This prior post covered the 2019 Foreign Corrupt Practices Act enforcement action against Ericsson. The enforcement action concerned conduct in Djibouti, China, Vietnam, Kuwait, Indonesia, and Saudi Arabia and included a DOJ and SEC component. The DOJ matter involved a one count criminal information against Ericsson subsidiary Ericsson Egypt Ltd. charging conspiracy to violate the FCPA’s anti-bribery provisions resolved through a plea agreement and a criminal information against Ericsson charging conspiracies to violate the FCPA’s anti-bribery, books and records, and internal controls provisions resolved through a deferred prosecution agreement. The DOJ matter was resolved through payment of a $520 million criminal penalty.
As highlighted in this prior post, in 2021 the DOJ suggested that Ericsson was in breach of its DPA obligations and in March 2023 the DOJ announced that “Ericsson has agreed to plead guilty and pay a criminal penalty of more than $206 million after breaching a 2019 Deferred Prosecution Agreement (DPA).” (See here for the prior post).
In between, reports suggested that “Ericsson may have made payments to the ISIS terror organization to gain access to certain transport routes in Iraq.” (See here for the prior post).
As sure as the sun rises in the east and dogs bark, investors brought a securities fraud class action in related to the above events.
In mid-2023, Judge William Kuntz (E.D.N.Y.) dismissed the action (see here for the prior post).
On appeal, the Second Circuit recently affirmed the dismissal (See 2024 WL 4023842).
The decision begins with the following background.
“Plaintiff-Appellant Boston Retirement System (“BRS”) appeals from the district court’s judgment dismissing the putative class action it brought against Defendants-Appellees Telefonaktiebolaget LM Ericsson (“Ericsson”), Borje Ekholm, Carl Mellander, and Xavier Dedullen (collectively, “Defendants”). BRS asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and Securities and Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. As relevant here, the claims relate to allegations that Defendants made false and misleading statements about Ericsson’s anti-corruption policies and controls, as well as its resolution of investigations conducted by the United States government, while concealing its allegedly corrupt business practices in Iraq.
…
Ericsson is a Swedish telecommunications company that provides hardware, software, and information technology services to customers in over 180 countries around the globe. In 2016, Ericsson disclosed that the United States Department of Justice (the “DOJ”) and the SEC had launched investigations into Ericsson’s potential violations of the Foreign Corrupt Practices Act (“FCPA”). On December 6, 2019, the DOJ announced that Ericsson had entered into a deferred prosecution agreement (the “DPA”) with the DOJ and a settlement agreement with the SEC, and that those resolutions were made in connection with FCPA violations in “at least five countries.” As part of the DOJ settlement, Ericsson’s Egyptian subsidiary agreed to plead guilty to conspiracy to violate the FCPA’s anti-bribery provisions, and Ericsson admitted to participating in the charged conspiracy. Ericsson explained in a press release that, pursuant to the DPA, it had “agreed to engage an independent compliance monitor for a period of three years while the Company continues to undertake significant reforms to strengthen its Ethics & Compliance program.” The DPA provided that the monitorship would “reduce the risk of misconduct,” given that “[Ericsson] ha[d] not yet fully implemented or tested its compliance program.” Ericsson further agreed that, for the duration of the DPA’s term, it would report to the DOJ “any evidence or allegation of conduct that may constitute a violation of the FCPA anti-bribery or accounting provisions.”
Several years later, on February 15, 2022, Ericsson issued a press release in response to media inquiries, stating that, in 2019, it had initiated an internal investigation covering the period of 2011 through 2019 of Ericsson employees, vendors, and suppliers, that was triggered by “[u]nusual expense claims in Iraq.” Ericsson reported that its internal investigation, which was supported by external legal counsel, “found serious breaches of compliance rules and the Code of Business Ethics” and “corruption-related misconduct” in Iraq, including, inter alia, “payments to intermediaries and the use of alternate transport routes in connection with circumventing Iraqi Customs, at a time when terrorist organizations, including ISIS, controlled some transport routes.” Ericsson further reported that “[i]nvestigators could not determine the ultimate recipients of these payments,” but “[t]he investigation could not identify that any Ericsson employee was directly involved in financing terrorist organizations.”
On March 2, 2022, Ericsson issued another press release announcing that, one day earlier, the DOJ informed Ericsson that its disclosure to the DOJ “prior to the DPA about its internal investigation into conduct in Iraq in the period 2011 until 2019 was insufficient,” and that Ericsson had “breached the DPA by failing to make subsequent disclosure related to [its Iraq] investigation post-DPA.” On March 2, 2023, Ericsson agreed to plead guilty to the same FCPA violations to which it previously admitted in the DPA concerning countries other than Iraq, in order to resolve the DOJ’s determination that Ericsson breached the DPA based, in part, on the inadequate disclosure to the DOJ regarding Ericsson’s internal Iraq investigation.
