Potpourri
Wal-Mart Related
Here is what Wal-Mart said in its recent 3Q FY 2015 earnings call.
“FCPA and compliance-related costs were approximately $41 million, which represents approximately $30 million for the ongoing inquiries and investigations and approximately $11 million for our global compliance program and organizational enhancements. Last year, FCPA and compliance-related costs were $69 million for the third quarter. Through the third quarter of this year, we have spent $137 million on FCPA and compliance-related costs, versus our guidance of between $200 and $240 million. We expect to be near the low end of the guidance for the full year.”
Doing the math, that is approximately $640,000 in FCPA-related expenses per working day.
Over the past approximate two years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny. Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.
While $640,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past four quarters have been approximately $662,000, $855,000, $1.1 million and $1.3 million per working day.
In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.
FY 2013 = $157 million.
FY 2014 = $282 million.
FY 2015 (first three quarters) = $137 million.
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Another ripple of FCPA scrutiny and enforcement highlighted in “Foreign Corrupt Practices Act Ripples” is shareholder litigation in connection with FCPA scrutiny.
On that score, plaintiffs firm Robbins Geller Rudman & Dowd LLP recently sued the SEC in federal court seeking certain documents in the SEC’s possession concerning Wal-Mart’s FCPA scrutiny. In the complaint, Robbins Geller alleges that the SEC has improperly denied its Freedom of Information Act document requests. The complaint alleges that the SEC’s reliance on a FOIA exemption concerning documents “compiled for law enforcement purposes” does not apply because the documents sought “were provided by and retained by Walmart, the subject of the SEC investigation, and therefore not “compiled for law enforcement purposes.”
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India’s Economic Times reports:
“The Indian arm of American retail giant Walmart has terminated a mid-level manager amid investigations into alleged violations of U.S. anti-bribery laws in the country. Two years ago, when the company was known as Bharti Wal-Mart, it had sacked its chief financial officer and the entire legal team in connection with the same probe. The mid-level manager, who received a termination notice last week, is also required to be available for questioning by the U.S. Department of Justice in the next five years.”
Petrobras
Petrobras, an oil and gas company in Brazil, has been the focus of much recent news.
Recently, the Financial Times reported that the DOJ and SEC have opened investigations into the company and reported that “U.S. authorities are looking into whether Petrobras or its employees, middlemen, or contractors, violated the FCPA.” It was reported that there is also an open investigation in Brazil and the Financial Times noted that “prosecutors in Brazil allege that Petrobras and its contractors overinflated the cost of capital expenditure projects and acquisitions by hundreds of millions of dollars and paid part of the proceeds to politicians from the ruling Workers’ Party coalition.” According to the Financial Times, the “ruling coalition politicians received 3 percent of all contracts.”
The apparent FCPA scrutiny of Petrobras is interesting on many levels.
For starters, certain FCPA enforcement actions have involved Petrobras employees – not as a payor of alleged improper payments – but as the recipient of alleged improper payments. The enforcement theory of course is that the company making the alleged improper payments violated the FCPA’s anti-bribery provisions because Petrobras was an alleged “instrumentality” of the Brazilian government and thus Petrobras employees were “foreign officials” under the FCPA.
On the flip side of course is the fact that Petrobras has ADRs listed on a U.S. exchange and thus would be considered by the enforcement agencies to be an “issuer” subject to the FCPA.
In short, the enforcement theory that employees of SOEs are “foreign officials” results in an interesting paradox of sorts should there be an FCPA enforcement action against Petrobras as Petrobras employees would have been on “both sides” of the FCPA – an occurrence that has likely never happened before. Taking the enforcement theory to its logical conclusion also means that the U.S. government is apparently investigating whether the Brazilian government has engaged in corruption. A host of legal and policy issues would seem to arise.
Another interesting issue to ponder from Petrobras’s apparent FCPA scrutiny is whether any alleged improper payments by Petrobras – either directly or indirectly through others – to Brazilian officials would truly represent payments to ‘foreign officials.”
As highlighted in this prior post concerning the first FCPA enforcement action against a foreign issuer (albeit not charging violations of the anti-bribery provisions), according to a knowledgeable source at the SEC at the time, there was a belief that there were no “foreign” officials involved because Montedison, an Italian company, allegedly bribed Italian officials.
This dynamic has not been present in other foreign issuer FCPA enforcement actions (for instance Siemens did not allegedly bribe German “officials,” Technip did not allegedly bribe French “officials”, etc.) but would be present in any FCPA enforcement action against Petrobras.
