics program alone is not sufficient. A company like Key must also “take reasonable steps . . .

to ensure that [its] compliance and ethics program is followed, including monitoring and auditing

to detect criminal conduct . . . .” 66

123. Notably, the Federal Sentencing Guidelines recognize that “[a]fter criminal conduct has

been detected, the organization shall take reasonable steps to respond appropriately to the

63 Id. § 8B2.1(b)(2)(B). 64 Id. § 8B2.1(b)(2)(C). 65 Id. § 8B2.1(b)(4)(A)&(B). 66 Id. § 8B2.1(b)(5)(A).

43


criminal conduct and to prevent further similar criminal conduct, including making any

necessary modifications to the organization’s compliance and ethics program.” 67

124. In November 2012, the DOJ/SEC Resource Guide , a nearly 130-page manual that

provides detailed information about the DOJ’s and SEC’s “enforcement approach and

priorities.”68 While providing a comprehensive study of the statute itself and what constitutes a

violation, the DOJ/SEC Resource Guide emphasizes that “[e]ffective compliance programs are

tailored to the company’s specific business and to the risks associated with that business. They

are dynamic and evolve as the business and the markets change.” 69

125. As the DOJ/SEC Resource Guide notes, “[i]n the end, if designed carefully,

implemented earnestly, and enforced fairly, a company’s compliance program—no matter how

large or small the organization—will allow the company generally to prevent violations, detect

those that do occur, and remediate them promptly and appropriately.” 70 It further states that a

“check the box” approach is generally “inefficient,” and provides instead the hallmarks of an

effective compliance program. 71

126. Just like the Federal Sentencing Guidelines, the DOJ/SEC Resource Guide dictates that

“[w]ithin a business organization, compliance begins with the board of directors and senior

executives setting the proper tone for the rest of the company. Managers and employees take

their cues from these corporate leaders.” 72 Compliance programs that “are strong on paper” may

not be sufficient if “management has failed to effectively implement the program even in the

67 Id. § 8B2.1(b)(7). 68 See generally DOJ/SEC Resource Guide . 69 Id. at 56. 70 Id. at 57. 71 Id. 72 Id.

44


face of obvious signs of corruption.” 73 In fact, the DOJ and SEC recognize that “[t]he higher the

financial stakes of the transaction, the greater the temptation for management to choose profit

over compliance.” 74

127. The DOJ and SEC look to a company’s code of business conduct and any applicable

compliance manuals when determining what type of action to take following an alleged violation

of the FCPA. They suggest that “[e]ffective policies and procedures require an in-depth

understanding of the company’s business model, including its products and services, third-party

agents, customers, government interactions, and industry and geographic risks. Among the risks

that a company may need to address are the nature and extent of transactions with foreign

governments, including payments to foreign officials; use of third parties; gifts, travel, and

entertainment expenses; charitable and political donations; and facilitating and expediting

payments.”75

128. The DOJ and SEC also recognize that the individual given the responsibility for

implementation and oversight of a company’s compliance program “must have appropriate

authority within the organization, adequate autonomy from management, and sufficient resources

to ensure that the company’s compliance program is implemented effectively.” 76

129. According to the DOJ/SEC Resource Guide , assessing a company’s risk is critical to

developing a robust compliance program. It recognizes that “[o]ne-size-fits-all compliance

programs are generally ill-conceived and ineffective because resources inevitably are spread too

thin, with too much focus on low-risk markets and transactions to the detriment of high-risk

73 Id. 74 Id. 75 Id. at 58. 76 Id.

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areas.”77 Likewise, “[d]evoting a disproportionate amount of time policing modest entertainment

and gift-giving instead of focusing on large government bids, questionable payments to third-

party consultants, or excessive discounts to resellers and distributors may indicate that a

company’s compliance program is ineffective.” 78

130. Similar to the Federal Sentencing Guidelines, the DOJ and SEC underscore that

“[c]ompliance policies cannot work unless effectively communicated throughout a company.

Accordingly, DOJ and SEC will evaluate whether a company has taken steps to ensure that

relevant policies and procedures have been communicated throughout the organization, including

through periodic training and certification for all directors, officers, relevant employees, and,

where appropriate, agents and business partners.” 79

131. Additionally, the DOJ and SEC recognize that a company that does not perform

adequate due diligence before an acquisition or merger may face significant legal and business

risks. They note that “inadequate due diligence can allow a course of bribery to continue—with

all the attendant harms to a business’s profitability and reputation, as well as potential civil and

criminal liability.” 80 However, due diligence prior to an acquisition or merger is only one of the

recommended actions. The “DOJ and SEC evaluate whether the acquiring company promptly

incorporated the acquired company into all of its internal controls, including its compliance

program. Companies should consider training new employees, reevaluating third parties under

company standards, and, where appropriate, conducting audits on new business units.” 81

77 Id. 78 Id. 79 Id. at 59. 80 Id. at 62. 81 Id.

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132. Taken together, the Federal Sentencing Guidelines and the DOJ/SEC Resource Guide

provided Key with clear instructions on how to implement a robust compliance and ethics

program.

133. As detailed in ¶¶ 94-114, while Key had a compliance program that, at best, appeared

strong “on paper,” Key did not actually have an effective compliance or training program in

place at all. As Lead Plaintiff’s investigation revealed, the Company failed to properly staff its

compliance department and failed to establish effective internal controls and internal audit

departments. This created an atmosphere in which violations of laws and regulations and the

Company’s own internal policies were ignored. The Company’s lack of effective compliance

procedures, policies, and internal controls belied Key’s stated goal of compliance and integrity in

its non-U.S. business dealings. These deficiencies made it impossible for Defendants to believe

that Key’s success in certain international markets was not, at least in part, the result of rampant

FCPA violations. This is especially true when conducting business in countries that are

notoriously corrupt, such as Mexico and Russia. Either Defendants knew (or should have

known) the Company’s internal controls were non-existent or they recklessly disregarded the

controls in place, exposing Key to costly government and internal FCPA investigations and

financial injury. In contrast, if Key had adopted programs, policies, procedures, and actions

consistent with the Federal Sentencing Guidelines and the DOJ/SEC Resource Guide and

followed them, it likely would have avoided the costly and protracted SEC investigation into

alleged FCPA violations in its Russia operations and an internal investigation that also includes

possible FCPA violations in Mexico and Colombia, as well as Russia.

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F. Key’s failure to implement and follow an effective FCPA compliance program exposed the Company to multiple FCPA-related investigations and financial harm

134. Although Key gave the appearance that it had designed a robust FCPA compliance

program, which extended to all of its operations including Mexico and Russia, confidential

witnesses have revealed that it was illusory. In fact, CW2, a Senior Internal Auditor at Key from

May 2012 through July 2013 and who has worked at several other large public companies,

expressed surprise at Key’s lack of internal controls and compliance efforts. “A lot of things

were not taken care of. . . . [Key] doesn’t have a robust internal control function at all ,” as

CW2 noted. This was echoed by CW6, a Corporate Auditor at Key from May 2011 through

May 2013, who stated that at Key, “[i]nternal controls are non-existent. . . . There’s no support

from the CEO or the CFO for [that] type of work.”

135. As a senior internal auditor with substantial experience conducting audits both

domestically and abroad, including in countries known for having corrupt business cultures,

CW2 explained that internal control departments are supposed to closely monitor the financial

and other processes to prevent misconduct, such as violations of the FCPA. Further, CW2 stated

that internal control departments typically work closely with a company’s internal audit

department to conduct audits of those processes. However, CW6—whose job responsibilities

included assisting in fraud investigations—stated that “I don’t think internal audit [at Key] ever

audited internationally.” For instance, CW6 recalled that, in certain international operations,

Key did not have processes in place to determine how vendors were chosen, how they were

vetted, and who approved their invoices. Considering the severe penalties of the FCPA, CW6

noted that Key should have been more concerned about implementing controls to protect against

violations of federal laws: “[y]ou should have in your risk assessment process, done by someone

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in management, identifying that FCPA is an issue in x,y,z countries. . . . And then you have to

audit [those countries] this frequently – once a year, twice a year[, b]ut no, that was not existent

[at Key].”

136. CW2 corroborates CW6’s observations, stating that “[t]here is really not a structure in

place that would provide a compliance function. . . . I never saw a single person mention

compliance [at Key].” To the contrary, CW2 described the internal audit department as

“completely dysfunctional” and plagued by high turnover and unqualified staff. Similarly, when

asked about Key’s compliance department, CW6 could not recall Key even having a compliance

department, nor did CW6 even recall discussions about compliance efforts. Finally, both CW2

and CW6 noted that the head of the internal audit department reported directly to the CFO,

which, in their view, was problematic. According to CW2 and CW6, the internal audit

department should report to the Board of Directors’ Audit Committee.

137. In addition to non-existent internal controls and audit functions, CW2 stated that the

internal audit department focused on issues such as safety instead of focusing audits on critical

financial processes. In addition, CW6 learned that internal auditors were sent to Mexico on

several occasions in 2012 and 2013 to determine what types of control processes needed to be

implemented in local operations, such as payroll, purchasing, and other items, but the auditing

team did not conduct any audits of potential FCPA violations because, as CW6 underscored, they

were not even asked to do so. CW6 also emphasized “a lack of response” by senior executives

in Mexico that hampered the auditing team’s ability to complete its work and compromised the

independence of the audit. Moreover, CW2 noted that had Key concentrated its internal audits

on such processes, it would have revealed improper activities that were overlooked. For

example, CW2 stated that in 2012 Key’s Board of Directors requested an internal audit on the

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executive use of company credit cards. CW2 did not work directly on the audit, but learned that

it was conducted in 2013 and found widespread misuse such as the use of company credit cards

for personal expenditures. CW6 substantiated findings of improper use of company credit cards.

138. Likewise, as CW2 explained, CW2 was contacted by CW3 to discuss unusual numbers

that CW3 observed in the accounting records of Key’s Mexican operations. CW2 was told that

millions of dollars of accruals sat on these accounting records without being cleared for a much

longer period than the 30-day limit. CW2 further explained that a number of these “accruals

were on the Mexican books for a very long time, over 90 days, over 6 months. . . . A lot of

money was being accrued and nothing was booked as actual sales or payments.” CW3 was

contacted, but was instructed not to speak to Lead Plaintiff by CW3’s attorney.

139. Moreover, in January 2014, Key’s Senior Vice President International, Global Business

Development & Technology (“SVP International) was terminated from the Company. CW4

reported to SVP International and explained that this person’s departure was abrupt and went

unexplained—“I got a call from [defendant] Wilson, and he said, ‘You can’t ask me any

questions as to why, but [SVP International] is no longer with the company and you will be

reporting to [another Senior Vice President].’”

140. CW5 was contacted about Key’s investigation regarding possible FCPA violations in

Mexico and Russia, but declined to be interviewed without Key’s permission. CW5, however,

reported that, at the request of Key’s Board of Directors, CW5 spoke with SEC and the law firm

Key retained to conduct the internal investigation.

141. Further, contrary to its representations that it was moving carefully in its acquisition of

Geostream, Key had actually hastily moved to acquire Geostream in Russia without performing

due diligence sufficient to satisfy the FCPA. Key had acquired an initial 50% interest in Russian

50


drilling company Geostream through two investments in 2008 and 2009, and then opted to

acquire the remaining 50% on April 9, 2013. While Key assured investors that it followed the

FCPA and its own compliance policies and procedures in pursuing this transaction and aligning

Geostream’s practices with its own, as Lead Plaintiff’s investigation uncovered, these assurances

were hollow.

142. CW1, a former Vice President of International Human Resources at Key who worked at

the Company from 2008 through 2013, confirmed that Key had a joint venture with Geostream

in Russia, but that Geostream maintained its own employees until Key acquired the remaining

50% interest in the company. However, CW1 indicated that, once Key owned 100% of

Geostream, Geostream’s employees became Key’s employees. Moreover, CW1 reported that

Geostream’s then-CEO and other senior executives left Geostream after Key acquired the

remaining half. CW1 viewed the exit of some of Geostream’s senior management as the result

of pressure from Key so Key could exercise complete control over Geostream’s operations.

