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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.”

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