BRS brought this federal securities class action on behalf of a putative class of investors who acquired Ericsson’s American Depository Shares between April 27, 2017 and March 1, 2022. The amended complaint alleges that Defendants, while concealing Ericsson’s corrupt business practices in Iraq, made false and misleading statements to investors relating to: (1) the source of Ericsson’s strong growth in business in the Middle East (the “Middle East Growth Statements”); (2) the strength of its compliance programs (the “Anti-Corruption Policy Statements”); and (3) its entry into the DPA and purported resolution of the DOJ’s investigation into its business practices (the “FCPA Statements”).
The district court granted Defendants’ motion to dismiss all of the claims asserted in the amended complaint under Federal Rule of Civil Procedure 12(b)(6). See In re Telefonaktiebolaget LM Ericsson Sec. Litig., 675 F. Supp. 3d 273, 300 (E.D.N.Y. 2023). The district court held that BRS failed to plead actionable misrepresentations or omissions with respect to its Section 10(b) and Rule 10-5 claims. In the alternative, the district court concluded that BRS did not sufficiently plead scienter or the requisite loss causation with respect to those claims. Finally, because it had concluded that there was no primary Section 10(b) violation, the district court found that there could be no control person liability under Section 20(a) of the Exchange Act and, thus, also dismissed that claim. This appeal followed.”
On appeal, BRS did not challenge the dismissal of its claims relating to the Middle East Growth Statements and thus the Second Circuit analyzed only the claims related to the Anti-Corruption Policy Statements and the FCPA Statements.
The opinion states (certain internal citations omitted):
“The Anti-Corruption Policy Statements
BRS challenges the district court’s dismissal with respect to the Anti-Corruption Statements made by Ericsson between 2016 and 2018, which related to Ericsson’s policies regarding compliance, ethics, and other anti-corruption measures that it was working to improve. The district court held that “[these] compliance- and policy-related statements are unactionable both because of their generality and because [Ericsson] never promised perfect compliance.” We agree.
We have repeatedly held that “general statements about reputation, integrity, and compliance with ethical norms are inactionable ‘puffery,’ meaning that they are too general to cause a reasonable investor to rely upon them.”
Here, as the district court explained, the Anti-Corruption Statements consisted of generalized statements about ethics and compliance, such that no reasonable investor would rely upon them. For example, Ericsson’s 2016 SEC Form 20-F, filed on April 27, 2017, referred investors to its 2016 corporate governance report which stated, inter alia, the following: “[T]o ensure compliance with legal and regulatory requirements and the high standards that we set for ourselves, Ericsson has adopted internal rules that include:” a “Code of Business Ethics”; “Group Steering Documents, including Group policies and directives, instructions and business processes for approval, control and risk management”; and a “Code of Conduct, which applies to product development, production, supply and support of Ericsson products and services worldwide.”
Similarly, Ericsson’s 2017 SEC Form 20-F, filed on March 27, 2018, stated, “Ericsson has a zero-tolerance approach to corruption expressed in the Company’s Code of Business Ethics.” That Form 20-F also stated that “[i]n 2017, Ericsson introduced a vetting process that focuses on ethics and compliance” and that “[a]ll members of the current Executive Team have been vetted, and all future recruitment to these positions will also go through mandatory vetting.”
BRS concedes that the Anti-Corruption Statements did not guarantee “perfect compliance,” but asserts that they nevertheless were “false and misleading” because Ericsson “downplayed the risk of FCPA violations when Defendants knew those risks had already materialized.” We find this argument unpersuasive. Indeed, in making these statements, Ericsson expressly cautioned that “[w]e may fail to comply with our corporate governance standards” and “we cannot assure that violations [of laws and regulations] do not occur.” Ericsson also disclosed that it had received hundreds of employee reports of possible misconduct through its “whistle-blower tool, the Ericsson Compliance Line hotline” and other channels.
To be sure, we recognize that “a company’s specific statements that emphasize its reputation for integrity or ethical conduct as central to its financial condition or that are clearly designed to distinguish the company from other specified companies in the same industry” can, “in some circumstances, violate the securities laws.” […] However, Ericsson’s Anti-Corruption Statements contained no such specificity that would transform any of those generalized statements from mere puffery to an actionable material misrepresentation.
Accordingly, the district court correctly determined that the Anti-Corruption Statements could not form the basis of a plausible Section 10(b) claim.”