Regarding the potential FCPA scrutiny of Petrobras, it appears that the subject of inquiry concerns potential payments made by third parties on behalf of Petrobras or at least with the knowledge of Petrobras employees. As I indicated to the Wall Street Journal in this story:
“The vast majority of FCPA enforcement actions are indeed based upon indirect payments. If Petrobras paid an inflated amount to a contractor, the questions will be why, were they aware it was inflated, and what steps did they take to remedy the situation, or did they just accept the inflated amount with an inkling or suspicion that it would go somewhere else?”
More recently, the story continues to evolve and as highlighted in this recent Wall Street Journal article:
“Federal police [in Brazil last week] arrested 18 people, including Renato Duque, former director of engineering and services at Petrobras. Authorities allege he and others were part of a bribery and money-laundering scheme that has siphoned hundreds of millions of dollars from the state-owned oil firm into the pockets of employees, contractors and politicians. Police also served dozens of search warrants and raided the offices of 11 companies they suspect of participating in a scam. The companies, which include Brazilian multinationals Odebrecht SA, Camargo Corrêa SA, Construtora OAS SA and others, are suspected of colluding to inflate the costs of work performed for Petrobras. Prosecutors allege some of the resulting profits were funneled to Petrobras executives and high-level politicians, including some members of the president’s ruling Workers’ Party, a charge the party has repeatedly denied.”
As a result of the controversy swirling about the company, Petrobras recently announced that it was “unable to release its third quarter 2014 financial statements at this time.”
Separately, Reuters reported:
“Petrobras said on Monday it had received a subpoena from the U.S. Securities and Exchange Commission asking for documents relating to an investigation it is pursuing. […] Petrobras did not provide details as to what documents the SEC had requested. The company is also under investigation by the U.S. Department of Justice, according to a person familiar with the matter who was not authorized to speak publicly about the matter. […] The U.S. investigation, conducted by both the SEC and the DOJ, is “broad” in nature and has been ongoing since at least the start of 2014, the person said.”
In short, the apparent FCPA scrutiny of Petrobras raises several interesting issues worthy of pondering. Should there be an enforcement action against the company for violating the FCPA’s anti-bribery provisions, it would be historic for the reasons discussed above.
Whistleblower Statistics
The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act. In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement. As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement. So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.
So far, there has not been any whistleblower award in connection with an FCPA enforcement action. Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.
Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress. Recently, the SEC released (here) its annual report for FY2014.
Of the 3620 whistleblower tips received by the SEC in FY2014, 4.4% (159) related to the FCPA. As noted in this similar post from last year, of the 3,238 whistleblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA. As noted in this similar post from 2012, of the 3,001 whistleblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA. In FY2011 (a partial reporting year) 3.9% of the 334 tips received by the SEC related to the FCPA.
Yes, in the future there will be a whistleblower award made in the context of an FCPA enforcement action. Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.” Yet, I stand by my prediction – now 4.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.
Items Of Interest From The Bio-Rad Enforcement Action
This previous post dived deep into the Bio-Rad Laboratories FCPA enforcement action.
This post continues the analysis by highlighting various issues from the enforcement action.
Play On Words
The enforcement action was the result of Bio-Rad’s voluntary disclosure and both the DOJ and SEC were complimentary of the company’s cooperation.
In the words of the DOJ, “that cooperation included voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, and summarizing the findings of its internal investigation. ” Elsewhere the DOJ stated that Bio-Rad translated numerous documents and provided timely reports on witness interviews to the DOJ.
Likewise, the SEC noted that Bio-Rad’s investigation “included over 100 in-person interviews, the collection of millions of documents, the production of tens of thousands of documents, and forensic auditing.”
Against this backdrop, the DOJ’s press release contained a most interesting play of words.
“The department pursues corruption from all angles …” (emphasis added).
“The FBI remains committed to identifying and investigating violations of the FCPA.” (emphasis added).
Bio-Rad’s press release also contained an interesting play on words as well.
As highlighted in several previous posts (see here for instance), the term “declination” is already one of the more amorphous term in the “FCPA vocabulary.”
In a further twist, the company’s press release stated:
“The DOJ declined to prosecute Bio-Rad, and the parties entered into a Non-Prosecution Agreement under which Bio-Rad has agreed to pay a penalty of $14.35 million.” (emphasis added).
A Government Required Transfer of Shareholder Wealth to FCPA Inc?
Bio-Rad was the second FCPA enforcement in the past two weeks – Layne Christensen being the other (see here and here for prior posts).
Both enforcement actions were the result of voluntary disclosures in which the DOJ and/or SEC were complimentary of the company’s internal investigation, remedial actions, and compliance enhancements.
For instance, the DOJ noted that Bio-Rad conducted “an extensive internal investigation in several countries” and noted, among other things, as follows.
