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Ericsson “Ripple Effects”

Ripple

Prior posts hereherehere, and here covered the 2019 Foreign Corrupt Practices Act enforcement action against Ericsson resolved through a deferred prosecution agreement; how the DOJ in 2021 accused Ericsson of breaching its DPA obligations; recent reports suggesting that “Ericsson may have made payments to the ISIS terror organization to gain access to certain transport routes in Iraq;” and the recent release by the International Consortium of Investigative Journalists of the “Ericsson List.”

As highlighted here, most recently Ericsson disclosed: “On March 1, 2022, the DOJ informed Ericsson that the disclosure made by the company prior to the DPA about its internal investigation into conduct in Iraq in the period 2011 until 2019 was insufficient. Furthermore, it determined that the company breached the DPA by failing to make subsequent disclosure related to the investigation post-DPA.”

This post highlights certain ripple effects from the recent activity.

As sure as the sun rises in the east and dogs bark, lawyers representing shareholders are circling and recently this securities fraud class action complaint was filed against Ericsson. In summary fashion it alleges:

“This is a federal securities class action on behalf of a class consisting of all persons and entities other than Defendants that purchased or otherwise acquired Ericsson securities between April 27, 2017 and February 25, 2022, both dates inclusive (the “Class Period”), seeking to recover damages caused by Defendants’ violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, against the Company and certain of its top officials.

Ericsson, together with its subsidiaries, provides communication infrastructure, services, and software solutions to the telecommunications and other sectors. The Company operates in, among other countries, the Republic of Iraq (“Iraq”).

Ericsson has a well-documented history of using bribes to secure business in countries throughout the Middle East and Asia. For example, in December 2019, Ericsson was the subject of an SEC action alleging, among other things, that the Company used third party consultants and illicit payments from 2011 through early 2017 to access business in Djibouti, Saudi Arabia, and China. The Company also entered into a Deferred Prosecution Agreement (“DPA”) with the U.S. Department of Justice (“DOJ”) the same month for its illicit business dealings.

Following the foregoing regulatory enforcement actions—which resulted in Ericsson being fined over $520 million and nearly $540 million by the DOJ and SEC, respectively—Ericsson repeatedly assured investors that the Company had a “zero tolerance” stance for bribery and was making significant investments in related programs. For example, in a December 2019 press release, the Company asserted that it was “[e]nhancing . . . internal anticorruption and compliance related awareness campaigns (including the Company’s zero tolerance for corruption).” Likewise, in its 2019 annual report, the Company asserted that it has “zero tolerance for corruption” and “work[s] hard every day to build a culture of compliance, anchored securely within the organization, to ensure that such an event will never happen again.”

Throughout the Class Period, Defendants made materially false and misleading statements regarding the Company’s business, operations, and compliance policies. Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (i) Ericsson overstated the extent to which it had reformed its business practices to eliminate the use of bribes to secure business in foreign countries; (ii) Ericsson had paid bribes to the terrorist group the Islamic State in Iraq and Syria (“ISIS” or the “Islamic State”) to gain access to certain transport routes in Iraq; (iii) accordingly, the Company’s revenues derived from its operations in Iraq were, in at least substantial part, derived from unlawful conduct and thus unsustainable; and (iv) as a result, the Company’s public statements were materially false and misleading at all relevant times.

On February 15, 2022, during intraday trading hours, Ericsson issued a press release disclosing media inquiries into its business dealings in Iraq. That press release assured investors of the Company’s “transparency” regarding these inquiries, while vaguely alluding to having undertaken its own investigative and compliance efforts.

Then, on February 16, 2022, Ericsson’s Chief Executive Officer (“CEO”) told a Swedish newspaper that the Company may have made payments to ISIS to gain access to certain transport routes in Iraq, noting that the Company had identified “unusual expenses dating back to 2018” but had not yet determined the final recipient of the funds for those expenses, although Defendants could “see that it disappeared[,]” and that Ericsson has spent “considerable resources trying to understand this as best we can.”

Following these disclosures, Ericsson’s American Depositary Share (“ADS”) price fell $1.44 per ADS, or 11.57%, to close at $11.01 per ADS on February 16, 2022.

Finally, on Sunday, February 27, 2022, the International Consortium of Investigative Journalists (“ICIJ”) published a report on Ericsson’s alleged dealings with ISIS in Iraq, citing a leaked internal investigation that revealed that Ericsson had reportedly made “tens of millions of dollars in suspicious payments” over nearly a decade to keep its business in the country. The ICIJ report also alleged that “a spreadsheet lists company probes into possible bribery, money laundering and embezzlement by employees in Angola, Azerbaijan, Bahrain, Brazil, China, Croatia, Libya, Morocco, the United States and South Africa[,]” which “have not been previously disclosed.”

On this news, Ericsson’s ADS price fell $0.84 per ADS, or 8.3%, from its closing price on February 25, 2022, to close at $9.28 per ADS on February 28, 2022, the next trading day.

As a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the Company’s securities, Plaintiff and other Class members have suffered significant losses and damages.”

As reported here:

“A Swedish activist investor called on Ericsson AB to revamp its corporate governance structure on Friday, after federal prosecutors rebuked the telecommunications equipment maker for failing to disclose potential terrorism financing in Iraq.

Weeks before Ericsson will elect a new board of directors during its annual shareholder meeting, Cevian Capital submitted a list of proposals aimed at cleaning up Ericsson’s reputation after federal prosecutors found that Ericsson violated a 2019 deferred prosecution agreement by failing to sufficiently disclose an internal investigation into its Iraq business.

Cevian, whose senior partner, Jonas Synnergren, sits on the five-member committee that will nominate Ericsson’s new board, said in a Friday statement that Ericsson’s top internal auditor must report its work directly to the board of directors, not to company management. The company must also make public all information concerning its corruption investigations, with very limited exceptions, Cevian said.

“While we do not question the good intentions of Ericsson’s board and management team to grapple with this, it is clear that significant change is needed,” the statement said.”

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