143. According to CW2, when Key acquired the remaining half of Geostream, “[d]ue

diligence was done, but it wasn’t as thorough as it should have been.” Nor did the due diligence

provide a clear picture of Geostream’s operations. CW2 stated that there was concern at Key

about liability issues relating to Geostream because, prior to purchasing the remaining 50%, Key

had virtually no access to Geostream’s books. CW2 described the final acquisition process as

“very messy,” with “no visibility on what was going on there.” In fact, “[i]nternal audit wasn’t

even allowed into the [Geostream] building” and “[t]here was no internal audits conducted ever.”

CW2 spoke with colleagues in Key’s Accounting Group who explained that “[n]obody could tell

how the deal was structured or where documents came from.” This raises two very troubling

issues. First, the failure to conduct adequate due diligence, especially since Key did not even

51


have access to Geostream’s books or conduct any internal audits, may have fallen well short of

the FCPA’s requirements for conducting an acquisition of a foreign company. Second, without

conducting these critical processes, Key was left in the dark about whether Geostream’s

operations themselves were FCPA compliant. These facts further underscore the absence of the

robust internal controls Defendants touted to investors.

144. CW2 elaborated that, once Key completed the acquisition of Geostream, Key

uncovered more details about Geostream’s structure and finances—which turned out to be far

more complex than anticipated. In fact, Geostream held offshore shell companies and made

several transfers of ownership from one business to the next. As CW2 explained, “[t]hey had 16

companies under the Russian umbrella.” Regarding Geostream’s operations, CW2 stated:

“Obviously the FCPA was really foreign to them. . . . They have a different kind of mentality

there.” Again, because of Russia’s notorious reputation, Key was reckless, at best, in completing

the Geostream acquisition without conducting the necessary due diligence. This lack of

oversight also ignored whether Geostream’s employees were violating the FCPA.

145. The market first learned of potential FCPA violations at Key on May 6, 2014, when the

Company filed its Form 10-Q for the quarterly period ended March 31, 2014, which revealed

that the SEC was investigating potential violations involving Key’s operations in Russia. By this

point, Key had acquired 100% of Geostream, which Key represented as its primary growth

strategy in Russia. In fact, during a conference call on October 31, 2013, defendant Alario noted

that “[w]e believe that we can more effectively grow in . . . Russia operating the business[]

ourselves.”

146. Indeed, the Company understood the development prospect in Russia and formulated a

plan to grow there. On a February 15, 2013 conference call with investors and analysts,

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defendant Alario explained: “And [Russia] is the second-largest oil well inventory market in the

world. So there’s great reason for Key to be in that market. And we’re being very, very patient,

as we learn about it, and as we get better at convincing a small, select group of customers that

this highly reliable equipment that we have over there is a better way to go.”

147. Unsurprisingly, Key’s corrupt culture was not isolated to the Company’s operations in

Russia. Instead, focus would also turn on one of Key’s critical international markets—Mexico.

On January 6, 2014, Key slowly began to reveal that something was amiss in its Mexico

operations when it issued a press release disclosing, among other things, that PEMEX was

auditing $372 million worth of Key’s billings, and that this would lead Key to take a charge of

$2 million to $3 million in 4Q 2013. Just over a month later, on February 13, 2014, Key issued a

press release confirming that, in connection with the PEMEX audits announced in January 2014,

the Company had taken an even larger $3.2 million pre-tax charge.

148. Key, however, remained optimistic about the future of its operations in Mexico. In

fact, on an earnings conference call on February 14, 2014, defendant Alario noted the difficulties

that Key had faced as a result of PEMEX’s budget issues, but explained his expectation that Key

would obtain “mega tenders” and “incentivized contracts” from PEMEX going forward, as well

as continued success in Mexico’s Southern region.

149. Then, on June 4, 2014, Key filed with the SEC another 8-K, which revealed that “[i]n

April 2014, the Company became aware of an allegation involving Key’s Mexico operations

that, if true, could potentially constitute a violation of certain Company policies, including our

Code of Business Conduct, the U.S. Foreign Corrupt Practices Act (FCPA) and other applicable

laws.” Although Key did not disclose the full breadth of the alleged FCPA violation in Mexico

or Russia, it revealed that it “conducted an initial investigation of this matter and the Board of

53


Directors of the Company has formed a special committee of independent directors to oversee

the investigation” of these matters and “any other resulting matters.” Moreover, Key also

thought enough of the alleged FCPA violation in Mexico that, according to the press release, on

May 30, 2014, the Company voluntarily disclosed the allegation and information from this initial

investigation to the SEC and DOJ, and could face fines, criminal penalties, and/or sanctions

related to the alleged FCPA infractions.

150. Although Key still has not made public any reports on its FCPA investigation, the

FCPA violations have already impacted its financial results. Just a little over a month following

the stunning revelation of alleged FCPA violations in both its Mexico and Russia operations, on

July 17, 2014, Key issued a press release revealing that: (1) it “expects to record a $30 --

$35 million pre-tax charge for goodwill and other assets impairments related to its operations in

Russia”; (2) it had incurred approximately $5 million in pre-tax expenses associated with its

FCPA investigations; and (3) after accounting for the $30 million to $35 million charge, the

Company expects to report a loss for the quarter in the range of $0.35 to $0.38 per share.

151. On November 3, 2014, when Key filed its Form 10-Q for the quarterly period ending

September 30, 2014, it noted that in addition to Mexico and Russia, the special committee’s

investigations now also “include[d] a review of certain aspects of the Company’s operations in

Colombia.”

152. These incidents could have been prevented had Key simply used the FCPA controls and

compliance measures that it led the market to believe were in place to identify, prevent, and/or

respond to potential or actual violations of the FCPA. This, however, was not the case. Instead,

Defendants’ failure to maintain these practices has severely degraded the value of Key’s

common stock.

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V. MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD

153. Defendants made numerous statements throughout the Class Period regarding the

Company’s business and results from operations that were materially incomplete and/or false and

misleading, given that Defendants’ failure to disclose that Key’s growth, particularly in its

International segment, was due, in large part, to alleged conduct that violated the FCPA. Nor did

the Defendants disclose the Company’s exposure to other substantial harms including

impairment of goodwill to its Russia subsidiary, criminal and regulatory investigations that may

result in a significant settlement with the U.S. government, significant damage to reputation, and

other losses and costs.

154. In addition, throughout the Class Period, Defendants claimed, among other things, that

Key strictly adhered to the highest ethical standards, was committed to a policy of complying

with all applicable laws and regulations, including the FCPA, and that employees must “[n]ot

offer bribes or accept kickbacks from our suppliers, contractors, or customers for any reason.”

See , e.g. , ¶¶ 94-114. However, such statements were materially incomplete and/or false and

misleading, given Defendants’ failure to disclose, among other things, (a) the full magnitude and

consequences of the Company’s FCPA violations; (b) that the Company’s compliance function

and internal controls were woefully inadequate or not strictly adhered to; and (c) that violations

of Key’s internal controls and corporate policy were ignored.

A. Key’s FCPA Compliance Manual

155. The statements quoted above from Key’s FCPA Compliance Manual, ¶¶ 99-114, were

false and misleading from the beginning of the Class Period. Defendants expressly promoted

Key’s commitment to FCPA compliance through publication of the Company’s FCPA

55


Compliance Manual on its publicly available website throughout the Class Period. For example,

it states that “[i]t is our policy that the Company, as well as each person or entity acting as a

representative or advisor to the Company, shall fully comply with all applicable provisions of the

FCPA.” J 99. Likewise, Key’s FCPA Compliance Manual further recognizes that either “[t]he

use of Company funds or assets for any unlawful, improper or unethical purpose” or any

“[i]mproper gifts, payments or offerings of anything of value to foreign officials could jeopardize

the growth and reputation of the Company, and will not be tolerated.” J 101.

156. The statements in JJ 99-114; 155 were materially false and misleading because

Defendants were, at the time these statements were made, aware of and/or recklessly disregarded

material weaknesses in Key’s internal controls that were not disclosed to the investing public.

As Lead Plaintiff’s investigation uncovered, Key’s internal controls were woefully inadequate.

Former employees confirmed that Key maintained near non-existent FCPA compliance policies

and procedures during the Class Period. For instance, CW2 corroborated that Key failed to put

“a structure in place that would provide a compliance function,” especially with respect to Key’s

Mexican and Russian operations. This was further confirmed by CW6 who stated, “I don’t think

[Key’s] internal audit ever audited internationally.” Moreover, confidential witnesses

substantiated that Key’s operations in Mexico were hampered by accounting irregularities and

that Key’s acquisition of the remaining half of Geostream was completed without adequate due

diligence. There is no clearer evidence of this than the fact that Key has disclosed potential

FCPA violations in three separate countries (one, in Colombia, after the Class Period) in less

than six months. For example, on May 6, 2014, Key revealed that the SEC was investigating

potential violations involving Key’s operations in Russia. As the market was digesting the fact

of potential misconduct in Russia, on June 4, 2014, Key revealed that “[i]n April 2014, the

56


Company became aware of an allegation involving Key’s Mexico operations that, if true, could

potentially constitute a violation of certain Company policies[.]” Although Key did not disclose

the full breadth of the alleged FCPA violations in Mexico or Russia, it revealed that it

“conducted an initial investigation of this matter and the Board of Directors of the Company has

formed a special committee of independent directors to oversee the investigation” of these

matters and “any other resulting matters.” Then, on July 17, 2014, Key disclosed that it was

“record[ing] a $30 -- $35 million pre-tax charge for goodwill and other assets impairments related

to its operations in Russia,” and that it had incurred approximately $5 million in pre-tax expenses

associated with its FCPA investigations. Finally, on November 3, 2014, after the end of the

Class Period, Key made public that the special committee’s investigations now also “include[d] a

review of certain aspects of the Company’s operations in Colombia.”

B. Key’s Code of Business Conduct

157. The statements quoted above from Key’s Code of Business Conduct, ¶¶ 94-98, were

false and misleading from the beginning of the Class Period. During the Class Period,

Defendants publicly attested to creating a corporate culture and employing procedural

mechanisms that ensured Key’s compliance with applicable laws, including the FCPA. For

example, the Code was adopted by Key’s Board of Directors and establishes “high standards of

ethical and legal behavior for all employees and officers.” The Code also addresses the FCPA

directly and advises Key’s personnel that the FCPA “prohibits payments to foreign officials for

the purpose of obtaining or keeping business.” ¶ 98. In fact, the Code emphasizes what is

considered a “foreign official” under the FCPA and ominously singles out PEMEX as an

example. ¶ 98.

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158. The statements in ¶¶ 94-99; 157, above, were materially false and misleading for the

same reasons as stated in ¶ 156.

C. September 4, 2012—Barclays Capital CEO Power Energy Conference

159. On September 4, 2012, defendant Alario, while presenting at the Barclays Capital CEO

Power Energy Conference in New York, offered insight on Key’s international operations,

including its experience with PEMEX in the north of Mexico and opportunities to expand into

the southern part of the country. As defendant Alario explained, “the core of our story is our

business with PEMEX. And as I like to say, I don’t think there’s a better example of value

delivered by a service company to a customer than Key’s value to PEMEX.”

160. Later in the call, in response to an analyst’s question about future opportunities for the

Company in Mexico, defendant Alario trumpeted the extent to which PEMEX had entrusted Key

to handle some of PEMEX’s riskiest work, noting that “I think [that] proves that PEMEX has got

confidence in Key,” and “it feels good that the customer’s got confidence in us.” Through these

statements, defendant Alario led investors to believe that Key would have opportunities to work

with PEMEX going forward on the basis of the Company’s merit.

161. Defendant Alario also discussed Key’s business in Russia, explaining that the

Company’s business there—which, at the time, consisted of a 50% interest in GeoStream—was a

small but “solid” investment:

In Russia, Russia’s the second largest well service market in the world. It was a place that we felt like we had to have a small investment in and that’s exactly the way you ought to think of it. We don’t think of Russia ever being the biggest place that we have an investment outside the U.S. We do think of it as being potentially a good solid market. We’re trying to prove a new business plan there on the back of the idea that reliable equipment is more valuable to our customers than some of the equipment that they have there in country. It’s taking longer than we hoped. But I can tell you that over the course of the last couple of

58


quarters, we’ve convinced more customers than we had in the past that’s the right business model and, as a result, our fortunes in Russia have improved.

162. The statements identified in JJ 159-161 were materially false and misleading.

Defendants failed to disclose that revenues from PEMEX were overstated due to overbilling and

that the Company’s production from PEMEX was in decline. For example, on January 6, 2014,

Key revealed that PEMEX was auditing $372 million worth of Key’s billings submitted under its

contracts with PEMEX—eventually forcing Key to take a $3.2 million charge. Moreover, these

statements were materially false and misleading because defendant Alario failed to disclose that

Key’s growth strategy in Mexico and Russia was largely attributable to or directly related to

conduct that violated the FCPA.

