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From The Dockets

This post highlights updates to Foreign Corrupt Practices Act related civil actions involving OSI Systems and Misonix.

OSI Systems

As highlighted in this prior post [1], in late 2017 investment firm Muddy Waters Research accused OSI Systems (a California based company that develops and markets security and inspection systems such as airport security X-ray machines and metal detectors) of corruption in Albania. As often happens when a company becomes the subject of FCPA scrutiny, plaintiff’s lawyers representing shareholder filed securities fraud class action lawsuits.

Recently, Chief Judge Virginia Phillips (C.D. of California) dismissed a consolidated class action complaint (a case which originated as four separate actions). In terms of the background, the opinion notes:

“Plaintiffs allege that Defendants made various misrepresentations and concealed wrongful conduct that artificially inflated or maintained the value of OSI securities. Plaintiffs claim OSI and its management (Defendants Deepak Chopra, Alan Edrick, and Ajay Mehra) concealed the fact that it obtained certain major foreign contracts through bribery and false representations. Specifically, Plaintiffs allege that in the wake of a decline in overall business prospects, Defendants announced a new contract with the government of Albania, which promised substantial revenue. Plaintiffs allege that Defendants continued to tout the success of the contract, despite a hidden arrangement where Defendants, through their Albanian subsidiary would enter into a profit sharing agreement with an Albanian dentist, Olti Peçini. Plaintiffs further allege that Defendants then transferred 49% of the subsidiary to an Albanian holding company for a nominal price without disclosing the transfer to investors.”

After reviewing the relevant legal standards for securities fraud actions, Judge Phillips concluded that the plaintiffs failed to plead an actionable misstatement and that other statements identified by Plaintiffs were not actionable material misrepresentations or omissions.

[2]

Misonix

As highlighted in this prior post [3], in late 2016  Misonix made a voluntary disclosure to the DOJ and SEC to “inform both agencies that the Company may have had knowledge of certain business practices of the independent Chinese entity that distributes its products in China, which practices raise questions under the Foreign Corrupt Practices Act.”

Thereafter, shareholder plaintiffs filed a derivative action alleging that various individual defendants breached fiduciary duties and the plaintiffs also sought enactment of “material enhancements to the Company’s internal controls and corporate governance practices, in particular with regard to, among other things, the Company’s compliance with the FCPA, so that the alleged damage to the Company would not recur.”

Recently, a settlement was reached in the action in which Misonix agreed to the following corporate governance reforms for a minimum period of six years:

In addition, as a condition of settlement, the Misonix Board acknowledges that the derivative action was a material factor in the following enhancements adopted and changes made during the pendency of the action, which the Board has agreed to maintain for at least six (6) years:

As a condition of settlement, the Misonix board also acknowledged that the derivative action was a factor in certain other remedial measures implemented or in the process of implementation, including, but not limited to: (i) certain personnel changes made since the action was commenced; (ii) the termination of Misonix’s agreement with its former independent distributor of the Company’s products in China; and (iii) amendments of distribution agreements with Misonix’s international distributors to ensure compliance with the FCPA, as well as all other applicable laws.

Even though all of the above conditions of settlement have long been associated with FCPA compliance “best practices,” in resolving the matter Misonix has agreed to pay Plaintiffs’ counsel a fee and expense award of $500,000.

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