“the Company has engaged in significant remedial actions, including enhancing it anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional FCPA compliance procedures, including due diligence and contracting procedures for intermediaries, instituting heightened review of proposals and other transactional documents for all Company contracts … and conducting extensive anti-corruption training throughout the global organization.”
Likewise, the SEC stated, among other things, as follows.
“Bio-Rad also undertook significant and extensive remedial actions including: terminating problematic practices; terminating Bio-Rad employees who were involved in the misconduct; comprehensively re-evaluating and supplementing its anticorruption policies and procedures on a world-wide basis, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing FCPA compliance procedures, including the further development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries and policies concerning hospitality, entertainment, travel, and other business courtesies; and conducting extensive anticorruption training throughout the organization world-wide.”
In the Layne Christensen action, the SEC likewise stated, as other things, as follows.
“Layne Christensen also took affirmative steps to strengthen its internal compliance policies, procedures, and controls. Layne Christensen issued a standalone anti-bribery policy and procedures, improved its accounting policies relating to cash disbursements, implemented an integrated accounting system worldwide, revamped its anti-corruption training, and conducted extensive due diligence of third parties with which it does business. In addition, Layne Christensen hired a dedicated chief compliance officer and three full-time compliance personnel and retained a consulting firm to conduct an assessment of its anti corruption program and make recommendations.”
Nevertheless, both Bio-Rad and Layne Christensen have two-year reporting obligations to the government after the enforcement action.
The following observation is the same as in this prior post.
In situations involving voluntary disclosures where the enforcement agencies are complimentary of the company’s remedial actions and compliance enhancements, such post-enforcement action reporting obligations seem to be little more than a government required transfer of shareholder wealth to FCPA Inc.
Sure, such post-enforcement action reporting obligations give enforcement agency officials something to do and provide even more work for FCPA Inc., but in the situations discussed above, are such post-enforcement action reporting obligations necessary?
Both Bio-Rad’s (see below) and Layne Christensen’s FCPA scrutiny lasted approximately four years from beginning to enforcement action. Tack on two more years of reporting obligations and the result is that these two instances of FCPA scrutiny will have provided FCPA Inc. participants an engagement lasting over six years.
This recent Wall Street Journal article asks “what would get more companies to self-disclose bribery” (a more detailed answer to this question will be explored in a future post).
One answer is to ditch the post-enforcement action reporting obligations in cases where there is a voluntary disclosure and the enforcement agencies are complimentary of the company’s remedial actions and compliance enhancements.
Or perhaps the post-enforcement action reporting requirements do indeed lead to more voluntary disclosures when one considers the important gatekeeper role FCPA counsel often play in such corporate decisions. (See here).
Timeline
As indicated in the resolution documents, Bio-Rad’s initial self-disclosure of potential FCPA violations occurred in May 2010. The length of the company’s FCPA scrutiny – from point of first public disclosure to resolution – thus lasted approximately 4.5 years. (See here for the prior post “The Gray Cloud of FCPA Scrutiny Simply Lasts Too Long”).
5 for 5
In 2014, there have been five SEC corporate FCPA enforcement actions (Bio-Rad, Layne Christensen, Smith & Wesson, Alcoa, and HP). All have been resolved via the SEC’s administrative process.
My recent article, “A Foreign Corrupt Practices Act Narrative,” (see pgs. 991-995) discusses this trend and how it is troubling as it places the SEC in the role of regulator, prosecutor, judge and jury all at the same time. As Judge Rakoff recently observed, “from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”
Here Come the Plaintiffs’ Lawyers
It is as predictable as the sun rising in the east.
No less than 24 hours after release of the Bio-Rad enforcement action documents, plaintiffs’ lawyers began salivating and announcing investigations to determine whether officers and directors of the company breached fiduciary duties owed to shareholders. (See here, here, here, here, here, and here for releases).
Friday Roundup
SEC administrative proceedings, a sorry state of affairs, voluntary disclosure calculus, nice payday but what was really accomplished, and for the reading stack. It’s all here in the Friday roundup.
SEC Administrative Proceedings
A focus on SEC administrative proceedings here at the Wall Street Journal.
“The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges …”
For discussion of this dynamic in the FCPA context, see my article “A Foreign Corrupt Practices Act Narrative” (pgs. 991-995).
“SEC administrative settlements, as well as SEC DPAs and NPAs, place the SEC in the role of regulator, prosecutor, judge and jury all at the same time and a notable feature from 2013 SEC FCPA corporate enforcement is that 4 (1 NPA and 3 administrative orders) of the 8 corporate enforcement actions (50%) were not subjected to one ounce of judicial scrutiny.”