D. October 2, 2012—Johnson Rice Energy Conference

163. On October 2, 2012, defendant Whichard spoke at the Johnson Rice Energy Conference

in New Orleans, Louisiana. During his presentation, Whichard commented on Key’s rapid

growth in the Mexican market, touting that the Company’s “business has doubled in Mexico

year-over-year,” and noting that “we’re adding other assets into that market, such as coil,

wireline, premium rental equipment, and PEMEX is calling on us to add more and more

equipment into their market.” Regarding Key’s future prospects in Mexico, Whichard

“expect[ed] it to continue. Our business opportunities are with PEMEX obviously, but also with

other large multinational companies, so we’re broadening our customer base, as it were, in

Mexico. We’re looking at opportunities in other regions of Mexico outside of the Chicontepec

area, referred to by them as the ATG field.”

164. The statements identified in J 163 were materially false and misleading because

defendant Whichard failed to disclose that Key’s “rapid growth” and “future prospects” in

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Mexico were largely attributable to or directly related to conduct that violated the FCPA. As

Lead Plaintiff’s investigation uncovered, Key’s internal controls were knowingly or recklessly

wholly inadequate. Former employees confirmed that Key maintained non-existent FCPA

compliance policies and procedures during the Class Period, notwithstanding Defendants’ public

representations to the contrary. For instance, CW2 corroborated that Key failed to put “a

structure in place that would provide a compliance function,” especially with respect to Key’s

Mexican and Russian operations. This was further conformed by CW6 who stated, “I don’t

think [Key’s] internal audit ever audited internationally.” Moreover, confidential witnesses



diligence to even determine if Geostream’s operations themselves were FCPA compliant. Key’s

culture of corruption slowly emerged when it revealed to the investing public that the SEC was

investigating conduct that violated the FCPA in Key’s Russia operations and that a special

committee of Key’s Board of Directors was obligated to report further FCPA violations in its

Mexico and Columbia operations to both the SEC and DOJ. Defendant Whichard also failed to

address or discuss the significant risk that, once Key’s illegal practices were made public, the

Company would be exposed to a regulatory investigation that could result in a significant

settlement payment to the U.S. government, damage to its reputation, and other losses and costs.

E. Third Quarter 2012 Form 10-Q

165. In connection with the 3Q 2012 Form 10-Q, defendants Alario and Whichard submitted

false and misleading certifications pursuant to the Sarbanes-Oxley Act of 2002 (“SOX

Certifications”). First, defendant Whichard recognized that the “unaudited condensed

consolidated financial statements contained in [the Form 10-Q] include all normal and recurring

60


material adjustments that, in the opinion of management, are necessary for a fair presentation of

our financial position. . . . ”

166. These SOX Certifications further stated that:

1. I have reviewed this Quarterly Report on Form 10-Q of Key Energy Services, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal

61


quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

167. The SOX Certifications identified in NJNJ 165-166 were materially false and misleading

because defendants Alario and Whichard were at the time aware of and/or recklessly disregarded

material weaknesses in Key’s internal controls that were not disclosed to the investing public.

As Lead Plaintiff’s investigation uncovered, Key’s internal controls were so woefully inadequate

that it made Defendants’ public representations regarding them false and misleading. Former

employees confirmed that Key maintained non-existent FCPA compliance policies and

procedures during the Class Period. For instance, CW2 corroborated that Key failed to put “a






diligence. Key’s culture of corruption slowly emerged when it revealed to the investing public

that the SEC was investigating conduct that violated the FCPA in Key’s Russia operations and

62


that a special committee of Key’s Board of Directors reported further potential FCPA violations

to both the SEC and DOJ.

F. November 1, 2012 Earnings Call

168. On November 1, 2012, Key held a conference call regarding its quarterly results with

analysts and investors. In his prepared remarks, defendant Wilson commented on the

Company’s recent successes in Mexico, noting:

But our most meaningful growth has been in Mexico . Enjoyed success in Mexico primarily because PEMEX recognizes the value we deliver in terms of tangible production improvements. We started operations in Mexico in 2007 with three rigs in the ATG asset of PEMEX’s northern region. Today we 're operating over 40 rigs largely in that same asset and we have recently begun broadening our presence .

169. The statement identified in ¶ 168 were materially false and misleading because

Defendants failed to disclose that revenues from PEMEX were overstated due to overbilling and

that the Company’s production from PEMEX was in decline. For example, on January 6, 2014,

Key revealed that PEMEX was auditing $372 million worth of Key’s billings submitted under its

contracts with PEMEX—eventually forcing Key to take a $3.2 million charge. Moreover,

defendant Wilson failed to disclose that Key’s “meaningful growth” in Mexico was largely

attributable to or directly related to conduct that violated the FCPA.

G. December 4, 2012—Dahlman Rose & Co. Ultimate Oil Services and E&P Conference

170. On December 4, 2012, defendant Alario spoke at the Dahlman Rose & Co. Ultimate Oil

Services and E&P Conference in New York, New York. During his presentation, defendant

Alario commented on Key’s Russian and Mexican operations. Regarding the Company’s

Russian business, defendant Alario noted the significant challenges, stating:

63


Russia, we continue to prosecute our new business model in that country . What we got convinced of was that we would be able to convince certain customers in that market that reliability of equipment would make a difference. And it’s been slow. We have been doing that one customer at a time. We now have had enough success to have been able to get a contract with a very large player there . We think that was the next natural step. And we’ll continue to keep our toe in the water in that market which is the second largest work-over market in the world. As the biggest player in that business, we kind of have to be there, but we don 't have a lot of capital invested and we continue to do to improve the business model conversion for certain customers in that marketplace and we expect that to continue.

Mexico is the bright spot . You all know that things have been stable there for past six or eight quarters. And one of the reasons that we've been able to capitalize so well in Mexico is because we've clearly been able to prove, and I'll show you a slide in a minute, that the value of work-overs again in shallow fields, low pressure oil fields has become illuminated. And the way that happened was when drilling in the Chicontepec field began to slowdown in 2009, work-overs continue to go up.

In fact I'll just go to that slide now. What we're showing you here is that starting in 2010, the blue line is Key's number of work-overs per quarter. So as we begin to add back rigs to the Mexican market during that time period, and as those rigs became more highly utilized, you can see that the number of work-overs went up dramatically . The red line is Mexico's or PEMEX's production from—excuse me, the Chicontepec field during the same period. This is every CEO's dreams slide. We all want to prove how we can distinguish ourselves from our competition with regard to enhancing production. That's the core competency in this business. And this is probably the best, most clear example of a company in this business being able to do that. This is the reason PEMEX places so much value on these work-overs. I'm encouraged by the fact that their budget for 2013 is bigger than it was in 2012. I'm encouraged by the fact that we only work in one field in Mexico. We have opportunities to work in the south region and potentially one day in the gas fields there.

We've established what I think is a wonderful working relationship with the customer. We don't have to have the Eagle Ford horizontals take place in Mexico to do well. There is lots of growth opportunity without that . So again, a clear—and by the way KeyView was the thing that got PEMEX's attention when we began to talk to them and they gave us our first direct assignment contract. So clear proof that when you're able to illuminate the value that you bring certainly enhances the relationship with the customer. So just to wrap up and have some time for a couple of questions, very focused especially in the short term on driving some operating efficiencies in the

64


U.S. particularly in these businesses that were affected by the dislocation from gas markets to oil. We expect to capitalize on some growth capital in the international marketplace in 2013 . And that's our highest return on capital that we deploy in the company today. And then again, a focus on debt reduction in the short-term and get back to 35% debt-to-cap which we think will enhance shareholder return.

171. Based on the positive news that Key was starting to gain traction in Russia and its

optimism on its operations in Mexico, Key’s share price rose approximately 1% to close at $6.82

on December 4, 2012.

172. The statements identified in ¶ 170 were materially false and misleading because

defendant Alario failed to disclose that Key’s growth in Mexico was largely attributable to or

directly related to conduct that violated the FCPA. As Lead Plaintiff’s investigation uncovered,

Key’s internal controls were woefully inadequate. Former employees confirmed that Key

maintained non-existent FCPA compliance policies and procedures during the Class Period. For

instance, CW2 corroborated that Key failed to put “a structure in place that would provide a

compliance function,” especially with respect to Key’s Mexican and Russian operations. This

was further conformed by CW6 who stated, “I don’t think [Key’s] internal audit ever audited

internationally.” Moreover, confidential witnesses substantiated that Key’s operations in Mexico

were hampered by accounting irregularities and that Key’s acquisition of the remaining half of

Geostream was completed without adequate due diligence. Key’s culture of corruption slowly

emerged when it revealed to the investing public that the SEC was investigating conduct that

violated the FCPA in Key’s Russia operations and that a special committee of Key’s Board of

Directors was obligated to report further FCPA violations in its Mexico and Columbia operations

to both the SEC and DOJ. Defendant Alario also failed to address or discuss the significant risk

that, once Key’s illegal practices were made public, the Company would be exposed to a

65


regulatory investigation that could result in a significant settlement payment to the U.S.

government, damage to its reputation, and other losses and costs.

H. Fourth Quarter and Full Year 2012 Results and Earnings Call

173. On February 14, 2013, the Company issued a press release announcing its financial

results for 4Q and FY 2012. The press release contained information on Key’s International

segment, reporting that the Company’s “[m]argins were impacted by costs associated with

anticipated activity growth in Mexico that did not occur during the quarter.” Commenting on

Key’s yearly results, defendant Alario stated that “ [w]e anticipate another good year in 2013 in

our international segment following 67% revenue growth in 2012 . The stalled activity growth

in Mexico in the fourth quarter has already resumed, and assets delivered to Mexico and

Colombia late in 2012 should fuel additional growth given a full year’s contribution in 2013.”

The following day, Key filed a copy of the press release with the SEC on Form 8-K.

174. On February 15, 2013, on a conference call with analysts and investors, Defendants

commented on Key’s expansion in Russia. In response to an analyst’s question regarding the

Company’s Russian business, defendant Alario provided the following answer:

<A -- Richard J. Alario>: Yeah. Okay, Kurt. Listen, Russia is a small market for Key. Our strategy there was to get our toe in the water. It’s in there. We have a building business. It’s been improving.

We have a little bit different business model than what most people in the region have. And it is the second-largest oil well inventory market in the world. So there’s great reason for Key to be in that market. And we’re being very, very patient, as we learn about it, and as we get better at convincing a small, select group of customers that this highly reliable equipment that we have over there is a better way to go.

175. Based on significant revenue growth in Key’s international segment and defendant

Alario’s encouraging views on the Company’s foray into Russia, Key’s share price increased

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from a closing price of $8.82 on February 14, 2013 to a closing price of $9.38 on February 15,

2013, or over 6%.

176. The statements identified in ¶¶ 173-174 concerning Key’s growth in Russia and Mexico

were materially false and misleading because Defendants did not address the significance of the

conduct that violated the FCPA to Key’s revenue growth in such markets. To the contrary, such

statements falsely implied that the Company’s success in these areas was based entirely on

legitimate business activities. Key’s culture of corruption slowly emerged when it revealed to

the investing public that the SEC was investigating conduct that violated the FCPA in Key’s

Russia operations and that a special committee of Key’s Board of Directors was obligated to

report further FCPA violations to both the SEC and DOJ.

I. 2012 Form 10-K

177. On February 25, 2013, Key filed with the SEC its Annual Report on Form 10-K. This

filing included in the “Risk Factors” section a warning that Key’s “failure to comply with the

Foreign Corrupt Practices Act (‘FCPA’) and similar laws would have a negative impact on our

ongoing operations.” The Company stated:

Our ability to comply with the FCPA and similar laws is dependent on the success of our ongoing compliance program, including our ability to continue to manage our agents, affiliates and business partners, and supervise, train and retain competent employees. Our compliance program is also dependent on the efforts of our employees to comply with applicable law and our Business Code of Conduct. We could be subject to sanctions and civil and criminal prosecution as well as fines and penalties in the event of a finding of violation of the FCPA or similar laws by us or any of our employees.

