It is as predictable as the sun rising in the east and dogs barking.
In the aftermath of a Foreign Corrupt Practices Act enforcement action (or mere instances of FCPA scrutiny), plaintiffs’ lawyers representing shareholders on a contingent fee basis file securities fraud claims against the company and/or certain officers or directors. Such FCPA-related claims are frequently dismissed, but the claims nevertheless continue to be filed.
In the latest example, U.S. District Court Judge Ann Donnelly (E.D.N.Y.) recently granted a motion to dismiss  filed by Mobile Telesystems PJSC (“MTS) and various individual defendants. As highlighted in prior posts here  and here , in 2019 Russia-based MTS agreed to resolve an $850 million DOJ/SEC FCPA enforcement action concerning a telecom bribery scheme in Uzbekistan (the same scheme that previously resulted in FCPA enforcement actions against VimpelCom and Telia).
As summarized by Judge Donnelly:
“[T]he plaintiffs allege that between 2014 and 2019 (the “Class Period”), MTS issued false and misleading statements about the company’s potential liability for the bribery scheme, the effectiveness of the company’s internal controls and compliance structure, and the company’s cooperation with U.S investigators. According to the SAC, the defendants’ misstatements and omissions artificially inflated MTS’s stock price, causing the plaintiffs to suffer a loss after the company entered into a Deferred Prosecution Agreement (“DPA”) with the Department of Justice (“DOJ”) in 2019. The plaintiffs claim that the defendants violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and that defendants Dubovskov, Kornya and Kamensky (the “Individual Defendants”) violated Section 20(a) of the Exchange Act. MTS moves to dismiss, arguing that the plaintiffs have not alleged any actionable misstatements or omissions, and that they did not sufficiently plead scienter.”
The plaintiffs, on behalf of a putative class, claim that MTS engaged in securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and its implementing regulation, Rule 10b-5, because it did not timely record a reserve, filed misleading statements about the nature of the government’s investigation and the extent of the company’s cooperation with it, and filed misleading statements about the company’s compliance with its code of conduct (Count I). They also claim that the Individual Defendants are liable under Section 20(a) of the Exchange Act as controlling persons of MTS with the power to direct activities that comprised the securities violations (Count II).”
As stated by Judge Donnelly :
“The plaintiffs’ allegations of misleading statements or omissions can be grouped into four categories: (i) recording a reserve; (ii) disclosures about the nature of the DOJ and SEC investigations; (iii) statements that MTS was cooperating with the investigation; and (iv) statements regarding MTS’s compliance with its code of ethics.”
As to the recording of the reserve, the opinion states:
“The plaintiffs allege that MTS violated the Generally Accepted Accounting Principles’ (“GAAP”) Accounting Standard Codification (“ASC”) 450 and the International Financial Reporting Standards’ (“IFRS”) International Accounting Standard (“IAS”) 37 because it did not timely record a reserve for potential fines resulting from the DOJ and SEC investigations.
ASC 450 defines a loss contingency as an “existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur.”
IAS 37 contains similar reporting obligations. Companies must disclose the existence of a contingent liability “unless the possibility of an outflow of resources embodying economic benefits is remote.” A contingent liability is “a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity . . . .” IAS 37.
According to the plaintiffs, MTS could have made a reasonable and reliable estimate of its potential liability. In particular, the plaintiffs maintain that MTS would have “learned of each FCPA violation and the amount of each bribe and thus could have easily estimated the minimum amount of MTS’s contingent liability emanating from MTS’s FCPA violations” if it had “performed a reasonable investigation.” The plaintiffs allege that MTS should have been able to calculate and report its potential liability before November of 2018 because the FCPA provides a “predictable structure for calculating penalties.”
MTS does not deny that the plaintiffs have established first factor, but it argues that they have not sufficiently pled that MTS’s potential loss was either probable or reasonably estimable at any time before it recorded a reserve of $850 million in November of 2018.”