In 2014, there have been three SEC corporate FCPA enforcement actions (Smith & Wesson, Alcoa, and HP). All have been resolved via the SEC’s administrative process.
Sorry State of Affairs
It really is a sorry state of affairs when former government enforcement attorneys go into private practice and then criticize the current enforcement climate that they helped create. For more on this dynamic in the FCPA context, see this prior post “A Former Enforcement Official Is Likely To Say (Or Has Already Said) The Same Thing.”
Albeit outside the FCPA Context, this ProPublica article, “In Turnabout, Former Regulators Assail Wall St. Watchdogs,” touches on the same general issue.
“Last week, I visited an alternate universe. The real world sees a pandemic of bank misconduct, but to the white-collar defense lawyers of Washington, the banks are the victims as they bow beneath the weight of regulators’ remarkably harsh punishments.
I was attending the Securities Enforcement Forum, a gathering of top regulators and white-collar defense worthies. The marquee section was a panel that included Andrew Ceresney, the current enforcement director of the SEC, and five of his predecessors. Four of those former S.E.C. officials represent corporations at prominent white-collar law firms. […] The conference turned into a free-for-all of high-powered and influential white-collar defense lawyers hammering regulators on how unfair they have been to their clients, some of America’s largest financial companies.
[…]
This is how power and influence work in Washington. Former top officials, whose portraits mount the walls, weigh in on matters of enforcement. Now working for the private sector, they assail the regulatory “overreach.” Sincerely held or self-serving, these views carry weight in Washington’s clubby legal milieu.
[…]
Former regulators are the mouthpieces. And given what they say in public, one can only imagine what is happening behind closed doors.”
Voluntary Disclosure Calculus
At the Corporate Crime Reporter, Laurence Urgenson (Mayer Brown) talks about, among other topics, voluntary disclosure.
“Voluntary disclosure is still an important option in dealing with FCPA risk,” Urgenson said. “It used to be the default position — people had a predisposition toward it. It’s moved from the default position to one taken only after a clear-eyed case by case analysis of the benefits and the costs.” “That’s because the benefits and costs of voluntary disclosure have shifted. Part of that is the result of globalization. Part of it has to do with the increased penalties.” “It used to be that the Department of Justice and the SEC could provide companies with one stop shopping. If you volunteered to the Department and SEC, and you settled the matter, you had finality.” “That was a big benefit of the voluntary disclosure process. Now, because in part of the high penalties and globalization, the Department and SEC resolution can be the first stop in a long journey, which includes dealing with law enforcement authorities around the world, dealing with NGOs such as the World Bank which has an enforcement process, and navigating the risks of civil litigation.” “Once the Department of Justice resorted to the alternative fine provisions, which greatly increases the potential fines and once the SEC began to use the disgorgement remedy, FCPA settlements became much more costly, so much so that they could affect the stock price and provoke civil actions.” “You really have to sit down with the client and look at the list of pluses and minuses to voluntary disclosure. You have to go through with the client the long list of things that follow from voluntary disclosure.”
Nice Payday But What Was Really Accomplished?
As highlighted in this Law360 article:
“Alcoa Inc. shareholders on Monday asked a Pennsylvania federal judge to approve a settlement between shareholders and the board over allegations that the company paid hundreds of millions of dollars in illegal bribes to government officials in Bahrain. The proposed agreement states that aluminum producer Alcoa “has adopted or will adopt” compliance reforms that include the creation of a chief ethics and compliance officer, an officer-level position that oversees the ethics and compliance program, enhancements to the program that include the development of an anti-corruption policy, and implementation of Alcoa’s due diligence and contracting procedure for intermediaries.
[…]
The proposed settlement also provides that there be a reorganization of Alcoa’s regional and local counsel reporting structure, enhanced mandatory annual Foreign Corrupt Practices Act and employee anti-corruption training, improvements to its business expense policies, and enhancements to its compliance policies for evaluating the effectiveness of preventing corruption.
In addition, the company has agreed to pay $3.75 million to the plaintiffs’ counsel.
Alcoa admits no wrongdoing or liability under the terms of the proposed agreement.”
The issue is the same as highlighted in this prior post – nice payday, plaintiffs’ lawyer,s but what was really accomplished?
In connection with the January 2014 FCPA enforcement action against Alcoa World Alumina, Alcoa basically agreed to the same thing it agreed to do in the above settlement. (See here at Exhibit 4).