178. Further, regarding the Company’s International segment, Key reported in the 10-K that

“[r]evenues for our international segment increased $134.2 million, or 67.4%, to $333.3 million

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for the year ended December 31, 2012,” which “was primarily attributable to increased activity

in Mexico.”

179. Significantly, Key reported in its 10-K that, in conducting its yearly goodwill

impairment analysis, the Company’s review of its Russian reporting unit indicated that the

goodwill for that unit at the end of 2012 was approximately $24.6 million, and that the fair value

of these assets exceeded the carrying value by 17.8%. The Company also reported that it did not

record any assets impairments in 2012.

180. The statements identified in NJNJ 177-179 concerning Key’s revenue growth in its

international segment and goodwill for its reporting unit in Russia, as well as Defendants’

statement that Key did not need to record any assets impairments, were materially false and

misleading. Defendants failed to address the significance of the conduct that violated the FCPA

to Key’s revenue growth in such markets. To the contrary, such statements falsely implied that

the Company’s success in these areas was based entirely on legitimate business activities.

Moreover, these statements created the false impression that Key had adequate internal controls

in place, including controls that would prevent misconduct prohibited by the FCPA. Nothing

could be further from the truth. As Lead Plaintiff’s investigation uncovered, Key’s internal

controls were so woefully inadequate that it made Defendants’ public representations regarding

them false and misleading. Former employees confirmed that Key maintained non-existent

FCPA compliance policies and procedures during the Class Period. For instance, CW2

corroborated that Key failed to put “a structure in place that would provide a compliance

function,” especially with respect to Key’s Mexican and Russian operations. This was further

confirmed by CW6 who stated, “I don’t think [Key’s] internal audit ever audited

internationally.” Moreover, confidential witnesses substantiated that Key’s operations in Mexico

68


were hampered by accounting irregularities and that Key’s acquisition of the remaining half of

Geostream was completed without adequate due diligence. Key’s culture of corruption slowly

emerged when it revealed to the investing public that the SEC was investigating conduct that

violated the FCPA in Key’s Russia operations and that a special committee of Key’s Board of

Directors reported further potential FCPA violations to both the SEC and DOJ.

181. In connection with this Form 10-K, the Company also assured that “[m]anagement

conducted an assessment of the effectiveness of our internal control over financial reporting as of

December 31, 2012,” and that “[b]ased on this assessment, management concluded that our

internal control over financial reporting was effective as of December 31, 2012.” The Form 10-

K contained signed SOX certifications by defendants Alario and Whichard stating that the

information in the Form 10-K was accurate, and that it disclosed any material changes to the

Company’s internal control over financial reporting. These certifications were materially false

and misleading for the same reasons set forth in ¶ 167.

J. March 5, 2013—Raymond James Institutional Investors Conference

182. On March 5, 2013, defendant Alario presented at the Raymond James Institutional

Investors Conference in Orlando, Florida. Once again, Alario took the opportunity to discuss

Key’s international operations, including its successes in Mexico and its expansion in Russia:

And then finally Russia, we operate eight rigs or nine rigs in Russia. We do some drilling there. It 's really the only place that we do any significant amount of drilling.

We have been working in Russia very pragmatically there, and we don’t have a big investment there, mainly focused on trying to convince operators to rely upon our high-quality equipment. That marketplace is not known for reliability of equipment, and we set out to convince a handful of customers that this was valuable.

It’s been slow. We have done that. We’ve convinced some operators that is - it

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has value. But it ’ s just going very slowly, and that ’ s really okay with us. Because as we continue to build our team there, continue to look at projects, we think it ’ s important just to be prudent and manage our exposure very carefully in that marketplace.

So let ’s talk about Mexico. I don ’t have to tell you what ’s been going on there with regard to the political scene and the potential for PEMEX to become more of a typical oil company. But that doesn ’t have to happen for Key to meet its goals in Mexico. It would be serendipitous if that were to take place.

This slide is what I call the CEO dream slide. I can ’ t think of a better example of a service company bringing value to a customer than what you see right here. This tracks two things. Key ’ s number of well interventions per month starting in 2010 when we really began to build our fleet there, after the sort of things that went on in middle of 2010. As you can see, our well interventions per month, that ’ s the blue line, were running about 35 on average. And we had 24 rigs in the market in the beginning of 2010. So we left the market with 9 of those rigs, if I remember - 8 or 9. That ’ s how we started our Colombia business. We wound up with 16 or so. And then finally in early 2011, PEMEX, when they unlocked that budget, we got some of the first dollars. And as you can see, our well interventions per month are now up to 130 or so.

The red line is—and this is all in one field. What was formally known as Chicontepec is now called ATG. The red line is PEMEX ’ s production from that field. As you can see, back in the early 2010, it was about 30,000 barrels a day, and as of the end of the year, when this data was compiled, it was pretty close to 80,000 barrels a day.

So that ’ s why I call it the dream slide. When you can show a customer —and by the way, there ’ s some background here that I skipped. During this time period, the drilling rig activity in PEMEX has been much lower comparatively to drilling activity in this field back in the 2007, 2008 timeframe. If you remember, there were nearly 100 rigs drilling in this field, and today, it ’ s much lower than that.

So this production increase was not driven by new wells. This production increase was driven by Key ’ s work in the field, doing repair on existing wells, working over existing wells. This is a 60-year-old oilfield with thousands of wells, many of which only needed to be turned back on. So there ’s some project managers and engineers in PEMEX that walk around with this slide and use it to promote well repair and workover, and that should spill over outside of this field. It should spill over outside of the region that this field is in. And as we ’re able to take advantage of that opportunity in the south region and in other fields in the north region, you now hopefully get a sense, on the back of this

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kind of value delivery, why we feel pretty confident that PEMEX is going to want to have Key involved in its activities this year and in the future.

183. The statements identified in ¶ 182 were materially false and misleading because

defendant Alario failed to disclose that Key’s growth strategy in Mexico and Russia was largely

attributable to or directly related to conduct that violated the FCPA. Key’s culture of corruption

slowly emerged when it revealed to the investing public that the SEC was investigating conduct

that violated the FCPA in Key’s Russia operations and that a special committee of Key’s Board

of Directors reported further potential FCPA violations to both the SEC and DOJ. Defendant

Alario also failed to address or discuss the significant risk that, once Key’s illegal practices were

made public, the Company would be exposed to a regulatory investigation that could result in a

significant settlement payment to the U.S. government, damage to its reputation, and other losses

and costs.

K. First Quarter 2013 Press Release and Earnings Call

184. On April 25, 2013, Key issued a press release announcing its financial results for 1Q

2013. In the press release, the Company announced that PEMEX had significantly reduced

activities in Mexico, thus negatively impacting Key’s quarterly earnings. Commenting on the

situation in Mexico, defendant Alario stated that Key was “closely monitoring our customer’s

evolving plans, and we are quickly reducing our costs in the country commensurate with the

activity decline. While we understand this disruption to be short term, we are redeploying rigs to

unaffected areas in Mexico and other countries where there are opportunities for these rigs.”

Notably, the reduction in activities in Mexico was attributed to budgeting constraints at

PEMEX’s, and had no relationship to Key’s business strategy or practices. The following day,

Key filed a copy of the press release with the SEC on Form 8-K.

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185. On April 26, 2013, Key held a conference call in connection with its quarterly earnings

announcement. During that call, defendant Wilson elaborated on the Company’s revised strategy

with regard to its Russian business:

Russia is the second largest well servicing and workover market in the world after the United States and we see opportunities to expand our presence there profitably. In addition, we see significant untapped value within GeoStream’s reservoir engineering enterprise of about 50 professionals, which we intend to leverage to grow our consulting formation, evaluation and production enhancement business in Russia and other operating regions. This expanded capability allows us to provide a more complete solution for our customer needs to enhance production in mature fields and to exploit shale opportunities around the world.

186. The revelation of PEMEX’s reduction in activities in Mexico due to budgeting

constraints had an adverse impact on Key’s share price, which fell from a closing price of $7.09

on April 25, 2013, to a closing price of $5.90 on April 26, 2014, or almost 17%.

187. The statements identified in ¶¶ 184-185 were materially false and misleading because

defendants Alario and Wilson failed to disclose that Key’s growth strategy in Mexico and Russia

was largely attributable to or directly related to conduct that violated the FCPA. Moreover, the

statements created the false impression that Key had adequate internal controls in place,

including controls that would prevent misconduct prohibited by the FCPA. Key’s culture of

corruption slowly emerged when it revealed to the investing public that the SEC was


committee of Key’s Board of Directors reported further potential FCPA violations to both the

SEC and DOJ. Defendants Alario and Wilson also failed to address or discuss the significant

risk that, once Key’s illegal practices were made public, the Company would be exposed to a

regulatory investigation that could result in a significant settlement payment to the U.S.

government, damage to its reputation, and other losses and costs.

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L. First Quarter 2013 Form 10-Q

188. On May 3, 2013, Key filed with the SEC its Quarterly Report for 1Q 2013 on Form 10-

Q. In the 10-Q, Key noted that revenue from its International business declined sequentially as a

result of PEMEX’s slowdown, but that overall revenue for the segment increased by

$20.6 million, or 33.3% compared to 1Q 2012, to $82.4 million, “primarily attributable to

increased activity in Mexico.” The 10-Q also noted the Company’s purchase of the remaining

interest in Geostream.

189. The statements identified in ¶ 188 concerning Key’s revenue growth in its international

segment were false and misleading because Defendants failed to address the significance of the



legitimate business activities. Moreover, the statements created the false impression that Key

had adequate internal controls in place, including controls that would prevent misconduct

prohibited by the FCPA. Nothing could be further from the truth. As Lead Plaintiff’s

investigation uncovered, Key’s internal controls were so woefully inadequate that it made

Defendants’ public representations regarding them false and misleading. Former employees

confirmed that Key maintained non-existent FCPA compliance policies and procedures during

the Class Period. For instance, CW2 corroborated that Key failed to put “a structure in place that

would provide a compliance function,” especially with respect to Key’s Mexican and Russian

operations. This was further confirmed by CW6, who stated, “I don’t think [Key’s] internal

audit ever audited internationally.” Moreover, confidential witnesses substantiated that Key’s

operations in Mexico were hampered by accounting irregularities and that Key’s acquisition of

the remaining half of Geostream was completed without adequate due diligence. Key’s culture

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of corruption slowly emerged when it revealed to the investing public that the SEC was



SEC and DOJ.

190. In connection with this Form 10-Q, defendants Alario and Dodson also executed SOX

Certifications similar to those set forth in ¶ 166. These certifications were materially false and

misleading for the same reasons set forth in ¶ 167.

M. June 26, 2013—Global Hunter Securities GHS 100 Conference

191. On June 26, 2013, defendant Alario presented at the 2013 Global Hunter Securities

GHS 100 Energy Conference in Chicago, Illinois. During his presentation, Alario commented

on Key’s operations in Mexico, noting that Key was averaging 16 operating rigs for the quarter

throughout the country, including rigs in the south of Mexico and rigs working for non-PEMEX

customers.

192. The statements identified in ¶ 191 concerning Key’s growth in Mexico were materially

false and misleading because defendant Alario did not address the significance of the conduct

that violated the FCPA to Key’s revenue growth in that market and created the false impression

that Key had adequate internal controls in place, including controls that would prevent

misconduct prohibited by the FCPA. To the contrary, such statements falsely implied that the

Company’s success in Mexico was based entirely on legitimate business activities. Key’s culture

of corruption slowly emerged when it revealed to the investing public that the SEC was



SEC and DOJ.

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N. Second Quarter 2013 Earnings Call and Form 10-Q

193. On July 26, 2013, the Company held a conference call in connection with its quarterly

earnings report for 2Q 2013. During the call, the defendants made a number of statements

concerning Key’s ongoing operations in Mexico and Russia. For instance, defendant Alario

explained that, notwithstanding the PEMEX slowdown, Key would have a more stable Mexican

revenue base going forward:

First, the recent awarding of three incentivized contracts in the ATG asset means that three entities other than PEMEX will now supply capital to increase production in ATG. Thus there are several additional potential customers for Key to target in the North region. In fact we already are working for one of the operators of an incentivized contract from an earlier licensing round.

Second, we believe that our early success at mobilizing our Rig and Coiled Tubing Services into the South region further diversifies our revenue concentration outside the North, which somewhat further derisks Key’s exposure.

And third, as PEMEX increases spending to recover quickly declining production rates in ATG, we believe we’ll be well positioned to assist this customer and regain utilization. According to PEMEX this spending could commence in the fourth quarter when the following year budget can be accessed, which is typical in Mexico.

