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Yet Another FCPA-Related Securities Fraud Lawsuit Dismissed

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 Andrew Carter (S.D.N.Y) recently granted VEON’s (formerly known as Vimpelcom) motion to dismiss  As highlighted in this prior post [1], in 2016 the telecommunications company resolved an FCPA enforcement action concerning conduct in Uzbekistan by agreeing to a net $397.5 million FCPA settlement.

As summarized by Judge Carter (internal citations omitted):

“In the Second Amended Complaint, Plaintiffs describe in detail the facts alleged in the criminal information against VEON and admitted by VEON in the DPA’s Statement of Facts. For present purposes, it suffices to say that, beginning in 2005, as VEON first looked to enter the Uzbek telecommunications market, through 2012, VEON made, or attempted to make, millions of dollars in improper payments to Gulnara Karimova, the eldest daughter of Uzbekistan’s President, in an effort to achieve favorable treatment in Uzbekistan. Executives disguised these payments in VEON’s books and records as legitimate transactions. One of the ways in which these payments were made was through a partnership between VEON and Takilant Limited, a company owned by Karimova.  This included a $25 million bribe paid in 2007 to secure certain 3G frequencies for VEON’s wholly-owned subsidiary in Uzbekistan. VEON also entered into sham consulting agreements with Takilant in 2008 and 2011, through which it funneled $32 million to Karimova in exchange for certain telecommunications assets and continued access to the Uzbek market. VEON made an additional $10 million in payments to Karimova in 2011 and 2012, using a variety of sham transactions.

Plaintiffs also describe contemplated bribes in 2012 and 2013 that apparently were not completed. In addition to admitting much of the underlying conduct just described, in the DPA, VEON admitted that the company “failed to implement adequate internal accounting controls and failed to enforce the internal accounting controls it did have in place,” thereby allowing the bribes to Karimova.  VEON also identified problems with its internal audit function, including a failure to have adequate processes for reviewing contracts and conflicts of interest. The company did not have a designated full-time compliance function until 2013, and compliance was treated as a mere formality prior to that time. Accordingly, VEON admitted that it had “little to no anticorruption compliance program.” Consistent with these admissions, at VEON’s plea proceeding, a Government attorney asserted that there was “high-level knowledge of the bribery” at VEON.

Plaintiffs allege that VEON admits numerous allegations in their answer to the Amended Complaint, including that VEON knowingly entered into contracts for fake consulting services with Takilant; executives conspired to take advantage of a resell process to conceal a $10 million bribe to Foreign Official via Takilant; VEON failed to implement adequate internal accounting controls and failed to enforce the accounting controls they had in place; VEON failed to implement a system for conducting, recording, and verifying due diligence on third parties; VEON failed to require that all consulting agreement be for bona fide services and that the services paid for were actually performed; VEON had little to no anticorruption compliance program; and that VEON disguised on its books and records over $114 million in bribe payments made to Foreign Official in exchange for the ability to do business in the Uzbek telecommunications market.

Plaintiffs also allege that VEON’s omissions included that it disguised on its books and records over $114 million in bribe payments made to Karimova in exchange for the ability to do business in the Uzbek telecommunications market. Plaintiffs state that paragraphs 62-66 of the deferred prosecution agreement are material omissions that VEON had a duty close.  Plaintiffs further assert that these material facts should have been disclosed pursuant to 17 C.F. R. 240.13a-15(f)(1)-3. Accordingly, Plaintiffs state that Westway purchased 30,000 VEON ADRS on December 10, 2010, two days after the start of the Class Period, and 50,0000 VEON ADRs on January 19, 2011.  Therefore, Plaintiffs assert that due to VEON’s admission that the Company lacked effective internal accounting controls and made false entries in its books, VEON had a duty to disclose these material facts to Westway before the start of the Class Period.

Additionally, Plaintiffs allege that VEON’s conduct that formed the basis of its FCPA violations led to material misstatements and omissions in its SEC filings during the relevant time period. In particular, Plaintiffs allege that when VEON referred to a 17.8 increase in its broadband subscriptions, including in Uzbekistan, and revenue in general, it “put the topic of the cause of its financial success at issue,” thereby obligating the company to report that the increase in subscriptions in Uzbekistan was due, at least in part, to the bribes paid to Karimova. Plaintiffs do not allege that the actual numbers reported were inaccurate.

Plaintiffs also allege that VEON misrepresented that “[t]he government authorities responsible for supervising the telecommunications industry in the Republic of Uzbekistan are the Republic of Uzbekistan Cabinet and a specially authorized telecommunications agency.” Plaintiffs contend that this was a misrepresentation because it failed to disclose the role that Karimova played.

Finally, Plaintiffs identify a number of VEON’s disclosures in its annual reports regarding the company’s internal controls. In its annual reports for the calendar years 2010 and 2012, VEON stated that, “[b]ased on the assessment” of its “internal control over financial reporting,” its management “believes our company maintained effective internal control over financial reporting” during the relevant calendar year. Stated somewhat differently in its 2014 Form 20-F, the company disclosed that, “as a result of management’s assessment of our internal control over financial reporting as of December 31, 2014, management concluded, that that our internal control over financial reporting was effective.” That year, VEON also assured the market that its “internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting.” Plaintiffs also quote from VEON’s website regarding the company’s compliance program.

In a similar vein, between 2010 and 2014, VEON executives signed certifications pursuant to the Sarbanes Oxley Act of 2002 that the information in the company’s Forms 20-F was accurate. VEON later admitted in connection with its DPA that it:

(a) failed to implement adequate internal accounting controls; (b) failed to enforce the internal accounting controls it did have in place, which permitted the above-referenced bribe payments to occur without detection or remediation; (c) failed to implement a system for conducting, recording, and verifying due diligence on third parties, including joint venture partners, consultants, reseller companies, and suppliers to uncover their true nature, beneficial ownership, and possible corruption risks; and (d) failed to require that all consulting agreements be for bona fide services, that agreed-upon payments were commensurate with the services to be performed, and that services paid for were, in fact, performed.