Reading Stack
A review of my book, “The Foreign Corrupt Practices Act in a New Era” published at International Policy Digest by John Giraudo (of the Aspen Institute and formerly a chief compliance officer). It begins:
“If you care about the rule of law, The Foreign Corrupt Practices Act in the New Era by Mike Koehler, is one of the most important books you can read—to learn how it is being eroded. Professor Koehler’s book … is a must read for people who care about law reform. It is a story of how a good law, the US Foreign Corrupt Practices Act, a criminal law that prevents companies from bribing foreign government officials has been misapplied in recent enforcement actions by the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC).”
Miller & Chevalier’s FCPA Autumn Review 2014 is here.
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A good weekend to all.
FCPA-Related Securities Fraud Claims Against Avon And Former Executives Dismissed … Securities Fraud Claims Against Wal-Mart And Former CEO Go Forward
As highlighted in “Foreign Corrupt Practices Act Ripples,” although courts have held that the FCPA does not provide a private right of action, plaintiffs’ lawyers representing shareholders often target directors and executive officers of companies subject to FCPA scrutiny with civil suits alleging, among other things, breach of fiduciary duty or securities fraud.
Such claims often follow a predictable pattern. In the days and weeks following an FCPA enforcement action, or even a company disclosing or otherwise being the subject of FCPA scrutiny, purported investigations are launched by plaintiffs’ firms representing shareholders and lawsuits often begin to rain down on the company, its board of directors or executive officers.
Even though such claims rarely survive the motion to dismiss stage, opportunistic plaintiffs’ counsel continue to bring such claims in what is viewed by many as a parasitic attempt to feed off of FCPA scrutiny and enforcement.
The securities fraud lawsuit against Avon Products and Andrea Jung (former Chief Executive Officer) and Charles Cramb (former Chief Financial Strategy Officer) was less worse than a typical suit, yet nevertheless suffered a similar fate.
Earlier this week, Judge Paul Gardephe (S.D.N.Y.) dismissed the claims.
The putative class action was brought on behalf of purchasers of Avon’s stock between July 2006 and October 2011 and the complaint alleged that Avon, Jung and Cramb issued materially false and misleading statements concerning Avon’s compliance with the FCPA in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
The factual portion of the opinion no doubt foreshadows the likely facts to be alleged in Avon’s upcoming FCPA enforcement action – namely that Avon allegedly made improper payments in connection to obtain Chinese government approval to engage in direct selling.
The plaintiffs alleged a variety of false and misleading statements.
As to general statements in Avon’s ethics codes and corporate responsibility reports, the court ruled (consistent with prior courts) that general statements proclaiming compliance with ethical and legal standards are not material and thus not actionable. In the words of the court:
“[A] reasonable investor would not rely on the statements … as a guarantee that Avon would, in fact, maintain a heightened standard of legal and ethical compliance. The … statements from the Ethics Codes and the Corporate Responsibility Reports offer no assurance that Avon’s compliance efforts will be successful, and do not suggest that Avon’s compliance systems give the Company a competitive advantage over other companies. Instead, these statements merely set forth standards in generalized terms that Avon hoped its employees would adhere to. Such statements are not material.”
The court did conclude that other statements in Avon’s Corporate Responsibility Report addressing concrete steps that Avon has taken to ensure the integrity of its financial reporting were material, but nevertheless dismissed claims relating to those statements on other grounds such as lack of scienter.
Plaintiffs also alleged that a variety of statements concerning Avon’s business success were false and misleading “because they did not attribute Avon’s success to the bribery of foreign officials or disclose the significant risk that, once the full extent of Avon’s illegal practices become known, the Company would be exposed to criminal and regulatory investigations, significant damage to reputation, and other losses and costs.”
As to these various statements, the court concluded that such statements could be construed as misleading – and thus actionable – but nevertheless concluded that the plaintiffs failed to plead facts sufficient to give rise to a strong inference that the defendants acted with scienter in making such statements.
In pertinent part, the court concluded that “generalized allegations founded solely on an individuals’ corporate position are not sufficient to demonstrate scienter.” Elsewhere, the court stated that “Avon’s voluntary disclosure of alleged FCPA violations .. weigh against a finding of scienter.”
Another set of plaintiffs’ allegations concerned a whistleblower letter allegedly received by Jung and how this letter allegedly gave rise to a strong inference of scienter that Jung knew of bribery allegations in its China business operations. However, the court rejected this claim and cited other court decisions standing for the proposition that “defendants are permitted a reasonable amount of time to evaluate potentially negative information and to consider appropriate responses before a duty to disclose arises.”
While the above Avon FCPA-related civil suit was dismissed, not all suits are dismissed.