Defendant Dodson echoed this sentiment, stating that “we think Mexico is a very good long term

market for Key, and we’re not especially worried about it.”

194. At another point in the call, defendant Alario commented on Key’s progress in Russia:

“So happy with the results of what we’ve been able to get done so far in terms of planning and

developing a process to have a much stronger business over there.”

195. Based on defendant Alario’s statements that PEMEX was increasing its spending in

Mexico and progress on its investment in Russia, Key’s share price increased from a closing

price of $6.69 on July 25, 2013, to a closing price of $6.82 on July 26, 2013, or approximately

2%.

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196. On August 2, 2013, Key filed with the SEC its Quarterly Report for 2Q 2013 on Form

10-Q. In the 10-Q, the Company once again noted the impact of the PEMEX slowdown, which

resulted in a 41.1% year-over-year decrease in International segment revenue on a quarterly

basis, and reasserted its plan to expand its operations to other regions in Mexico.





legitimate business activities and created the false impression that Key had adequate internal

controls in place, including controls that would prevent misconduct prohibited by the FCPA.

Key’s culture of corruption slowly emerged when it revealed to the investing public that the SEC

was investigating conduct that violated the FCPA in Key’s Russia operations and that a special


SEC and DOJ.

198. In connection with the August 2, 2013 Form 10-Q, defendants Alario and Dodson also

executed SOX Certifications similar to those set forth in ¶ 166. These certifications were

materially false and misleading for the same reasons set forth in ¶ 167.

O. Third Quarter 2013 Press Release and Earnings Call

199. On October 30, 2013, Key issued a press release announcing its financial results for 3Q

2013. In the press release, the Company reported a continuing negative impact resulting from

PEMEX’s continued slowdown in the Northern region. The following day, Key filed a copy of

the press release with the SEC on Form 8-K.

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200. On October 31, 2013, the Company held a conference call in connection with its

quarterly earnings report. Once again, Defendants discussed Key’s International segment

operations, including its business in Mexico and Russia. For instance, defendant Alario

discussed Key’s opportunities in Mexico, noting that notwithstanding the slowdown in

PEMEX’s Northern region activities, Key had a number of other opportunities in the country.

And in discussing Key’s acquisition of 100% of the Geostream business, defendant Alario noted

that “[w]e believe that we can more effectively grow in . . . Russia operating the business[]

ourselves.” Defendant Wilson similarly provided commentary in response to a question about

the status of Key’s Eastern Hemisphere operations, describing the “Russia business” as

“profitable.”

201. While Key revealed discouraging news negatively affecting its operations in Mexico,

its share price was buoyed by, among other things, the possibility of other opportunities in

Mexico and its growing Russian operations, causing Key’s share price to jump almost 4%, from

a closing price of $7.53 on October 30, 2013, to a closing price of $7.82 on October 31, 2013.







prohibited by the FCPA. Key’s culture of corruption slowly emerged when it revealed to the

investing public that the SEC was investigating conduct that violated the FCPA in Key’s Russia

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operations and that a special committee of Key’s Board of Directors reported further potential

FCPA violations to both the SEC and DOJ.

P. Third Quarter 2013 Form 10-Q

203. On November 1, 2013, the Company filed with the SEC its Quarterly Report for 3Q

2013 on Form 10-Q. In connection with this Form 10-Q, defendants Alario and Dodson

executed SOX Certifications similar to those set forth in ¶ 166. These certifications were

materially false and misleading for the same reasons set forth in ¶ 167.

Q. January 6, 2014—Press Release

204. On January 6, 2014, the Company issued a press release updating the market about the

expected impact on its 4Q 2013 results of PEMEX’s activity slowdown in the Northern region of

Mexico. In the press release, the Company disclosed that PEMEX was auditing $372 million

worth of Key’s billings made under its contracts with PEMEX, which would lead the company to

take a charge of $2 million to $3 million in 4Q 2013. The following day, Key filed a copy of the

press release with the SEC on Form 8-K.

205. Based on Key’s revelation that a slowdown in PEMEX’s activity was expected to

negatively impact Key’s 4Q 2013 results and that PEMEX was auditing $372 million worth of

Key’s billings, Key’s share price decreased from a closing price of $7.83 on January 6, 2014, to

a closing price of $7.55 on January 7, 2014, or over 3%.

206. The statements identified in ¶ 204 concerning Key’s growth in Russia and Mexico were

materially false and misleading because Defendants did not address the significance of the




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prohibited by the FCPA. Key’s culture of corruption slowly emerged when it revealed to the

investing public that the SEC was investigating conduct that violated the FCPA in Key’s Russia

operations and that a special committee of Key’s Board of Directors reported further potential

FCPA violations to both the SEC and DOJ.

R. Fourth Quarter and Full Year 2013 Press Release and Earnings Call

207. On February 13, 2014, Key issued a press release announcing its 4Q and full year 2013

financial results, which included quarterly International segment revenues of $38.1 million,

down 14.5% sequentially. In the press release, the Company confirmed that, in connection with

the PEMEX audits announced in January 2014, the Company had taken a $3.2 million pre-tax

charge. The following day, Key filed a copy of the press release with the SEC on Form 8-K.

208. On February 14, 2014, Key held a conference call in connection with its earnings

report. During the call, the defendants made a number of statements concerning Key’s ongoing

operations in Mexico and Russia. With regard to Mexico, defendant Alario noted the difficulties

that Key had faced as a result of PEMEX’s budget issues, but explained his expectation that Key

would obtain “mega tenders” and “incentivized contracts” from PEMEX going forward, as well

as continued success in Mexico’s Southern region. With regard to the transition of Key’s

Russian business from a joint venture to a wholly owned subsidiary, Alario stated that “there’s

some transitional work being done there to improve our business. We’re already seeing results

of that in Russia.” Indeed, defendant Wilson noted that, under the Company’s full control, Key

“saw a slight profit in Russia during the quarter . . . .”

209. While Key’s revenue for its International segment was down sequentially, Key’s shares

remained up based on defendant Alario’s expectations that Key would obtain “mega tenders”

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and “incentivized contracts” from PEMEX going forward, increasing Key’s share price from a

closing price of $7.81 on February 13, 2014, to a closing price of $8.00 on February 14, 2014, or

over 2%.

210. The statements identified in ¶ 207 above concerning Key’s growth in Russia and

Mexico were materially false and misleading because Defendants did not address the

significance of the conduct that violated the FCPA to Key’s revenue growth in such markets. To

the contrary, such statements falsely implied that the Company’s success in these areas was

based entirely on legitimate business activities. Moreover, the statements created the false

impression that Key had adequate internal controls in place, including controls that would

prevent misconduct prohibited by the FCPA. Key’s culture of corruption slowly emerged when

it revealed to the investing public that the SEC was investigating conduct that violated the FCPA

in Key’s Russia operations and that a special committee of Key’s Board of Directors reported

further potential FCPA violations to both the SEC and DOJ.

S. 2013 Form 10-K

211. On February 25, 2014, Key filed with the SEC its Annual Report on Form 10-K. As

with it most recent 10-K, the February 25, 2014 10-K included in the “Risk Factors” section a

warning that Key’s “failure to comply with the Foreign Corrupt Practices Act (‘FCPA’) and

similar laws may have a negative impact on our ongoing operations.” The text following this

heading reads:

Our ability to comply with the FCPA and similar laws is dependent on the success of our ongoing compliance program, including our ability to continue to manage our agents, affiliates and business partners, and supervise, train and retain competent employees. Our compliance program is also dependent on the efforts of our employees to comply with applicable law and our Business Code of Conduct. We could be subject to sanctions and civil and criminal prosecution as

80


well as fines and penalties in the event of a finding of violation of the FCPA or similar laws by us or any of our employees.

212. Moreover, Key reported in its Form 10-K that, in conducting its yearly goodwill

impairment analysis, the Company’s review of its Russian reporting unit indicated that the

goodwill for that unit at the end of 2013 was approximately $23 million, and that the fair value

of these assets exceeded the carrying value by a staggering 86% . In addition, the Company

reported that it did not need to record any assets impairments during 2013.

213. The statements identified in ¶¶ 211-212 above concerning Key’s goodwill for its

reporting unit in Russia, as well as Defendants’ statement that Key did not need to record any

assets impairments, were false and misleading because Defendants failed to address the

significance of the conduct that violated the FCPA to Key’s growth in such markets. To the

contrary, such statements falsely implied that the Company’s success in these areas was based

entirely on legitimate business activities. Moreover, these statements created the false

impression that Key had adequate internal controls in place, including controls that would

prevent misconduct prohibited by the FCPA. Nothing could be further from the truth. As Lead

Plaintiff’s investigation uncovered, Key’s internal controls were so woefully inadequate that it

made Defendants’ public representations regarding them false and misleading. Former

employees confirmed that Key maintained non-existent FCPA compliance policies and

procedures during the Class Period. For instance, CW2 corroborated that Key failed to put “a





81



diligence. Key’s culture of corruption slowly emerged when it revealed to the investing public

that the SEC was investigating conduct that violated the FCPA in Key’s Russia operations and

that a special committee of Key’s Board of Directors reported further potential FCPA violations

to both the SEC and DOJ.

214. In connection with this Form 10-K, defendants Alario and Dodson also executed SOX

Certifications similar to those set forth in ¶ 181. These certifications were materially false and

misleading for the same reasons set forth in ¶ 167.

T. First Quarter 2014 Press Release and Earnings Call

215. On April 30, 2014, Key issued a press release announcing its 1Q 2014 financial results.

Regarding the Company’s International segment, Key reported International revenues of

$32.1 million, down 15.7% sequentially. The following day, the Company filed a copy of the

press release with the SEC on Form 8-K.

216. On May 1, 2014, Key held a conference call for analysts and investors in connection

with its quarterly earnings announcement. During the call, defendant Alario discussed the

Company’s business in Mexico, commenting that “[w]e’ve reached the point where we’re

willing to say that our International business has essentially reached bottom. Mexico has clearly

been the drag on this segment, and at this point, we’re only working three rigs in Mexico.” Later

in the call, however, Alario expressed confidence in Key’s ability to turn its International

segment around: “Much as we talked about in the U.S. where some large production driven

tenders that come to market recently. In Mexico, we’ve also recently seen a number of

opportunities from integrated service companies under these incentive contracts, and some of

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those are under negotiation now. And hopefully, those will, as you indicate, will get started

sooner rather than later.”

217. Based on the disclosures that revenues in its International segment were down and that

this “business has essentially reached bottom,” Key’s share price dropped sharply from a closing

price of $10.04 on April 30, 2014, to a closing price of $9.14 on May 1, 2014.

218. The statements identified in ¶¶ 215-216 above concerning Key’s international business

were materially false and misleading because defendant Alario did not address the significance

of the conduct that violated the FCPA to Key’s revenue growth in such markets. To the

contrary, such statements falsely implied that the Company’s success in these areas was based

entirely on legitimate business activities. Moreover, the statements created the false impression

that Key had adequate internal controls in place, including controls that would prevent

misconduct prohibited by the FCPA. Key’s culture of corruption slowly emerged when it

revealed to the investing public that the SEC was investigating conduct that violated the FCPA in

Key’s Russia operations and that a special committee of Key’s Board of Directors reported

further potential FCPA violations to both the SEC and DOJ.

VI. THE TRUTH BEGINS TO EMERGE

219. On May 6, 2014, the Company filed with the SEC its Quarterly Report for 1Q 2014 on

Form 10-Q. In the 10-Q, which contained SOX certifications signed by defendants Alario and

Dodson stating that the information in the Form 10-Q was accurate, and that it disclosed any

material changes to the Company’s internal control over financial reporting, Key disclosed for

the first time that the SEC was investigating Key for possible FCPA violations in its Russian

operations. Notably, the Company disclosed this information for the first time in its Quarterly

Report, rather than in a timely Form 8-K. The 10-Q reads, in pertinent part:

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Government Investigation

The U.S. Securities and Exchange Commission has advised us that it is investigating possible violations of the U.S. Foreign Corrupt Practices Act involving business activities of Key’s operations in Russia. We take any such allegations very seriously and are conducting an investigation into the allegations. We are fully cooperating with and sharing the results of our investigation with the Commission. While the outcome of our investigation is currently not determinable, we do not expect that it will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

220. As the market absorbed this troubling information, Key’s share price dropped $0.64, or

more than 7%, between May 7 and May 9, 2014.