Plaintiffs allege that, beginning with a Form 6-K disclosure on March 12, 2014, the truth began to emerge. VEON disclosed that it had been informed that the Securities Exchange Commission (“SEC”) was conducting an investigation into the company and that its Amsterdam headquarters had been visited by Dutch law enforcement. The company stated that “[t]he investigation also appears to be concerned with the Company’s operations in Uzbekistan.” That day, the price of VEON’s American Depository Receipts (“ADRs”) dropped 6.3%, from $8.85 the previous day to an intraday low of $8.29. The following week, VEON disclosed that the United States Department of Justice also was investigating the company, and the ADR price declined 5.6%, from an intraday high of $9.07 to a low of $8.57.

In VEON’s 2013 Form 20-F filed on May 15, 2014, the company reiterated the existence of these investigations and provided more detail on the issues, which the company disclosed involved money laundering and bribery, and identified Karimova’s company, Takilant. VEON also explained that, in 2013, the company began an internal investigation into its business in Uzbekistan and its relationship with Takilant, led by outside counsel with FCPA expertise. VEON made similar disclosures in its Form 20-F filed in 2015.

After the close of the market on August 13, 2015, there were reports that United States authorities had asked their European counterparts “to seize roughly $1 billion in assets related to a wide-ranging criminal probe of alleged corruption by [VEON], MTS, and TeliaSonera, for paying hundreds of millions of dollars to businesses controlled by Ms. Karimova to secure wireless spectrum in Uzbekistan.” After that report, VEON’s ADR price fell from $5.56 on August 13 to an intraday low of $5.305 the following day.  Finally, on November 3, 2015, when VEON announced that it had reserved $900 million for litigation costs related to the ongoing investigations, the company’s ADRs declined 5.0%, from the previous day’s high of $3.665 to an intraday low of $3.48.”

Nevertheless, Judge Carter granted VEON’s motion to dismiss concluding that “Plaintiff has failed to establish that VEON had a duty to disclose prior to the filing of the June 2011 Form-20-F.”

[2]

As stated by Judge Carter (internal citations omitted):

“Plaintiffs assert a securities fraud claim against VEON under § 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. To state a claim under § 10(b) and Rule 10b-5, a plaintiff must allege that the defendant “(1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which the plaintiff relied, and (5) that the plaintiff’s reliance was the proximate cause of its injury.” VEON argues that Plaintiff has failed to allege any actionable omissions.

i. Duty to Disclose

VEON is under a duty to speak on matters only if “(1) a statute or regulation requires disclosure or (2) disclosure is necessary to avoid rendering existing statements misleading by failing to disclose material facts.”Moreover, the securities laws and regulations do not create “a rite of confession” whereby corporations have a duty “to disclose uncharged, unadjudicated wrongdoing.”

“To base a claim on an omission, a plaintiff must also plead that the defendant had a duty to disclose the omitted fact.” While Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information,” speakers have a duty to disclose when a statement would otherwise be “inaccurate, incomplete, or misleading” without the omitted material.

Lead Plaintiff posits three main arguments. First, Plaintiff argues that VEON’s admissions that the Company had “knowingly failed to implement adequate controls governing due diligence, contract approval, and internal audit, and, at the time, was aware that its internal controls were not effective” is material information that was omitted and concealed off the market; next, Plaintiff argues that VEON’s omissions regarding the internal controls, bribe payments disguised on its books and records, and false recording of a bribe are material omissions, and because Plaintiff purchased ADRs after the material omissions, Plaintiff has standing; and lastly, Plaintiff argues that since the information is material, VEON’s argument that Plaintiff has failed to identify a statute or regulation that requires disclosure is unavailing. Moreover, Plaintiff posits that VEON has violated, 17 C.F. R. § 240.13a-15(a), and that VEON’s admission that it “knowingly failed to implement adequate controls governing due diligence, contract approval, and internal audit, and, at the time, was aware that its internal controls were not effective” is material information that a reasonable investor is entitled to know.

Here, however, Lead Plaintiff has failed to establish that VEON had a duty to disclose the omissions prior to the first time VEON spoke on the internal issues in its June 2011 Form 20-F. Lead Plaintiff conflates the purported materiality of the omissions with disclosure. The Court notes that these are two separate inquiries. Even assuming arguendo that the omissions are material as Lead Plaintiff posits, “[a] corporation does not have a duty to disclose information simply because it is material.” Thus, “[d]isclosure of an item of information is not required … simply because it may be relevant or of interest to a reasonable investor.” Because of this, “companies may remain silent even with respect to information that a reasonable investor might consider material so long as they do not have an underlying duty to disclose that information.”

Accordingly, even if Lead Plaintiff were to establish materiality, Plaintiff must then point to a statute or regulation that requires disclosure, or alternatively, provide a prior statement made by VEON that would then render disclosure necessary to prevent that prior statement from being misleading. While Plaintiff argues that VEON violated 17 C.F.R. § 240.13a-15, that regulation does not create disclosure requirements. Rather, the regulation expands on controls and procedures for financial reporting and “provide[s] reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes … and includes those policies and procedures” relating to maintenance of accurate records of transactions. Moreover, the Court has not found, and Plaintiff has not posited any case that provides that the aforementioned regulation creates disclosure requirements. Therefore, Plaintiff has failed to establish that VEON had a duty to disclose prior to the filing of the June 2011 Form 20-F. VEON’s motion to dismiss must be granted.”

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