Recently, in this decision, U.S. District Judge Susan Hickey (W.D. Ark.) adopted a previous magistrate judge’s recommendation denying Wal-Mart and former CEO Michael Duke’s motion to dismiss securities fraud class action claims arising from the company’s FCPA scrutiny.
In pertinent part, the plaintiffs allege that Wal-Mart’s December 2011 FCPA disclosure (see here for prior coverage) deceived the investing public by omitting the fact that Wal-Mart learned of suspected corruption in 2005 and conducted an internal investigation in 2006 (“2005-2006 events”).
According to Plaintiff, the statement was misleading because it could have left investors with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, promptly began an investigation, and then referred the matter to the DOJ and SEC.
The court agreed with the prior magistrate judge’s recommendation that Plaintiff sufficiently alleged that Defendants’ omission from their 2011 statement of the 2005-2006 events renders that statement materially misleading to a reasonable investor. According to the court, the magistrate judge “correctly noted that, without any reference to the 2005 and 2006 events, a reasonable investor could have been left with the impression that Defendants first learned of the suspected corruption in fiscal year 2012, which prompted their investigation and self-reporting to the SEC and DOJ.”
In short, the Court agreed with the magistrate judge “that it is likely that the disclosure of the 2005-2006 events would have been viewed by a reasonable investor as having significantly altered the total mix of information available.”
In the words of the court:
“[The magistrate judge] correctly identified that the issue here is whether Defendant omitted a material fact from the December 2011 statement. She then found that the statement, because of the omission, could have left a reasonable investor with the impression that Defendants first learned of the suspected corruption during fiscal year 2012—an impression that would be untrue. The Court agrees with [the magistrate judge’s] conclusion that Plaintiff sufficiently alleges an actionable materially misleading statement.”
As to scienter, the court stated:
“Here, [the magistrate judge] found that Plaintiff sufficiently alleges that when Defendants made the December 2011 statement, they knew certain facts or had access to information suggesting that this statement was not entirely accurate. Plaintiff allege that, in October 2005, a top Wal-Mart attorney gave a detailed description of the suspected corruption allegations to Duke and that Duke rejected calls for a legitimate independent investigation in 2006 and instead assigned the investigation to the very office implicated in the corruption scheme. Plaintiff further alleges that Wal-Mart recognized the materiality of the 2005-2006 events because it reported these events in a June 2012 form.
Plaintiff also alleges that Defendants knew that the omission in the December 2011 statement of the 2005-2006 events was materially misleading. The information that Defendants consciously chose to omit include facts about when and how Defendants first learned of the suspected corruption and how they first responded to these allegations. It was only after the New York Times article was published that Defendants acknowledged that the suspected corruption was the subject of allegations in 2005 and that there were questions about how Defendants handled these allegations in 2005-2006. Plaintiff alleges that this shows that Defendants were concerned about exposure of their alleged mishandling of the suspected corruption. The inference that Defendants intentionally omitted certain information is just as strong, if not stronger, than any competing plausible inference. The Court agrees with [the magistrate judge’s] straightforward reasoning and conclusion that Plaintiff sufficiently alleges allegations that both Defendants acted with the requisite scienter.”
Second Circuit – “There Is No Private Right Of Action Under The Antibribery Provisions Of The FCPA”
In a September 18th decision, the Second Circuit concluded in Republic of Iraq v. ABB et al that “there is no private right of action under the antibribery provisions of the FCPA.”
The FCPA issue was a minor component of the Second Circuit’s decision in the long-running civil RICO case in which Iraq sought recovery from a long list of defendants for their “alleged conspiracy with Iraq’s then-president Saddam Hussein and Iraq’s ministries to corrupt and plunder the Oil-for-Food Program, an international humanitarian program administered by the United Nations during the final years of Hussein’s rule.” As to the primary RICO claim, the Second Circuit affirmed the trial court’s dismissal of the claim on the grounds that, among other things, the plaintiff was in pari delicto with defendants.
Notwithstanding the fact that previous FCPA enforcement actions concerning the Oil for Food Program were largely books and records and internal controls cases only because the alleged bribe payments went to the government, not a particular foreign official as required under the anti-bribery provisions, and notwithstanding the fact that Iraq was a unique plaintiff to say the least, it nevertheless brought FCPA claims against the defendants on the theory that the FCPA allowed for a private right of action.
As to this issue, the Second Circuit stated – in full – as follows.