221. On May 22, 2014, Key filed with the SEC a Form 8-K announcing that, effective May

20, 2014, defendant Wilson had been appointed “Executive Vice President with responsibility

for international operations, technology development and corporate strategy.” The 8-K also

noted that defendant Alario had “assumed the direction of the Company’s domestic operations,”

thus “allow[ing] Mr. Wilson to focus more exclusively on these critical areas.”

222. On June 4, 2014, Key filed with the SEC another 8-K, this time disclosing that it had

become aware of additional possible FCPA violations:

In April 2014, the Company became aware of an allegation involving Key’s Mexico operations that, if true, could potentially constitute a violation of certain Company policies, including our Code of Business Conduct, the U.S. Foreign Corrupt Practices Act (FCPA) and other applicable laws. The Company conducted an initial investigation of this matter and the Board of Directors of the Company has formed a special committee of independent directors to oversee the investigation of this matter as well as the investigation of previously disclosed possible violations of the FCPA involving business activities of our operations in Russia, and any other resulting matters. The special committee has retained external independent legal counsel to continue these investigations. On May 30, 2014, the Company voluntarily disclosed the allegation and information from this initial investigation to the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). The Company and its management are fully cooperating with the SEC and DOJ; however, at this time the Company is unable to predict the ultimate resolution of these matters with these agencies.

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223. Then, on July 17, 2014, Key shocked the market when, in a press release providing

updated guidance for 2Q 2014, the Company disclosed that: (1) it “expects to record a $30 --

$35 million pre-tax charge for goodwill and other assets impairments related to its operations in

Russia”; (2) it had incurred approximately $5 million in pre-tax expenses associated with its

FCPA investigations; and (3) after accounting for the $30 million to $35 million charge, the

Company expected to report a loss for the quarter in the range of $0.35 to $0.38 per share. In

announcing this severe hit to the Company’s goodwill and other assets in its Russian reporting

unit, Key gave investors a clear view into the extent of its failure to abide by the FCPA and

Key’s own policies, and the impact this would have on its bottom line. The reaction was swift

and severe, as Key’s share price plummeted $1.34 per share, or 16%, to close at $7.03 on July

18, 2014, on volume of more than 16 million shares.

224. On July 21, 2014, it was reported that “Imperial Capital downgraded Key Energy to In-

Line from Outperform following the Q2 miss saying the company’s production upturn could be

slow to materialize.” Imperial Capital lowered its price target for shares to $7.50 from $10.50.

225. On July 23, 2014, Wunderlich Securities reiterated a Hold rating on Key because “[t]he

company expects revenues to be down 2% sequentially; a surprising statistic given the strength

seen in the OFS market overall. This lower revenue figure also is joined by higher costs due to

write-offs, redeployment, and severance costs in Russia and Mexico. Overall it’s clear Key is

struggling even as the domestic services market is showing overall improvement and, while it

has been able to reduce debt nicely, we remain Hold rated given the company-specific

headwinds facing KEG.”

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VII. SCIENTER ALLEGATIONS

226. Defendants acted with scienter in that Defendants knew that the public documents and

statements issued or disseminated in the name of the Company were materially false and/or

misleading; knew that such statements or documents would be issued or disseminated to the

investing public; and knowingly and substantially participated or acquiesced in the issuance or

dissemination of such statements or documents as primary violations of the federal securities

laws. As set forth elsewhere in detail, Defendants, by virtue of their receipt of information

reflecting the true facts regarding Key, their control over and/or receipt and/or modification of

Key’s allegedly materially misleading misstatements, and/or their associations with the

Company, which made them privy to confidential proprietary information concerning Key,

participated in the fraudulent scheme alleged herein.

A. Key designed FCPA policies and procedures that were either recklessly or deliberately ignored

227. At the end of the Class Period, Key stunned the market by revealing potential FCPA

violations in its Mexican operations, less than one month after it revealed THAT the SEC was

investigating possible FCPA violations involving Key’s Russia reporting unit. Then, after the

end of the Class Period, on November 3, 2014, Key revealed “that in addition to Mexico and

Russia, the special committee’s investigations now also “include[d] a review of certain aspects of

the Company’s operations in Colombia.” Key’s violations of the FCPA could not have been

perpetrated in so many different markets without the knowledge, complicity and/or acquiescence

of personnel at the highest levels of the Company. When reviewed collectively, as required by

applicable law, Lead Plaintiff’s allegations support a strong inference of fraudulent intent on the

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part of Defendants or, at the very least, the strong inference that Defendants’ conduct was highly

unreasonable and an extreme departure from the standards of ordinary care.

228. As discussed in ¶¶ 99-114, Defendants adopted numerous policies and internal controls

designed to provide senior management with the means to be apprised of, and the ability to

address, any conduct that violated the anti-bribery or accounting provisions of the FCPA.

Through its FCPA Compliance Manual, which Key made publicly available on its website

throughout the Class Period, Defendants assured the market of Key’s commitment to compliance

with the FCPA—a necessary assurance given Key’s growth internationally in notoriously corrupt

countries, such as Mexico and Russia. If these internal controls were working properly, Key’s

senior management would have been alerted to these FCPA risks before they materialized. As a

result, to the extent the Defendants were not aware of any FCPA violations beforehand, Key only

likely learned of the potential FCPA violations in Mexico and Colombia after increased scrutiny

by the SEC in connection with FCPA allegations in Russia.

229. Key’s FCPA Policy and Procedures apply to all employees and third parties “who are

involved in any way in transactions in foreign countries, or who work temporarily outside the

United States, as well as all employees located in the corporate offices in Midland and Houston,

Texas.” Moreover, certain employees and departments are assigned substantive responsibilities

for assuring that the Company complies with the FCPA. For instance, Key’s Accounting

Department is required to maintain accounting procedures to ensure that no false or misleading

entry is made in the Company’s books and records for any reason. The FCPA Compliance

Officer implements and monitors the Company’s FCPA compliance program, including

investigating and approving the employment of all foreign agents, any gifts or entertainment with

foreign officials, and the commencement of significant business operations outside the United

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States. Finally, Key’s Audit Department, in conjunction with the FCPA Compliance Officer, is

responsible for developing an annual FCPA audit plan and also performing other random

compliance audits as may be requested from time to time by management.

230. Key’s FCPA Policy clearly states that “no gifts of any value can be given to a foreign

official.” However, where “the situation warrants a token gift of other than nominal value, the

employee must consult with the FCPA Compliance Officer prior to offering such a gift.” In

addition, the FCPA Compliance Officer is required to approve in advance “[e]mployment of a

foreign agent, commencement of significant business operations outside the United States, gifts,

or entertainment of a foreign official[.]” Moreover, Key recognizes that overtures from a foreign

official for anything of value can be more subtle than a direct request, and can include “gifts, gift

or sale of stock or other investment opportunities in other than an arm’s length transaction for

demonstrated fair market value, contracts or other business opportunities to a Key entity [in

which] a foreign official holds a beneficial interest, medical expenses, educational or living

expenses, travel expenses or meals, shopping or entertainment expenses, or contributions to any

foreign charity.”

231. With respect to third-party payments, Key’s FCPA Procedures recognize “that there are

circumstances where participation in the market is conditioned upon partnership with local

companies.” In these instances, Key requires that “prior to entering into an agreement with any

agent, consultant, joint venture partner or other representative who will act on behalf of the

Company with regard to foreign governments on international business development or

retention, we will perform appropriate FCPA-related due diligence, and impose prudent

safeguards against improper payments.”

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232. Similarly, when the Company expects to engage an agent, sponsor, or other third party

in connection with any non-U.S. business, “an investigation of the prospective Representative

must be conducted by the FCPA Compliance Officer in order to determine the reputation,

beneficial ownership, professional capability and experience, financial standing and credibility of

the prospective Representative and the history of such prospective Representative’s compliance

with applicable provisions of the FCPA or similar applicable legislation in other countries.”

233. Key’s FCPA Procedures also spell out the due diligence process required for

acquisitions and joint ventures, which is applicable here given Key’s joint venture and

subsequent acquisition of Geostream in Russia. For an acquisition, “the due diligence

process . . . shall be performed by the FCPA Compliance Officer, the Legal Department and

Internal Audit, and include an investigation of the acquisition target’s compliance with the

FCPA.” For joint ventures, “a review of the prospective joint venture partner or partners must be

conducted by the Compliance Officer in order to determine the reputation, beneficial ownership,

professional capability and experience, financial standing and credibility of the prospective joint

venture partner or partners and the history of such prospective joint venture partner’s or partners’

compliance with applicable provisions of the FCPA or similar applicable legislation in other

countries.”

234. Key also understood that the “record-keeping provisions of the FCPA require publicly

held U.S. companies such as Key to establish and maintain a system of internal controls . . . .” In

light of this provision, “Key’s Accounting Department is responsible for maintaining and

enforcing Key’s accounting and recordkeeping policies, and maintaining Key’s system of

internal controls to ensure that assets of Key are disbursed only as authorized by management, as

set forth in this Policy.” Further, Key’s Internal Audit Department “is responsible for auditing

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Key’s compliance with the policies outlined in this Compliance Manual and the related policies

and procedures that comprise Key’s internal control system.”

235. Key’s FCPA Procedures also require the Company to “maintain a system of internal

accounting controls sufficient to provide reasonable assurances” that the Company’s financial

transactions are transparent and FCPA compliant.

236. Key’s FCPA Procedures also direct that “[m]onitoring and auditing systems must be in

place to detect violations of Key policy and of applicable U.S. and international laws and

regulations. In particular, Key should monitor and review the records of personnel who have

discretionary authority over Key assets, who are likely to come into contact with government

officials, who engage into contracts directly or indirectly with active or former government

officials, or who submit financial data that affects Key financial statements or reports.”

237. Likewise, Key’s Internal Audit Department must conduct FCPA audits based on an

annual FCPA audit plan that “will include interviews of persons who are responsible for

administering, implementing, and monitoring Key’s compliance program.” The FCPA

Procedures state that, in conducting these audits, the “Internal Audit Department will focus on

FCPA compliance files, as well as the personnel files, due diligence information, and agreements

with international representatives, agents, or consultants, international mergers or acquisitions,

international joint ventures or other international equity investment transactions that may be

material. The Internal Audit Department will also review Key’s FCPA policy, procedures and

other published materials (such as training materials) pertaining to the FCPA.”

238. With the accounting and audit controls purportedly in place at Key through its Code of

Business Conduct and FCPA Compliance Manual, any FCPA violations at Key’s Russian or

Mexican operations—which Key has not yet publicly revealed the full scope of—could not have

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been committed without the knowledge and approval of its senior management. If Key’s FCPA

compliance controls were working properly, any suspected violations would have been

immediately detected by Key’s Accounting Department or its Internal Audit Department.

Moreover, if anyone in Key’s Russia or Mexico operations engaged an agent, sponsor, or other

third party in connection with any non-U.S. business, a review of that third party should have

been conducted by the Company’s FCPA Compliance Officer.

239. The statements in ¶¶ 94-114; 155-216, however, did not reflect the reality as it existed

then. Instead of strictly adhering to Key’s publicly stated FCPA compliance policies and

procedures, Defendants wholly ignored them for more lucrative motives. For instance, in Key’s

2011 Form 10-K, the Company emphasized that “[w]e generate significant revenue from our

contracts with the Mexican national oil company [PEMEX].” Indeed, the Company revealed

that “[r]eceivables outstanding from [PEMEX] were approximately 10% of our total accounts

receivable as of December 31, 2011.” Moreover, on February 16, 2012, on a conference call for

analysts, defendant Alario boasted that “[w]hen we first entered the Mexico market back in 2007

with three rigs, we believed then that it could become a 40 to 50 rig market for Key. I’m pleased

to report that our activity in Mexico should more than double in 2012 with at least 40 rigs for the

year compared to an average of 18 rigs in 2011.”

240. Similarly, expansion into Russia appeared equally lucrative for Key. For instance,

defendant Alario stated that in Russia “[w]e have a little bit different business model than what

most people in the region have. And it is the second-largest oil well inventory market in the

world. So there’s great reason for Key to be in that market.” Defendant Wilson also explained

that “Russia is the second largest well servicing and workover market in the world after the

United States and we see opportunities to expand our presence there profitably.” Key’s strategy

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looked like it was paying off—in its 2012 Form 10-K, Key reported that “[r]evenues for our

international segment increased $134.2 million, or 67.4%, to $333.3 million for the year ended

December 31, 2012.”

