500.com is an online gaming company incorporated in the Cayman Islands with principal executives offices in China and shares traded on the New York Stock Exchange.
In a securities fraud class action lawsuit, investors claimed that the company and certain of its executives “made false statements, misrepresentations, and omissions in various SEC filings after paying bribes of millions of yen to government officials in Japan for the purpose of securing a lucrative license to operate a casino.” Specifically, the plaintiffs alleged that the company paid Tsukaka Akimoto, a member of Japan’s legislature who was in charge of awarding licenses to run integrated resorts, approximately 7.6 million yen which came in the form of compensation for speaking at a 500.com symposium, elaborate trips, and other gifts. Plaintiffs also alleged that 500.com paid bribes to five members of Japan’s parliament in exchange for preferential treatment related to the integrated resorts the licenses which totaled approximately 5 million yen.
In its civil complaint alleging violations of the Section 10(b) and Rule 10b-5 the plaintiffs alleged, among other things. that 500.com’s Code of Business Conduct and Ethics, as contained in both its 2017 and 2018 Form 20-F filings, was materially false or misleading or omitted material facts for five reasons: (1) 500.com was not committed to conducting its business in accordance with “all applicable laws” because it authorized bribes to be paid in contravention of the Code; (2) “500.com did not obligate its employees to comply with the laws covering bribery or kickbacks because Defendants knew about or recklessly disregarded the payment of bribes to government officials;” (3) 500.com and its executives engaged in an unlawful bribery scheme which subjected the Company to criminal and civil exposure as well as reputational damage; (4) 500.com authorized and made multiple cash payments to public officials to secure illegal favors for its Japan casino bid; and (5) none of 500.com’s employees obtained waivers to the Code that were disclosed.
However, in recommending dismissal of the complaint Magistrate Judge Kathleen Tomlinson stated:
“500.com’s Code is purely forward looking. 500.com’s Code states that executives and employees “should strive” to comply with the law and are obligated to comply with the laws, rules, and regulations applicable to 500.com’s operations. In particular, the Code provides that “[f]ailure to comply with applicable laws and regulations can result in civil and criminal liability against you and the Company, as well as disciplinary action by the Company against you, including termination of employment.”
For this reason, the judge found that 500.com’s Code of Business Conduct and Ethics was not actionable and recommended dismissal of Plaintiffs’ Section 10(b) claim to the extent it is based upon statements contained within the Code.