“The Amended Complaint alleged that the surcharges and kickbacks paid by the Vendor and Oil Purchasing Defendants violated the antibribery provisions of the FCPA. The Republic contends that the district court should have recognized an implied private right of action for violations of those provisions despite a consistent line of cases holding to the contrary. The Republic is particularly critical of Lamb v. Phillip Morris, Inc., 915 F.2d 1024 (6th Cir. 1990) (“Lamb”), cert. denied, 498 U.S. 1086 (1991), the leading case declining to recognize such a cause of action. The Republic argues that Lamb erred in its analysis of the legislative history of the FCPA and that that history suggests that the reason Congress did not expressly provide for a private right of action was to avoid creating a “negative inference” that would dissuade judicial recognition of implied private rights of action under other provisions of the Securities Exchange Act of 1934, to which the FCPA was an amendment. We are unpersuaded.
“[P]rivate rights of action to enforce federal law must be created by Congress.” Alexander v. Sandoval, 532 U.S. 275, 286 (2001) (“Sandoval”). A federal statute may create a private right of action either expressly or, more rarely, by implication. In considering whether a statute confers an implied private right of action, “[t]he judicial task is to interpret the statute Congress has passed to determine whether it displays an intent to create not just a private right but also a private remedy.” Id. To discern Congress’s intent, “we look first to the text and structure of the statute.” Lindsay v. Association of Professional Flight Attendants, 581 F.3d 47, 52 (2d Cir. 2009), cert. denied, 11 130 S. Ct. 3513 (2010). To “illuminate” this analysis, id. at 52 n.3, we also consider factors enumerated in Cort v. Ash, 422 U.S. 66 (1975), which include the following:
First, is the plaintiff one of the class for whose especial benefit the statute was enacted, . . . –that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? . . . . Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? Id. at 78 (emphasis in Cort v. Ash) (internal quotation marks omitted). In our analysis, we are mindful that “the Supreme Court has come to view the implication of private remedies in regulatory statutes with increasing disfavor.” Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 618 (2d Cir. 2002).
The antibribery provisions of the FCPA prohibit certain entities and persons from, inter alia, corruptly making payments to foreign officials for the purpose of influencing official action in order to obtain business. See 15 U.S.C. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a). The text of the statute contains no explicit provision for a private right of action, although it does provide for civil and criminal penalties, see id. §§ 78dd-2(g), 78dd-3(e), 78ff(c), and permits the Attorney General to seek injunctive relief, see id. §§ 78dd-2(d), 78dd-3(d). Because “[t]he express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others,” Sandoval, 532 U.S. at 290, the structure of the statute, by focusing on public enforcement, tends to indicate the absence of a private remedy.
The Cort v. Ash factors also do not support recognition of a private right. The statute’s prohibitions focus on the regulated entities; the FCPA contains no language expressing solicitude for those who might be victimized by acts of bribery, or for any particular class of persons. “Statutes that focus on the person regulated rather than the individuals protected create no implication of an intent to confer rights on a particular class of persons.” Sandoval, 532 U.S. at 289 (internal quotation marks omitted).
Nor does the legislative history of the FCPA demonstrate an intention on the part of Congress to create a private right of action. As discussed in Lamb, 915 F.2d at 1029, a bill introduced by Senator Church in the 94th Congress included an express right of action for competitors of those who bribed foreign officials, see S. 3379, 94th Cong. § 10, 122 Cong. Rec. 12,605, 12,607 (1976); that provision, however, was deleted by a committee of the Senate, see S. Rep. No. 94-1031, at 13 (1976).
In the 95th Congress, which finally enacted the FCPA, a committee of the House of Representatives, in reporting out a bill that did not provide expressly for a private right of action, made a statement that the House “Committee intends that the courts shall recognize a private cause of action based on this legislation . . . on behalf of persons who suffer injury as a result of prohibited corporate bribery,” H.R. Rep. No. 95-640, at 10 (1977). We have three main problems with the Republic’s reliance on this statement, and other aspects of the FCPA’s legislative history, as justification for judicial implication of a private right of action in its favor
First, the House committee’s statement was not repeated (and no endorsement of its substance was in any way suggested) in the reports of either the Senate committee considering the FCPA or the conference committee that reconciled the views of the House and Senate to produce the language of the FCPA as it was ultimately enacted. See S. Rep. No. 95-114 (1977); H.R. Rep. 95-831 (1977). Indeed, in the debate on the conference committee report, one conferee stated that the question of whether “courts will recognize [an] implied private right of action . . . . was not considered in the Senate or during the conference, and thus [it] cannot be said that any intent is expressed at all on this issue.” 123 Cong. Rec. 38,601, 38,602 (1977) (statement of Sen. Tower) (emphasis added).
Second, although the legislative history contains additional references to the desirability of a private right of action, they do not provide any clear indication of congressional intent to create one. See generally Siegel, The Implication Doctrine and the Foreign Corrupt Practices Act, 79 Colum. L. Rev. 1085, 1105-12 (1979) (canvassing the legislative history in detail and finding “no conclusive evidence of congressional intent to grant private actions”).