Judge Donnelly agreed with MTS and stated:
“According to the plaintiffs, MTS could have easily estimated its loss; they say that MTS knew “(i) [it] had violated the FCPA, (ii) it was probable that its violations would result in a material loss to MTS, and (iii) of the dollar amount of corrupt bribes the Company had paid in violation of the FCPA, and could thus reasonably estimate the amount of that loss” as soon as it was aware that the DOJ was investigating. In my view, the circumstances were far less obvious and straightforward. When MTS learned of the investigation, it could not predict the outcome: whether the government would file charges, what those charges would be, whether the government would have agreed to a DPA at all and, if it did, what its terms would be. Nor could the company predict whether it would be willing to settle, or would contest the charges, assuming there were charges. And, at that point, MTS was not cooperating with the DOJ and could not predict whether it would ultimately receive cooperation or remediation credit.
Finally, observing that “FCPA violations are formulaic and predictable” the plaintiffs say that MTS knew how much it paid in bribes and should have been able to estimate its liability. At the same time, however, the plaintiffs cite the outcomes of the investigations into VimpelCom and TeliaSonera, assertedly similar cases with significantly different resolutions. According to the [complaint], the DOJ credited both companies with “fully remediating,” entitling them to downward departures from the penalties established by the U.S. Sentencing Guidelines (“USSG”). Nevertheless, VimpelCom’s total monetary penalty was 45% below the low end of its possible fine range, and TeliaSonera’s was 25% below the low end of its possible fine range. As these examples demonstrate, it is difficult to predict even the minimum amount for which a company may be liable. Indeed, had MTS recorded a reserve 45% below the USSG range, and then agreed in a DPA to pay 25% below the USSG range, the plaintiffs would undoubtedly have taken issue with the company’s reporting.
Accordingly, the plaintiffs have not demonstrated that MTS violated ASC 450 or IAS 37 by waiting to record a reserve until November of 2018.”
As to the disclosures about the nature of the DOJ and SEC investigations, Judge Donnelly summarized the arguments as follows:
“The plaintiffs also fault MTS for not disclosing until April 27, 2018 that the DOJ and SEC were investigating it for FCPA violations. In particular, the plaintiffs allege that MTS “failed to fulfill its basic obligation under GAAP and IFRS to adequately describe the nature of the contingency” because it did not disclose that it “faced an FCPA investigation, that the FCPA provided rigid guidelines for penalties, and that two of its competitors had agreed to hundreds of millions of dollars in penalties while admitting to the same illegal conduct in which MTS had itself engaged.” They also raise a new claim in their brief: “ASC 450 and IAS 37 required MTS to describe the nature of its liability arising from the FCPA investigation.”
MTS argues that it had no duty to disclose the details of the government’s investigation.
MTS cites Employees’ Retirement System of City of Providence v. Embraer S.A. as support for its position that it met its disclosure obligations. 2018 WL 1725574 (S.D.N.Y. Mar. 30, 2018). Embraer reported in Form 6-K and Form 20-F filings that it the DOJ and SEC were investigating it for alleged violations of the FCPA, that it had retained outside counsel to conduct an internal investigation, and that it may face “substantial fines” or “other sanctions” as provided in the FCPA. Rejecting the plaintiffs’ “faulty notion that Embraer was required to disclose details of the FCPA violations and admit that it had engaged in wrongdoing—before it had even been charged and before the investigations were even complete,” the court found that Embraer’s disclosures satisfied its reporting obligations.”
Judge Donnelly concluded:
“While not as comprehensive as Embraer’s, MTS’s disclosures satisfied its reporting obligations. MTS disclosed the existence of the investigation in early 2014, and warned investors of the potential for significant fines or penalties. In the April 24, 2014 Form 20-F— and in each 20-F filing thereafter—MTS included a paragraph about the Uzbekistan investigation, in which it mentioned the FCPA and other laws, stating that “any investigation of any potential violations of the FCPA, the UK Bribery Act or other anti-corruption laws by US, UK or foreign authorities could have an adverse impact on our business, financial condition and results of operations.” While MTS did not explicitly state that the DOJ was investigating it for possible violations of the FCPA or that it had retained outside counsel to conduct an investigation, it warned that it could face liability under the statute as well as any other anti-corruption laws. Thus, investors were alerted to the possibility that the DOJ’s investigation into conduct in Uzbekistan could result in liability under the FCPA.”