Regarding the FCPA Statements the opinion states (certain internal citations omitted):
“BRS also challenges the district court’s dismissal with respect to the FCPA Statements, which included statements made by Ericsson between 2019 and 2022 related to the government’s FCPA investigations and the risk of future enforcement actions. The district court found that Ericsson’s statements regarding entry into the DPA, including the seeming finality of the government investigations, were not misleading given the context in which they were made, “which here includes a steady stream of warnings to investors.” We agree.
It is well settled that “companies do not have a duty to disclose uncharged, unadjudicated wrongdoing” to investors. […] We have nevertheless recognized that, “when [a company] makes a disclosure about a particular topic, whether voluntary or required, the representation must be complete and accurate.” […] However, we have emphasized that one disclosure about a particular topic “[does] not trigger a generalized duty requiring defendants to disclose the entire corpus of their knowledge” about related subjects involving the company.
Here, BRS argues that Ericsson “made a series of misrepresentations … that emphasized the finality of the DPA” and that “[t]hese statements conveyed that the DPA resolved all then-existing corruption.” We are unpersuaded. Ericsson’s statements regarding the DPA were sufficiently limited to the scope of the FCPA investigations by the government that had already occurred and conveyed nothing about any internal investigations. For example, Ericsson’s December 6, 2019 press release stated: “The resolution marks the end of the FCPA-related investigations into Ericsson and its subsidiaries undertaken by the DOJ and the SEC.” BRS points to the statement by defendant Dedullen, Ericsson’s then-Chief Legal Officer, to an analyst during the December 7, 2019 earnings call that he was not aware of any “follow-on investigations,” and argues that it was misleading because he did not disclose the existence of Ericsson’s internal investigation into alleged illegal conduct in Iraq.
However, the district court correctly determined that, when taken in context, Dedullen’s statement would be reasonably understood to be related to investigations by a regulator, not internal investigations that Ericsson took on itself. Dedullen’s statement was made in response to the analyst’s question, which asked for an update on regulators’ investigations and Ericsson’s accounting in its financial statements of the costs of resolving those investigations. In particular, in asking Dedullen the question, the analyst referenced a question he had raised on the prior quarter’s analyst call regarding Ericsson’s provision for the estimated costs of resolving the FCPA investigations by the DOJ and the SEC, and whether “[i]n terms of the potential for other jurisdictions to look into this, [Ericsson could] just comment at this point, has anything else started at this point?” Referencing this earlier question, the analyst stated, “[W]henever we had the last color on this, when you took a provision in Q3, I think it wasn’t clear to you then whether other investigations in other regions around the same topics might kick off.” The analyst then asked for “an update on whether anything else has or you’ve had any kind of discussions with the regulators.” After Dedullen responded that “[w]e are not aware of any other follow-on investigations in any of the other countries,” the analyst asked two follow-up questions, concerning “the 2 investigations” and the differences between the DOJ and SEC resolutions. Thus, the district court correctly concluded that “[s]ince Defendant Dedullen was responding to a question about the existence of other government investigations, he did not mislead investors in stating Ericsson was unaware of further investigations writ large,” because “BRS does not allege that, as of December 7, 2019, any regulator had notified Ericsson of an investigation focused on Iraq.”
We also conclude that the remaining allegedly misleading statements by Defendants about the resolution of the FCPA investigations by the government and post-resolution efforts to monitor the effectiveness of its compliance program—including the statement at the time of the DPA that “[w]e’re now able to move on and fully focus on our business” and the description of “[i]mprovements to Ericsson’s Ethics and Compliance Program,” as well as statements in 2021 regarding the DPA’s monitorship requirement, —were non-actionable “expressions of puffery and corporate optimism [that] do not give rise to securities violations.” […] Indeed, as the district court noted, these statements were made in the context of “ubiquitous warnings to investors regarding the possibility of future compliance failures and investigations.”
For example, Ericsson’s annual report on its 2019 SEC Form 20-F, filed less than three months after Ericsson entered into the DPA, contained the following warnings: (1) “Ericsson may fail or be unable to comply with laws or regulations and could experience penalties and adverse rulings in enforcement or other proceedings” and “[Ericsson] cannot assure [that violations of laws and regulations] do not occur,”; (2) “[Ericsson] may be subject to further adverse consequences following our recent resolutions with the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) of the previously disclosed investigations under the FCPA,” ; and (3) “there can be no assurance that the remedial measures we have taken [in relation to the DPA] and plan to take in the future will be effective or that there will not be a finding of material weakness in our internal controls,”. In short, the district court correctly held that, “[s]ince Defendants continuously warned investors Ericsson might fail to comply with regulations and could be the target of future investigations, [the remaining FCPA Statements]—which relate to either Ericsson’s purportedly enhanced compliance framework or the resolution of the FCPA investigations—were not misleading.”
Ericsson was represented by Sullivan & Crowell. (See here for the firm’s press release).
