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Louis Berger Sues Former Executive For Exposing It To FCPA Liability

blame

As highlighted in this prior post, in July 2015 Louis Berger International agreed to pay $17.1 million pursuant to a DOJ deferred prosecution agreement based on allegations that it violated the FCPA’s anti-bribery provisions in connection with projects in Indonesia, Vietnam, India and Kuwait.

At the same time, the DOJ announced a Foreign Corrupt Practices Act enforcement action against Richard Hirsch (a former executive at the company located in the Philippines, who at times oversaw the Company’s overseas operations in Indonesia and Vietnam) as well as a co-defendant – James McClung.

This “issues to consider” post noted that it was fair to pose the question of whether the conduct at issue was engaged in by rogue employees including Hirsch.

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Nice Work, But What Did You Accomplish?

Greedy Lawyers

This is not the first post regarding the parasitic nature of most Foreign Corrupt Practices Act related shareholder litigation. (See this September 2012 with the same title as this post).

The game is very predictable.  In the days and weeks following an FCPA enforcement action, or even a company disclosing or otherwise being the subject of FCPA scrutiny, the lawsuits and/or “investigations” by plaintiffs firm will start to mount.

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Development From The “Other Universe” – In Dismissing FCPA-Related Securities Fraud Claims, Judge States That Merely Conducting Business In Countries “Rife With Corruption Does Not Demonstrate Knowledge Of FCPA Violations”

parallel universe

Foreign Corrupt Practices Act issues often co-exist in two parallel universes.

One universe is ruled by all-powerful gods with big and sharp sticks  in which subjects dare challenge the gods. Another universe consists of checks and balances in which independent actors call the balls and strikes.

The first universe refers to FCPA enforcement by the DOJ and SEC. The second universe refers to litigation of FCPA-related claims in which judges make decisions in the context of an adversarial legal system. This second universe is often referred to as the rule of law universe.

There are several examples of theories used in the first universe that do not work in the second universe. For instance, the FCPA enforcement agencies frequently take a seeming “if / then” position when it comes to issuer internal controls.  In other words, if some misconduct occurred somewhere within an issuer’s business organization or if some employee within that organization circumvented the issuer’s internal controls, then the issuer did not have effective internal controls.

However, when this simplistic theory is used in civil litigation, courts have routinely concluded that just because improper conduct allegedly occurred does not mean that internal controls must have been deficient.  (See e.g., Midwest Teamsters Pension v. Baker Hughes, 2009 WL 6799492 (S.D. Tex. 2009);  Freuler v. Parker Drilling 803 F.Supp.2d 630 (S.D. Tex. 2011).

This post concerns the most recent example regarding the parallel universe. Interestingly, the recent development comes from the same judge (U.S. District Court Judge Melinda Harmon (S.D. Tex.) highlighted in this September 2015 post about the parallel universe.

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Delaware Clamps Down On Parasitic Shareholder Litigation

Feeding FrenzyFCPA Professor has been highlighting for years the parasitic nature of many FCPA-related civil claims.

The actions are as predictable as the sun rising in the east and generally unfold as follows.

A company becomes the subject of Foreign Corrupt Practices Act scrutiny or resolves an FCPA enforcement action.

Then a feeding frenzy follows as plaintiffs lawyers representing (after recruiting) shareholders file civil suits alleging either breach of fiduciary claims under state law or securities fraud claims under federal law.

Like most shareholder litigation of this nature, success is often defined as passing the motion to dismiss stage, and in the FCPA context such FCPA-related civil claims rarely get past this most basic hurdle.

Yet some claims do indeed get past the motion to dismiss hurdle or even they do not are otherwise settled by companies because settlement represents the path of least resistance. In such situations, shareholders receive nothing of significance in the settlement, but the plaintiffs lawyers sure do make out nicely. (See this prior post “Nice Pay Day, But What Did You Accomplish?)