The plaintiffs charge further that MTS should have “disclosed that the FCPA provided rigid guidelines for penalties.” In fact, information about the FCPA’s penalty guidelines is publicly available and MTS was under no obligation to disclose readily accessible information in its securities filings. Nor do the plaintiffs cite any authority for the proposition that MTS had to disclose that VimpelCom and TeliaSonera entered into DPAs for similar misconduct. The requirement under ASC 450 and IAS 37 that a company must disclose the nature of its own liability cannot logically extend to reporting on the liabilities of competitors. Accordingly, these omissions are not actionable.”
As to statements about cooperation, Judge Donnelly summarized the arguments as follows:
“In disclosures throughout the Class Period, MTS stated that it had “received requests for documents and information from both the SEC and DOJ and continues to cooperate with these investigations in good faith.” The plaintiffs argue that this statement was materially false and misleading because the DOJ did not ultimately credit MTS for “cooperation and remediation” in the settlement. Had the company’s statements regarding cooperation been true, the plaintiffs allege, MTS would have gotten full credit for cooperation and remediation and the total monetary penalty would have been “nearly $350 million less than the $850 million that MTS ended up paying,” or an approximately 25% reduction off the low end of the USSG fine range.”
Judge Donnelly concluded:
“The plaintiffs have not sufficiently pled that MTS’s statements about cooperation were false. In public disclosures during the Class Period, MTS represented that it was cooperating with the SEC and DOJ investigations in good faith, including by providing information and answering government requests. The DPA corroborates these statements. The DOJ gave MTS a two point reduction to its score under the USSG because MTS “fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.” The fact that MTS did not also get credit for cooperation and remediation pursuant to the FCPA Corporate Enforcement Policy does not mean that its statements about cooperation were false. MTS said nothing about how the DOJ would evaluate its cooperation, and indeed it had no way of knowing at the time of the disclosure whether it would receive additional credit; it reported only that it was cooperating with the government, which was accurate. The plaintiffs have not alleged any facts that suggest that MTS’s statements were false or misleading, nor that the statements were false or misleading when they were made. Accordingly, they have not alleged an actionable statement or omission.”
As to statements regarding the company’s compliance with its code of ethics, Judge Donnelly summarized the arguments as follows:
“MTS also challenges the plaintiff’s allegations about the company’s statements during the Class Period that it “complies with legislation and generally accepted standards of business ethics” and that the code of conduct is a “fundamental document” that guides the company’s daily work and helps it to maintain a “competitive advantage.” MTS described its code of conduct as a “fundamental document, which guides us in our daily work and helps us to protect the good name of our Company and maintain our competitive advantage.” The company also reiterated its commitment to “compliance with anti-corruption laws . . . and ethical business conduct in all kinds of business relationships.”
According to MTS, these statements are “corporate puffery,” and thus cannot support a securities claim. Puffery includes “vague and optimistic ‘statements [that] are too general to cause a reasonable investor to rely upon them,’ and thus cannot serve as the basis for a securities fraud claim.”
Judge Donnelly concluded:
“MTS’s public disclosures regarding its business ethics and internal code of conduct use the type of “broad, aspirational, and vague” statements that are the hallmark of corporate puffery.”
In addition, the plaintiffs’ claims about MTS’s internal controls are not sufficiently particularized to survive a motion to dismiss.
Again citing the fact that MTS did not receive a 25% penalty reduction for cooperation or remediation, the plaintiffs say that the company could not possibly have been following its own code of conduct. As explained above, the government credited the company for its cooperation in the penalty calculation, and commended it for “continuing to enhance its compliance programs and internal accounting controls, including ensuring that its compliance program satisfies” its own corporate compliance program.
Similarly, MTS’s statement in its 2016 Annual Report that an independent consultant “concluded that the anti-corruption compliance program complies with the global best practices” is not actionable. The plaintiffs maintain that the statement “gave investors the false impression that MTS had actually implemented its compliance program.” But the statement was accurate. The company hired a consultant and reported the consultant’s findings; it did not represent that the new compliance program was fully operational.
In short, the plaintiffs have not pled sufficient facts to demonstrate that the challenged claims were false or misleading.”
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