241. Although Key gave the appearance that it had designed a robust FCPA compliance

program, which extended to all of its operations including Mexico and Russia, confidential

witnesses have revealed that this was not the case. In fact, Lead Plaintiff’s investigation

uncovered that Key’s internal controls were woefully inadequate and that Key’s acquisition of

the remaining half of Geostream was completed without adequate due diligence. For instance,

CW2 disclosed Key’s lack of internal controls and compliance efforts. “A lot of things were not

taken care of. . . . [Key] doesn’t have a robust internal control function at all.” In fact, CW2

explained that Key failed to put “a structure in place that would provide a compliance function,”

especially with respect to Key’s Mexican and Russian operations. This was further conformed

by CW6 who stated, “I don’t think [Key’s] internal audit ever audited internationally.” CW6

also underscored that Key had non-existent internal controls, especially for international

operations, for, among other processes, vetting vendors, bidding processes and protecting against

conflicts of interest. With respect to Geostream, CW2 stated that there was concern at Key about

liability issues because, prior to purchasing the remaining 50%, Key had virtually no access to

Geostream’s books. CW2 described the final acquisition process as “very messy,” with “no

visibility on what was going on there.” In fact, “[i]nternal audit wasn’t even allowed into the

[Geostream] building” and “[t]here was no internal audits conducted ever.” In fact, once the

acquisition was completed, Key uncovered more details about Geostream’s structure and

finances—which turned out to be far more complex than anticipated. Moreover, had Key’s

compliance machinery been as developed and stringent as Defendants represented, it would have

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been impossible for Defendants not to know that its success in certain international markets was,

at least in part, the result of rampant FCPA violations.

B. Key pushed into notoriously corrupt countries, including Mexico and Russia, with non-existent FCPA policies and procedures, significantly raising the Company’s exposure to FCPA violations

242. The Individual Defendants had access to all material information regarding the

Company’s core operations. While typically an officer’s position with a company does not

suffice to create an inference of scienter, where, as here, international expansion was a critical

component to Key’s growth strategy, a different result should follow. Thus, the Individual

Defendants are presumed to have had all knowledge of all material facts regarding those core

operations.

243. Mexico and, to a lesser extent, Russia, were the cornerstones of Key’s international

growth strategy and, as such, constituted a core operation of the Company. In fact, Defendants’

own statements detailed the material significance of these markets to Key’s future success

internationally:

• Company’s decline in [domestic] rig hours was partially offset by “our expansion into Mexico and Russia during 2009, and the full year effect of acquisitions completed during 2008.” ¶ 35;

• Defendant Alario stated that “the core of our story is our business with PEMEX. And as I like to say, I don’t think there’s a better example of value delivered by a service company to a customer than Key’s value to PEMEX.” ¶ 159;

• Defendant Wilson stated that “our most meaningful growth has been in Mexico. . . . Today we’re operating over 40 rigs largely in that same asset and we have recently begun broadening our presence.” ¶ 168;

• Defendant Alario stated: “Russia, we continue to prosecute our new business model in that country. . . . And we’ll continue to keep our toe in the water in that market which is the second largest work-over market in the world. As the biggest player in that business, we kind of have to be there, but we don’t have a lot of

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capital invested and we continue to do to improve the business model conversion for certain customers in that marketplace and we expect that to continue.” ¶ 170;

• With respect to Russia, defendant Alario explained that “[w]e have a little bit different business model than what most people in the region have. And it is the second-largest oil well inventory market in the world. So there’s great reason for Key to be in that market.” ¶ 174;

• In its 2012 Form 10-K, Key reported that “[r]evenues for our international segment increased $134.2 million, or 67.4%, to $333.3 million for the year ended December 31, 2012,” which “was primarily attributable to increased activity in Mexico.” ¶ 178;

• Defendant Alario stated: “And then finally Russia, we operate eight rigs or nine rigs in Russia. . . . It’s really the only place that we do any significant amount of drilling.” ¶ 182;

• With respect to Mexico, defendant Alario stated that “we’re able to take advantage of that opportunity in the south region and in other fields in the north region, you now hopefully get a sense, on the back of this kind of value delivery, why we feel pretty confident that PEMEX is going to want to have Key involved in its activities this year and in the future.” ¶ 182;

• Defendant Wilson explained that “Russia is the second largest well servicing and workover market in the world after the United States and we see opportunities to expand our presence there profitably.” ¶ 185;

• Defendant Alario discussed Key’s opportunities in Mexico, noting that, notwithstanding the slowdown in PEMEX’s Northern region activities, Key had a number of other opportunities in the country. And in discussing Key’s acquisition of 100% of the Geostream business, defendant Alario noted that “[w]e believe that we can more effectively grow in . . . Russia operating the business[] ourselves.” ¶ 200.

244. In light of the SEC’s and DOJ’s crackdown on FCPA violations and the well-publicized

risks of doing business in Mexico and Russia, Defendants failed to ensure that their public

statements regarding Key’s internal controls matched what actually existed at the Company: a

complete lack of internal controls that were wholly insufficient to prevent FCPA violations or to

promptly detect and resolve them.

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245. Indeed, Key’s advertised internal controls were either a sham or recklessly disregarded

by Key’s senior management. In fact, Key’s control and compliance deficiencies made it

impossible for Defendants to believe that the Company’s success in certain international markets

was not, at least in part, the result of rampant FCPA violations. To the contrary, Lead Plaintiff’s

investigation uncovered that Key’s internal controls were woefully inadequate. CW6

undermined senior management’s assurances by revealing that, at Key, “[i]nternal controls are

non-existent. . . . There’s no support from the CEO or the CFO for [that] type of work. ”

246. When, as here, a senior officer of a company makes false and misleading public

statements about critical operations, there is a strong inference that such officer knew the

statement was materially false and misleading when made. In other words, knowledge of falsity

can be imputed to key officers who should have known of facts relating to the core operations of

their company. Moreover, as signatories to the Company’s SEC filings, each Individual

Defendant had an affirmative obligation to familiarize himself with the facts relevant to Key’s

core operations that were a critical factor to its growth strategy. To the extent that the Individual

Defendants failed to fulfill that obligation, their recklessness would satisfy the scienter element

of a claim brought under Section 10(b) and Rule 10b-5.

VIII. INAPPLICABILITY OF STATUTORY SAFE HARBOR

247. As alleged herein, Defendants acted with scienter because, at the time that they issued

public documents and other statements in Key’s name, they knew, or acted with extreme

recklessness in disregarding the fact, that such statements were materially false and misleading

or omitted material facts. Moreover, Defendants knew that such documents and statements

would be issued or disseminated to the investing public; knew that persons were likely to rely

upon those misrepresentations and omissions, and knowingly and recklessly participated in the

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issuance and dissemination of such statements and documents as primary violators of the federal

securities laws.

248. As set forth in detail throughout this complaint, Defendants, by virtue of their control

over, and/or receipt, of Key’s materially misleading statements and their positions with the

Company that made them privy to confidential proprietary information, used such information to

artificially inflate Key’s financial results. Defendants created, were informed of, participated in,

and knew of the scheme alleged herein to distort and suppress material information pertaining to

Key’s financial condition, profitability, and present and future prospects of the Company. With

respect to non-forward looking statements and omissions, Defendants knew and recklessly

disregarded the falsity and misleading nature of that information, which they caused to be

disseminated to the investing public.

249. Key’s “Safe Harbor” warnings accompanying its forward-looking statements issued

during the Class Period were ineffective to shield those statements from liability and do not

apply to any of the false statements pleaded in this Complaint. None of the statements pleaded

herein are “forward-looking” statements and no such statement was identified as a “forward-

looking statement” when made. Rather, the statements alleged herein to be materially false and

misleading by affirmative misstatement and/or omissions of material fact all relate to facts and

conditions existing at the time the statements were made. Moreover, cautionary statements, if

any, did not identify important factors that could cause actual results to differ materially from

those in any putative forward-looking statements.

250. Alternatively, to the extent that the statutory safe harbor does apply to any forward-

looking statements pleaded herein, Defendants are liable for those false forward-looking

statements because, at the time each of those forward-looking statements was made, the

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particular speaker knew that the particular forward-looking statement was false and/or the

forward-looking statement was authorized and/or approved by an executive officer of Key who

knew that those statements were false when made. Moreover, to the extent that Defendants

issued any disclosures designed to “warn” or “caution” investors of certain “risks,” those

disclosures were also false and misleading because they did not disclose that Defendants were

actually engaging in the very actions about which they purportedly warned and/or had actual

knowledge of material adverse facts undermining such disclosures.

IX. CONTROL PERSON ALLEGATIONS/GROUP PLEADING

251. By virtue of the Individual Defendants’ positions within the Company, they had access

to undisclosed adverse information about Key, its business, operations, operational trends,

finances, and present and future business prospects. The Individual Defendants would ascertain

such information through Key’s internal corporate documents, conversations, and connections

with other corporate officers, bankers, traders, risk officers, marketing experts, and employees,

attendance at management and Board of Directors’ meetings, including committees thereof, and

through reports and other information provided to them in connection with their roles and duties

as Key officers and/or directors.

252. It is appropriate to treat the Individual Defendants collectively as a group for pleading

purposes and to presume that the materially false, misleading, and incomplete information

conveyed in the Company’s public filings, press releases, and public statements, as alleged

herein, was the result of the collective actions of the Individual Defendants identified above.

The Individual Defendants, by virtue of their high-level positions within the Company, directly

participated in the management of the Company, were directly involved in the day-to-day

operations of the Company at the highest levels, and were privy to confidential proprietary

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information concerning the Company, its business, operations, prospects, growth, finances, and

financial condition, as alleged herein.

253. The Individual Defendants were involved in drafting, producing, reviewing, approving,

and/or disseminating the materially false and misleading statements and information alleged

herein, were aware of or recklessly disregarded the fact that materially false and misleading

statements were being issued regarding the Company, and approved or ratified these statements,

in violation of the federal securities laws.

254. As officers and controlling persons of a publicly held company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, traded on the NYSE, and

governed by the provisions of the federal securities laws, the Individual Defendants each had a

duty to promptly disseminate accurate and truthful information with respect to the Company’s

financial condition and performance, growth, operations, financial statements, business, markets,

management, risk, earnings, and present and future business prospects, and to correct any

previously issued statements that had become materially misleading or untrue, so that the market

price of the Company’s publicly traded securities would be based upon truthful and accurate

information. The Individual Defendants’ material misrepresentations and omissions during the

Class Period violated these specific requirements and obligations.

255. The Individual Defendants, by virtue of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various

SEC filings, press releases, and other public statements pertaining to the Company during the

Class Period. The Individual Defendants were provided with copies of the documents alleged

herein to be misleading prior to or shortly after their issuance and/or had the ability and/or

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opportunity to prevent their issuance or cause them to be corrected. Accordingly, they are

responsible for the accuracy of the public reports and releases detailed herein.

256. Each of the Defendants is liable as a participant in a scheme, plan, and course of

conduct that operated as a fraud and deceit on Class Period purchasers of the Company’s

securities.

X. LEAD PLAINTIFF’S CLASS ACTION ALLEGATIONS

257. Lead Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who purchased or

otherwise acquired Key securities during the Class Period (the “Class”) and were damaged upon

the revelation of the alleged corrective disclosures. Excluded from the Class are the Defendants;

the officers and directors of the Company at all relevant times; members of their immediate

families and their legal representatives, heirs, successors, or assigns; any entity in which the

Defendants have or had a controlling interest; and any judicial officer who handles this matter

and the immediate family of any such judicial officer.

258. The members of the Class are so numerous that joinder of all members is impracticable.

Throughout the Class Period, Key securities were actively traded on the New York Stock

Exchange. While the exact number of Class members is unknown to Lead Plaintiff at this time

and can be ascertained only through appropriate discovery, Lead Plaintiff believes that there are

hundreds or thousands of members in the proposed Class. Record owners and other members of

the Class may be identified from records maintained by the Company or its transfer agent and

may be notified of the pendency of this action by mail, using the form of notice similar to that

customarily used in securities class actions.

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259. Lead Plaintiff’s claims are typical of the claims of members of the Class, as all

members of the Class are similarly affected by Defendants’ wrongful conduct in violation of

federal law alleged in this Complaint.