Yet, the actions, as well as the purported investigations by plaintiffs firm surrounding the issues, continue. As this 2010 Forbes column rightly observed:

“[The general increase in FCPA enforcement] has made corporate lawyers and accountants rich as big companies pay big law and accounting firms to investigate and defend potential violations. Plaintiff lawyers have noticed the enormous fees, which are often reaching into the hundreds of millions of dollars, enhanced FCPA enforcement is generating and are moving to extract their own cut.”

The latest company to find itself in the crosshairs of plaintiffs lawyers is Freeport-McMoRan Inc. concerning its business practices in Indonesia after an Indonesian politician resigned after allegedly asking for Freeport shares in exchange for assistance in securing a contract renewal for the company.

Within days, the usual cadre of plaintiffs firms filed lawsuits or otherwise announced investigations (see here, here, here, here, here, here) claiming that Freeport violated the FCPA and as a result various Freeport public statements were materially false and misleading.

Against the above backdrop and general dynamics was a recent notable decision by the Delaware Court of Chancery (the most high-profile trial court in the country when it comes to intra-corporate disputes).

The decision (here – in which Trulia, Inc. shareholders alleged that company directors breached their fiduciary duties in approving a proposed merger with Zillow at an unfair exchange ratio) did not involve FCPA-related civil claims, but did involve another vexatious form of shareholder litigation that typically follows corporate mergers. Perhaps you’ve heard the term “first the merger, then the lawsuit.”

While the decision is not a perfect parallel to FCPA-related civil claims, the language of the court in denying the proposed settlement between the parties is analogous to the FCPA context.

In denying the settlement, the court stated:

“The proposed settlement is of the type often referred to as a “disclosure settlement.” It has become the most common method for quickly resolving stockholder lawsuits that are filed routinely in response to the announcement of virtually every transaction involving the acquisition of a public corporation. In essence, Trulia agreed to supplement the proxy materials disseminated to its stockholders before they voted on the proposed transaction to include some additional information that theoretically would allow the stockholders to be better informed in exercising their franchise rights. In exchange, plaintiffs dropped their motion to preliminarily enjoin the transaction and agreed to provide a release of claims on behalf of a proposed class of Trulia’s stockholders. If approved, the settlement will not provide Trulia stockholders with any economic benefits. The only money that would change hands is the payment of a fee to plaintiffs’ counsel.”

[…]

Today, the public announcement of virtually every transaction involving the acquisition of a public corporation provokes a flurry of class action lawsuits alleging that the target’s directors breached their fiduciary duties by agreeing to sell the corporation for an unfair price. On occasion, although it is relatively infrequent, such litigation has generated meaningful economic benefits for stockholders when, for example, the integrity of a sales process has been corrupted by conflicts of interest on the part of corporate fiduciaries or their advisors. But far too often such litigation serves no useful purpose for stockholders. Instead, it serves only to generate fees for certain lawyers who are regular players in the enterprise of routinely filing hastily drafted complaints on behalf of stockholders on the heels of the public announcement of a deal and settling quickly on terms that yield no monetary compensation to the stockholders they represent.”

Friday Roundup

Roundup2

Scrutiny alerts and updates, civil litigation updates, SEC enforcement statistics, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Millicom

The telecom and media company headquartered in Luxembourg with shares traded over the counter (OTC) in the U.S. recently disclosed:

“Millicom … announced that it has reported to law enforcement authorities in the United States and Sweden potential improper payments made on behalf of the company’s joint venture in Guatemala. A Special Committee of the Board of Directors made the decision in connection with an independent investigation being overseen by the Special Committee and conducted by international law firm Covington & Burling LLP, with the support of Millicom’s management team. Millicom is committed to fully cooperating with the authorities. It is not possible at this time to predict the matter’s likely duration or outcome. Millicom is committed to the highest ethical business standards and to full compliance with all applicable laws and regulations in every market in which the company operates.”

AEI

Speaking of FCPA scrutiny in Guatemala, according to this article in the Nation, Jaguar Energy Guatemala, a subsidiary of Houston-based AEI, “participated in an influence-trafficking scheme to obtain privileged information and favors from high-level Guatemalan officials. Among other things, the subsidiary is accused of paying to obtain meetings with the country’s former president Otto Pérez Molina.”

