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Several FCPA Related Securities Fraud Actions Dismissed


Sure as dogs bark and the sun rises in the east, in the aftermath of a Foreign Corrupt Practices Act enforcement action or merely an instance of FCPA scrutiny, plaintiffs’ counsel (no doubt representing shareholders on a contingent fee basis) file securities fraud class actions and hope to get some claims past the motion to dismiss stage.

Rarely does this happen and this post highlights three instances, in just the past few weeks, in which federal trial court judges have dismissed FCPA related securities fraud class actions.

In re KBR 

In this matter, (2018 WL 4208681, S.D. Tex, Aug. 31, 2018) plaintiffs alleged:

“KBR and its subsidiaries in the United Kingdom a number of years [after resolving separate FCPA or related enforcement actions] engaged in a separate bribery scheme in Kazakhstan and Azerbaijan, using Monaco-based Unaoil as an intermediary.

Plaintiffs further allege that Defendants defrauded investors by knowingly or recklessly making false and misleading statements and omissions that concealed that (1) KBR and its U.K. subsidiaries violated U.K. antibribery laws and (2) the profits from the contracts illegally obtained would be subject to disgorgement. Specifically, Plaintiffs allege that, over the course of the Class Period, Defendants made misrepresentations falling into six categories: (1) reports of KBR’s net income and revenue, (2) statements about anti-bribery laws and KBR’s Code of Business Conduct (KBR’s “Code”), (3) statements about the awards of specific contracts, (4) statements about the charges relating to the Nigerian bribery scheme, (5) statements disclosing the Unaoil investigations, and (6) certifications required by the Sarbanes-Oxley Act of 2002, 15 U.S.C. § 7201 et seq. (“SOX certifications”).”

After reviewing the relevant substantive and procedural framework for securities fraud class actions, Judge Ewing Werlein Jr. stated:

“One observes initially that Plaintiffs’ conclusory allegation–which recurs in a variety of iterations–that KBR was directly or indirectly engaged in bribery to obtain contracts in Azerbaijan and Kazakhstan is only that: a conclusory allegation. Plaintiffs wholly fail to meet the heightened pleading requirements of Rule 9(b) and the PSLRA. Nowhere in Plaintiffs’ Complaint of 68 pages are the “particulars” of any bribe alleged. Plaintiffs have simply assumed the worst based on the fact that certain governmental agencies have announced the opening of investigations of Unaoil related to international projects involving several global companies, including KBR. No investigative findings have been announced, but Plaintiffs act as if the opening of an investigation is all they need to make wholesale allegations of bribery against KBR. The law requires more.”

Former and Current Executives of Veon

As highlighted in previous posts herehere and here, in 2016 VimpelCom (renamed Veon) resolved a net $397.5 million FCPA enforcement action in connection with a Uzbekistan telecommunications bribery scheme. The resolution documents contained numerous allegations about VimpelCom executive officers as well as various VimpelCom corporate committees that were engaged in the improper conduct. The allegations in the VimpelCom action were egregious and painted a picture of a culture of corruption at VimpelCom with high-level executives seeking legal cover at nearly every turn to facilitate the alleged bribery scheme.

This previous post highlighted how a securities fraud class action complaint against the corporate entity largely got past the motion to dismiss stage.

However related claims against former and current executives officers of the company were recently dismissed in this decision by Judge Andrew Carter (S.D. of N.Y.). The claims were against Alexander Izosimov (CEO from 2003 to 2011), Joe Lunder (CEO from 2011 to 2015 and member of the Management Board), Cornelis Hendrik van Dalen (CFO from 2010 to 2013) and Andrew Mark Davies  (CFO since 2013).

The judge noted that “while the DPA [in the VimpelCom matter] discusses liability for actions committed by senior executives of Veon, the DPA does not identify any of those senior executives by name.”

In his decision, Judge Carter found flaws in the plaintiffs’ service of process relevant to certain defendants and that certain additional claims against certain defendants were time-barred. “Regardless of the time bar and improper service,” the judge also addressed the merits of plaintiffs Section 10(b) claim and found it lacking.

The judge found that Veon made several material mistatements and that certain of them were attributable to defendants through various SOX certifications. However, the court concluded that the plaintiffs failed to sufficiently allege scienter as to each individual defendant.

As to Izosimov, the judge stated: “Plaintiffs do not allege that [he] was actually present during the relevant meetings, read the meeting minutes, or otherwise knew about the alleged misconduct.” The court further stated: “Izosimov’s position as CEO … is too general an allegation from which to conclude Izosimov had actionable data alerting him to the falsity of his statements.”

As to Lunder, the judge stated: “[A]s with Izosimov, Plaintiffs do not provide specific factual allegations that Lunder was aware of such concerns or other contradictory information at the time he made any alleged material mistatements.”

The judge made similar conclusions with respect to van Dalen and Davies as well.


In Magro v. Freeport-McMoran Inc. (2018 WL 3725781, D. Ariz. Aug. 3, 2018) Judge Diane Humetewa described the relevant background as follows:

“Plaintiffs, purchasers of Freeport common stock, initiated this federal securities class action … alleging that Freeport and its corporate officers conducted an illegal lobbying campaign in Indonesia aimed at extending its contract with the government to conduct mining operations in the country. The contract, or Contract of Work (“COW”) as the [complaint] calls it, is set to expire in 2021 but can be extended to 2041. Plaintiffs assert that “Indonesian regulations prohibited Freeport from negotiating the COW (or the terms of its extensions) prior to two years before the COW’s expiration (i.e., Freeport was not allowed to negotiate the terms of its extension prior to 2019).” The [complaint] alleges that despite this regulation, Defendants engaged in negotiations with the Indonesian government aimed at securing the COW’s extension. In doing so, Plaintiffs allege that Defendants violated the Foreign Corrupt Practices Act, Indonesian law, and Freeport’s internal policies against bribery and corruption.