260. Lead Plaintiff will fairly and adequately protect the interests of the members of the

Class and has retained counsel competent and experienced in class and securities litigation. Lead

Plaintiff has no interests antagonistic to or in conflict with those of the Class.

261. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

• whether the federal securities laws were violated by Defendants’ acts as alleged in this Complaint;

• whether statements made by Defendants to the investing public during the Class Period misrepresented material facts about the business, operations, and management of Key;

• whether Defendants acted knowingly or recklessly in issuing false and misleading statements;

• whether the prices of Key securities during the Class Period were artificially inflated because of the conduct by Defendants alleged in this Complaint; and

• whether the members of the Class have sustained damages and, if so, what is the proper measure of damages.

262. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action as

a class action.

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XI. LOSS CAUSATION

263. Defendants’ wrongful conduct, as alleged herein, directly and proximately caused the

economic loss suffered by Lead Plaintiff and the Class.

264. Defendants defrauded Lead Plaintiff and the Class because their false and misleading

statements and omissions artificially inflated the price of Key stock. The failure to disclose to

the market the truth about the Company’s operations, including those in Russia and Mexico,

caused and maintained artificial inflation in Key’s stock price throughout the Class Period, until

the truth was revealed on July 17, 2014.

265. When the market learned the truth about the Company, Key’s stock price plummeted as

the artificial inflation dissipated immediately. Through these disclosures, Defendants revealed

facts that indicate that their prior statements about Key’s compliance with all applicable laws and

regulations had been untrue.

266. During the Class Period, Lead Plaintiff and members of the Class purchased Key stock

at artificially inflated prices and were damaged thereby.

XII. APPLICABILITY OF THE PRESUMPTION OF RELIANCE: FRAUD ON THE MARKET DOCTRINE

267. Lead Plaintiff and members of the Class are entitled to the presumption of reliance

established by the fraud-on-the-market doctrine because:

(a) Defendants made public misrepresentations or failed to disclose material facts during the Class Period;

(b) The misrepresentations and omissions were material;

(c) Key common stock was traded in an efficient market, as described below;

(d) Key shares were liquid and were traded with moderate to heavy volume during the Class Period;

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(e) The alleged misrepresentations and omissions would tend to induce a reasonable investor to misjudge the value of Key’s common stock; and

(f) Lead Plaintiff and members of the Class purchased and/or sold Key stock between the time that Defendants misrepresented or failed to disclose material facts and the time that the true facts were disclosed, without knowledge of the misrepresented or omitted facts.

268. At all relevant times, the market for Key common stock was an efficient market for the

following reasons, among others:

(a) Key common stock met the requirements for listing, and was listed and actively traded on the NYSE, a highly efficient and automated market;

(b) as a regulated issuer, Key filed periodic public reports with the SEC;

(c) Key regularly communicated with public investors via established market communication mechanisms, including regular disseminations of press releases on the national circuits of major newswire services and other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and

(d) Key was followed by several securities analysts employed by major brokerage firms, who wrote reports that were distributed to the sales force and certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace.

269. As a result of the foregoing, the market for Key common stock was open, well-

developed, and efficient, and promptly digested current information regarding Key from all

publicly available sources and reflected such information in the prices of the stock.

270. As a result of the materially false and misleading statements and omissions detailed

herein, Key common stock traded at artificially inflated prices during the Class Period. Lead

Plaintiff and other members of the Class purchased or otherwise acquired Key common stock

relying upon the integrity of the market price of Key common stock and market information

relating to Key, and have been damaged thereby.

271. Based on the foregoing, Lead Plaintiff and members of the Class are entitled to a 102


presumption of reliance upon the integrity of the market.

272. Alternatively, Lead Plaintiff and the members of the Class are entitled to the

presumption of reliance established by the Supreme Court in Affiliated Ute Citizens of the State

of Utah v. United States , 406 U.S. 128, 92 S. Ct. 2430 (1972), because during the Class Period

Defendants omitted material information in their statements in violation of a duty to disclose

such information, as detailed above.

COUNT I

Violation of § 10(b) of the Exchange Act and Rule 10b-5

Against all Defendants

273. Lead Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

274. This Count is asserted against all Defendants and is based upon § 10(b) of the

Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

275. During the Class Period, Defendants engaged in a plan, scheme, conspiracy, and course

of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions,

practices, and courses of business that operated as a fraud and deceit upon Lead Plaintiff and the

other members of the Class. Defendants made various untrue statements of material facts and

omitted to state material facts necessary in order to make statements made, in light of the

circumstances under which they were made, not misleading. And Defendants employed devices,

schemes, and artifices to defraud in connection with the purchase and sale of securities. Such

scheme was intended to, and throughout the Class Period, did: (i) deceive the investing public,

including Lead Plaintiff and other Class members, as alleged in this complaint; (ii) artificially

inflate and maintain the market price of Key securities; and (iii) cause Lead Plaintiff and other

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members of the Class to purchase or otherwise acquire Key securities and options at artificially

inflated prices. In furtherance of this unlawful scheme, plan, and course of conduct, Defendants,

individually and collectively, took the actions set forth in this complaint.

276. Pursuant to the above plan, scheme, conspiracy, and course of conduct, each of the

Defendants participated directly or indirectly in the preparation and/or issuance of the quarterly

and annual reports, SEC filings, press releases, and other statements and documents described

above, including statements made to securities analysts and the media that were designed to

influence the market for Key securities. Such reports, filings, releases, and statements were

materially false and misleading in that they failed to disclose material adverse information and

misrepresented the truth about Key’s finances, operations, and business prospects.

277. By virtue of their positions at the Company, the Individual Defendants had actual

knowledge of the materially false and misleading statements and material omissions alleged

herein and intended thereby to deceive Lead Plaintiff and the other Class members or, in the

alternative, Defendants acted with reckless disregard for the truth in that they failed or refused to

ascertain and disclose such facts as would reveal the materially false and misleading nature of

the statements made, although such facts were readily available to Defendants. The Defendants’

acts and omissions were committed willfully or with reckless disregard for the truth. In addition,

each defendant knew or recklessly disregarded that material facts were being misrepresented or

omitted as described above.

278. Information showing that Defendants acted knowingly or with reckless disregard for

the truth is peculiarly within Defendants’ knowledge and control. As members of the

Company’s senior management, the Individual Defendants had knowledge of the details of

Key’s internal affairs.

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279. The Individual Defendants are liable both directly and indirectly for the wrongs alleged

in this complaint. Because of their positions of control and authority, the Individual Defendants

were able to, and did, directly or indirectly, control the contents of Key’s statements. As officers

and/or directors of a publicly held company, the Individual Defendants had a duty to disseminate

timely, accurate, and truthful information with respect to Key’s business, operations, future

financial condition, and future prospects. As a result of the dissemination of the aforementioned

false and misleading reports, releases, and public statements, the market price of Key securities

was artificially inflated throughout the Class Period. In ignorance of the adverse facts

concerning Key’s business and financial condition that were concealed by Defendants, Lead

Plaintiff and the other members of the Class purchased or otherwise acquired Key securities at

artificially inflated prices and relied on the price of the securities, the integrity of the market for

the securities, and/or on statements disseminated by Defendants, and were damaged thereby.

280. During the Class Period, Key securities were traded on an active and efficient market.

Lead Plaintiff and the other Class members, relying on the materially false and misleading

statements described herein, which the Defendants made, issued, or caused to be disseminated,

or relying upon the integrity of the market, purchased or otherwise acquired Key shares at prices

artificially inflated by Defendants’ wrongful conduct. Had Lead Plaintiff and the other members

of the Class known the truth, they would not have purchased or otherwise acquired these

securities, or would not have purchased or otherwise acquired them at the inflated prices that

were paid. At the time of the purchases and/or acquisitions by Lead Plaintiff and the Class, the

true value of Key securities was substantially lower than the prices paid by Lead Plaintiff and the

other members of the Class. The market price of Key securities declined sharply upon public

disclosure of the facts alleged herein, to the injury of Lead Plaintiff and Class members.

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281. By reason of the conduct alleged in this complaint, Defendants knowingly or

recklessly, directly or indirectly, have violated § 10(b) of the Exchange Act and Rule 10b-5

promulgated thereunder.

282. As a direct and proximate result of Defendants’ wrongful conduct, Lead Plaintiff and

the other members of the Class suffered damages in connection with their respective purchases,

acquisitions, and sales of the Company’s securities during the Class Period, upon the disclosure

that the Company had been disseminating misrepresented financial statements to the investing

public.

COUNT II

Violation of § 20(a) of the Exchange Act Against the Individual Defendants

283. Lead Plaintiff repeats and realleges each and every allegation contained in the

foregoing paragraphs as if fully set forth herein.

284. During the Class Period, the Individual Defendants participated in the operation and

management of Key, and conducted and participated, directly and indirectly, in the conduct of

Key’s business affairs. Because of their senior positions, they knew the adverse non-public

information about Key’s improper business practices.

285. As officers and/or directors of a publicly owned company, the Individual Defendants

had a duty to disseminate accurate and truthful information with respect to Key’s financial

condition and results of operations, and to correct promptly any public statements issued by the

Company that had become materially false or misleading.

286. Because of their positions of control and authority as senior officers, the Individual

Defendants were able to, and did, control the contents of the various reports, press releases, and

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public filings that Key disseminated in the marketplace during the Class Period concerning

Key’s results of operations. Throughout the Class Period, the Individual Defendants exercised

their power and authority to cause Key to engage in the wrongful acts alleged in this complaint.

The Individual Defendants were, therefore, “controlling persons” of the Company within the

meaning of § 20(a) of the Exchange Act. In this capacity, they participated in the unlawful

conduct alleged, which artificially inflated the market price of Key securities.

287. Each of the Individual Defendants thus acted as a controlling person of Key. By reason

of their senior management positions and/or being directors of Key, each of the Individual

Defendants had the power to direct the actions of, and exercised the same to cause, Key to

engage in the unlawful acts and conduct complained of herein. Each of the Individual

Defendants exercised control over the general operations of the Company and possessed the

power to control the specific activities that comprise the primary violations about which Lead

Plaintiff and the other members of the Class complain.

288. By reason of the above conduct, the Individual Defendants are liable pursuant to

§ 20(a) of the Exchange Act for the violations committed by the Company.

PRAYER FOR RELIEF

Lead Plaintiff seeks relief and judgment, as follows:

1. Determining that this action is a proper class action and certifying Lead Plaintiff as class representatives under Rule 23 of the Federal Rules of Civil Procedure;

2. Awarding compensatory damages, including interest, in favor of the Lead Plaintiff and the other Class members against all of Defendants, jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at trial;

3. Awarding Lead Plaintiff and the Class their reasonable costs and expenses incurred in this action, including counsel fees and expert fees; and

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4. Granting any other relief the Court may deem just and proper.

DEMAND FOR TRIAL BY JURY

Lead Plaintiff hereby demands a trial by jury.

Dated: February 13, 2015 KENDALL LAW GROUP LLP

By: /s/ Joe Kendall Joe Kendall State Bar No. 11260700 Jamie McKey State Bar No. 24045262 3232 McKinney Avenue Suite 700 Dallas, TX 75204 Tel.: 214.744.3000 Fax: 214.744.3015

Attorneys-in-Charge

SPECTOR ROSEMAN KODROFF & WILLIS, P.C.

Mark S. Willis 1101 Pennsylvania Avenue, N.W. Suite 600 Washington, D.C. 20004 Tel.: 202.756.3601 Fax: 202.756.3602

Robert M. Roseman Daniel J. Mirarchi Joshua B. Kaplan 1818 Market Street Suite 2500 Philadelphia, PA 19103 Tel.: 215.496.0300 Fax: 215.496.6611

Counsel for Lead Plaintiff Inter-Local Pension Fund of the Graphic Communications Conference of the International Brotherhood of Teamsters

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CERTIFICATE OF SERVICE

I hereby certify that on February 13, 2015, the foregoing document was filed with the

clerk of the court for the U.S. District Court for the Southern District of Texas, using the

electronic case filing system of the court. The electronic case filing system sent a “Notice of

Electronic Filing” to all attorneys of record who have consented in writing to accept this Notice

as service of documents by electronic means. I hereby certify that I have served the foregoing

document all individuals who have not consented to electronic notification by mail.

/s/ Joe Kendall JOE KENDALL

In Re Key Energy Services, Inc. Securities Litigation 14...

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