Goldman Sachs

The Wall Street Journal recently went in-depth regarding a Malaysian government investment fund,  1Malaysia Development Bhd., or 1MDB, and the role of Prime Minister Najib Razak. As noted in this article:

“[T]he fund has become the center of a political scandal that has engulfed Malaysia’s government. The fund is mired in debts of over $11 billion. It is a subject of a raft of local and international investigations, including, in Malaysia, by the central bank, auditor general, anticorruption agency and a parliament committee. It has faced accusations that billions of dollars are missing and that money was misused for political purposes or siphoned off in corruption by individuals.”

According to this article:

“Goldman Sachs Group Inc.’s role as adviser to a politically connected Malaysia development fund resulted in years of lucrative business. It also brought exposure to an expanding scandal. As part of a broad probe into allegations of money laundering and corruption investigators at the Federal Bureau of Investigation and the Justice Department have begun examining Goldman Sachs’s role in a series of transactions at 1Malaysia Development Bhd., people familiar with the matter said. The inquiries are at the information-gathering stage, and there is no suggestion of wrongdoing by the bank, the people said. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” a spokeswoman for the FBI said.”

Bristol-Myers

It was fairly obvious to knowledgeable observers that when the SEC brought an FCPA enforcement action against Bristol-Myers earlier this month (see here for the prior post), but the DOJ did not, that this signaled that there would not be a DOJ enforcement action as such parallel actions are almost always brought on the same day. Should there be any doubt, the company recently disclosed: “The Company has also been advised by the Department of Justice that it has closed its inquiry into this matter.”

Civil Litigation Updates

As highlighted in Foreign Corrupt Practices Act Ripples, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall consequences that can result from FCPA scrutiny or enforcement. Among other things, FCPA scrutiny or enforcement often leads to private shareholder litigation as well as other civil claims such as wrongful termination by employees who allegedly “blew the whistle.”

Two developments from the FCPA-related civil dockets.

This recent post highlighted the civil lawsuit filed by Sanford Wadler, the former General Counsel and Secretary of Bio-Lab Laboratories, against the company and certain executive officers and board members in the aftermath of the company’s FCPA scrutiny and enforcement action. In his complaint, Wadler alleged various unfair employment practices. In this recent decision from the Northern District of California, the court largely denied the defendants’ motion to dismiss and allowed the bulk of Wadler’s claims to proceed.

It did not take long for the Ninth Circuit to affirm a lower court order dismissing derivative claims against H-P directors for, among other things, alleged breach of fiduciary duty in connection with the company’s FCPA scrutiny.  The court’s 4 page order is here.

SEC Enforcement Statistics

Although the SEC has a specialized FCPA Unit (one of only five specialized units at the SEC) and declared the FCPA to be a “vital part” of its overall enforcement program, the fact remains that FCPA enforcement is a relatively minor part of the SEC’s overall enforcement program.

Indeed, as noted in this recent SEC release:

“In the fiscal year that ended in September, the SEC filed 807 enforcement actions covering a wide range of misconduct, and obtained orders totaling approximately $4.2 billion in disgorgement and penalties.  Of the 807 enforcement actions filed in fiscal year 2015, a record 507 were independent actions for violations of the federal securities laws and 300 were either actions against issuers who were delinquent in making required filings with the SEC or administrative proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or other orders.”

In the SEC’s FY 2015, there were 13 FCPA enforcement actions.

Nevertheless, the SEC’s release does mention:

Combating Foreign Corrupt Practices

Reading Stack

The most recent FCPA Update by Debevoise & Plimpton is here.

Miller & Chevalier’s Autumn FCPA Review is here.

An informative read here from Professor Peter Henning at his White Collar Crime Watch column in the New York Times titled “Reforming the SEC’s Administrative Process.”

*****

A good weekend to all.

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