Third, we note that this case illustrates the wisdom of Lamb, which avoids the question of what class of parties the FCPA was designed to protect. Although we agree that the statute was “primarily designed to protect the integrity of American foreign policy and domestic markets,” Lamb, 915 F.3d at 1029, one might argue that it is principally the foreign governments whose processes might be corrupted. The Republic’s claim highlights the obvious problem with the latter concern here: The foreign government supposedly to be “protect[ed]” by the FCPA was the entity that demanded the bribes in the first place.
Finally, we note that although it has been nearly a quarter of a century since Lamb was decided, and although Congress has more recently amended the FCPA, see International Anti-Bribery and Fair Competition Act of 1998, Pub. L. No. 105-366, 112 Stat. 3302 (1998), Congress has not chosen to override Lamb. We conclude that there is no private right of action under the antibribery provisions of the FCPA and that the district court did not err in dismissing the Republic’s FCPA claims.”
As indicated in the Second Circuit’s decision, there have been previous appellate court decisions addressing whether the FCPA has a private right of action. As highlighted in this prior post, the Sixth Circuit addressed the issue in Lamb v. Phillip Morris Inc., 915 F.2d 1024 (6th Cir. 1990). The primary reason articulated by the court for declining a private right of action was something that never happened – at least until 2012 when the DOJ/SEC issued FCPA Guidance. The Sixth Circuit stated:
“Recognition of the plaintiffs’ proposed private right of action, in our view, would directly contravene the carefully tailored FCPA scheme presently in place. Congress recently expanded the Attorney General’s responsibilities to include facilitating compliance with the FCPA. See 15 U.S.C. §§ 78dd-1(e), 78dd-2(f). Specifically, the Attorney General must ‘establish a procedure to provide responses to specific inquiries’ by issuers of securities and other domestic concerns regarding ‘conformance of their conduct with the Department of Justice’s [FCPA] enforcement policy….’ 15 U.S.C. §§ 78dd-1(e)(1), 78dd-2(f)(1). Moreover, the Attorney General must furnish ‘timely guidance concerning the Department of Justice’s [FCPA] enforcement policy … to potential exporters and small businesses that are unable to obtain specialized counsel on issues pertaining to [FCPA] provisions.’ 15 U.S.C. §§ 78dd-1(e)(4), 78dd-2(f)(4). Because this legislative action clearly evinces a preference for compliance in lieu of prosecution, the introduction of private plaintiffs interested solely in post-violation enforcement, rather than pre-violation compliance, most assuredly would hinder congressional efforts to protect companies and their employees concerned about FCPA liability.”
Prior to Lamb, the Fifth Circuit addressed a private right of action, albeit in dicta, in McLean v. Int’l Harvester Co., 817 F.2d 1214 (5th Cir. 1987). The court stated: “we find it inappropriate to imply a private cause of action from the statute. The statute on its face shows no congressional intent to create a private action. Moreover, no legislative history exists referring to such an intent.” This last sentence is obviously false given the legislative history discussed in the recent Second Circuit opinion.
In short, the three appellate court decisions that address an FCPA private right of action are either: (1) based on a false premise (McLean); (2) based on a false premise at the time (Lamb); or (3) involved a unique and odd plaintiff.
An FCPA private right of action does warrant further consideration.
At the very least, this much should be undisputed: if there was an FCPA private right of action, there would be substantially more case law of precedent concerning the FCPA’s provisions than currently exists and that, I submit, would be a good thing.
Contrary to the Second Circuit’s statement, courts have inferred private rights of action in several provisions of the ’34 Act (see e.g., J.I. Case v. Borak, 377 U.S. 426 (1964)) and the FCPA is after all part of the ’34 Act. Moreover, several of the Cort v. Ash factors for implying a private of right would seem to be met in the FCPA context. Among the reasons Congress passed the FCPA was to level the playing field given how the discovered foreign corporate payments distorted free and fair competition. Moreover, the SEC itself has said on numerous occasions that FCPA enforcement is central to its mission of investor protection. An FCPA private right of action would further seem to be consistent with the underlying premise of the FCPA which is to reduce foreign bribery. Finally, “regulation of bribery directed at foreign officials cannot be characterized as a matter traditionally relegated to state control,” as even the Lamb court recognized.
As highlighted in prior posts here, here and here, for several years U.S. Representative Ed Perlmutter (D-CO) consistently introduced the “Foreign Business Bribery Prohibition Act” which would have provided for a limited private right of action under the FCPA. The bills never made it out of committee.