The key event detailed in the [complaint] is a meeting in June of 2015 between the President of the Freeport subsidiary PT Freeport Indonesia (“Freeport Indonesia”), Maroef Sjamsoeddin (“Sjamsoeddin”), and Speaker of the Indonesian House of Representatives, Setya Novanto (“Novanto”).  The [complaint] alleges that Sjamsoeddin attempted to bribe Novanto by offering shares of Freeport Indonesia “as well as interests in lucrative business opportunities” in exchange for his support in extending the COW.  In addition, the [complaint] alleges that “Defendants expected Sjamsoeddin to engage in the course of conduct that he did in order to secure the COW extension as quickly as possible and for the best price possible.”

The [complaint] further alleges that throughout 2015 Defendants made various representations that they were engaged in active discussions to extend the COW, that the discussions were going well, and that Defendants were abiding by all laws and regulations forbidding bribery in accordance with the FCPA.

In November of 2015, some Indonesian media outlets published articles relaying that “Freeport Indonesia agreed to cooperate with an impending investigation by the Indonesian House of Representatives concerning allegations of bribery and extortion involving Novanto and Freeport Indonesia.” The [complaint] details a decline in Freeport’s stock price, starting on November 18, 2015 at $8.77 per share. On December 28, 2015, Defendant Moffett then resigned as Freeport’s Chairman of the Board, and on January 18, 2016, a Reuters press release announced Sjamsoeddin’s resignation from Freeport Indonesia. By January 19, 2015, Freeport’s stock price had dropped to $3.96 per share. Plaintiffs argue that this decline came as a result of “Defendants’ fraud finally being revealed to investors and the market”, and that Freeport raised around $1.4 billion in gross proceeds from stock sales during that period.

Count One of the [complaint] alleges that Freeport defrauded investors and violated Section 10(b) of the Exchange  Count Two cites the “Individual Defendants” as the controlling persons within Freeport who violated section 20(a) of the Exchange Act. The fraud alleged in the [complaint] is predicated upon Defendants’ representations of the COW negotiation’s status, and representations that they were not violating the FCPA or Indonesian law. Plaintiffs argue that had Defendants accurately represented Freeport’s activities in Indonesia, “investors would have been able to better evaluate the prospects of Freeport in Indonesia as well as the risk profile of their investments.”

Among other things, defendants argued that “[n]o governmental authority has ever found that Freeport violated the FCPA or even accused it of doing so.” In this regard, the judge stated: “Plaintiffs have not pled sufficient facts to plausibly claim that Sjamsoeddin, while acting as President of Freeport Indonesia, attempted to bribe Indonesian officials in violation of Indonesian law or the FCPA.”

Elsewhere, the opinion states:

“Defendants argue that statements made in Freeport’s Anti-Corruption Policy and Principles of Business Conduct Policy are not actionable because, as corporate codes of conduct, they are “transparently aspirational” and cannot serve as the basis for an action for fraud. As the Ninth Circuit has said, the “promotion of ethical conduct” cannot reasonably suggest that a company’s internal policies will not be violated. The Court agrees. The statements made in Freeport’s AntiCorruption Policy and Principles of Business Conduct Policy are also not actionable as a matter of law.

In sum, the Court finds that the [complaint’s] claims predicated upon violations of Indonesia’s COW extension regulations or attempted bribery in violation of the FCPA fail to demonstrate a material misrepresentation. In addition, statements about the status of the COW discussions and statements made in Freeport’s AntiCorruption Policy and Principles of Business Conduct Policy are not actionable.”

Next, the opinion notes:

“Defendants’ Motion also argues that general knowledge of Freeport’s Indonesian operations does not establish scienter. In their Response, Plaintiffs argue that Defendants were so involved in Freeport’s Indonesian operations that it would be absurd to suggest that they were unaware of the illicit means used in the COW negotiations. From this, Plaintiffs conclude that Defendants, especially Adkerson and Moffett, were directly responsible for initiating and monitoring a “bribery scheme.”

All companies have operations of critical importance. […] Ultimately the Court must ask, given that Defendants were knowledgeable of Freeport’s investments in Indonesia and the nature of the COW, would it be absurd to conclude anything but that Defendants intentionally or recklessly facilitated a bribery scheme carried out by a third person? This Court finds it is not absurd to conclude that Defendants’ had no knowledge of the alleged bribery scandal based on their knowledge of Indonesian operations alone. This action is not one of those “rare circumstances” where the bare assertion that Defendants were involved in managing Freeport’s Indonesian operations suffices demonstrate scienter.

Finally, Plaintiffs try to draw the inference of scienter by describing “almost three decades of alleged FCPA violations on the part of Freeport.” Although the events occurred before the class period, Plaintiffs argue Defendants “continued that course of illicit conduct during the Class Period.” In their Response, Defendants argue that “Plaintiff does not and cannot allege that Freeport has ever been charged with violating the FCPA; the claim is instead based on old reports containing recycled allegations that have never been substantiated or acted upon despite having been brought to the attention of the authorities years ago.” Additionally Defendants correctly assert that the confidential witnesses cited in the [complaint] do not profess to have knowledge that illegal activity occurred before the class period. Indeed, they only present their “opinion.” Put simply, the [complaint] presents allegations of FCPA violations to support more allegations of FCPA violations. A reasonable inference of scienter does not follow.”

Upon review of all the facts presented, the Court finds that there is no strong inference of scienter compelling enough to match the inference of nonfraudulent intent. Therefore, the Court finds that the [complaint] fails to adequately plead scienter.”

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