In prior posts, I have frequently noted the rising tide of Foreign Corrupt Practices Act (FCPA) enforcement activity as well as the increasing level of FCPA follow-on civil litigation. If the trends noted in a recent law firm memo are any indication, we are likely to continue to see both heightened enforcement activity and ensuing civil litigation for some time to come.
In a July 7, 2009 memo entitled "2009 Mid-Year FCPA Update" (here), the Gibson Dunn law firm takes a comprehensive look at FCPA enforcement trends. The memo notes that during the first six months of 2009, the regulatory authorities have "continued the recent explosion of FCPA enforcement activity, and the number of ongoing investigations suggest that this trend will not soon subside."
In substantiating the observation that there is a "continuing explosion of FCPA prosecutions," the memo notes that "in just the first six months of 2009, more FCPA prosecutions were brought than in any other full year prior to 2007" and that "the nineteen enforcement actions initiated to date in 2009 exceeds the enforcement activity undertaken during the first half of any prior year."
The memo also observes that the heightened enforcement activity trend is likely to continue for the foreseeable future. The memo cites key regulators as having "confirmed" that "at least 120 companies are the subject of ongoing investigations."
The memo also addresses a theme frequently raised on this blog, which is the threat of civil litigation following in the wake of FCPA enforcement action. As the memo notes, even though the FCPA does not provide a private right of action, "enterprising plaintiffs’ lawyers have not been deterred from shoehorning alleged FCPA violations into a variety of civil actions," including securities fraud actions, shareholder derivative suits, contract claims and tort claims. At the same time, the memo notes, some corporate enforcement action defendants "have brought suit against the individuals responsible for these violations."
Among other things, the memo discusses the continuous threat of FCPA-related securities litigation, mentioning specifically the UTStarcom securities litigation (background here) in which the plaintiff shareholders allege that the company knowingly violated the FCPA by bribing officials in China, Mongolia, and India in order to secure contracts.
The growing significance of FCPA-related securities litigation was underscored in the January 2009 NERA Economic Consulting report discussing, among other things, the growing size and number of FCPA securities class action lawsuit settlements. As discussed here, the NERA report notes that a total of $84.4 million was paid in securities class action settlements between 2002 and 2008.
In addition to FCPA-related securities lawsuits, plaintiffs have also filed FCPA-related shareholders derivative lawsuits. The Gibson Dunn memo specifically mentions the April 2009 settlement in which FARO Technologies agreed to implement certain corporate governance changes and to pay $400,000 in plaintiffs’ attorneys’ fees to settle a derivative suit alleging that the directors and officers breached their fiduciary duties by failed to properly oversee the company’s internal activities. The FARO Technologies derivative settlement follows FARO’s earlier settlement of an FCPA-related securities lawsuit in which its D&O insurers paid $6.785 million to settle the suit.
During the first half of this year, plaintiffs also filed a shareholders derivative lawsuit against Halliburton and KBR as nominal defendants and against the companies’ current and former directors and officers to recover as civil damages amounts the companies paid in connection with their recent high profile FCPA settlements, as discussed here.
The Gibson Dunn memo emphasizes that the follow-on lawsuits are not always successful, and the memo specifically cites as examples of unsuccessful cases the shareholders’ derivative suits involving Baker Hughes and Chevron Corporation, where motions to dismiss were granted earlier this year.
The memo also describes civil litigation that companies themselves are pursuing to try to recoup amounts the companies paid to settle FCPA enforcement actions. Among other cases the memo specifically mentions is an action brought by Willbros International against several former officials and consultants. Willbros pled guilty to violating the FCPA in 2008 and now alleges that the defendants were responsible for the unlawful conduct.
The Gibson Dunn memo concludes that "the number of recent enforcement actions and ongoing investigations suggests that the FCPA enforcement environment that we have observed over the past several years is here to stay." As the FCPA enforcement activity continues to grow, an increasing number of companies will find themselves involved in FCPA-related civil litigation.
Even though the FCPA enforcement fines and penalties generally would not be covered under a D&O insurance policy, the policy could be called upon to respond to the costs of defending against an FCPA enforcement action, and any follow-on civil litigation could also trigger the company’s D&O coverage, subject to all of the policy’s terms and conditions.
On a final note, the SEC Actions blog had an interesting recent post (here) emphasizing the high priority that FCPA enforcement actions are being given, both here and abroad. I would be remiss if I did not also note that The FCPA Blog (here) is a continuing source of excellent information on FCPA related developments that I follow regularly.
Pay to Play?: According to a July 7, 2009 article in the Deseret (Salt Lake City) News (here), U.S. Senator Bob Bennett (R. Utah) has asked the SEC to investigate whether plaintiffs’ law firms are making campaign contributions to public officials that oversee government pension funds in the hope of later being able to represent the funds in securities class action litigation.
According to the article, Bennett wrote that "state officials with control over pension fund decisions…receive very substantial campaign contributions from out-of-state law firms with no apparent interest in the election – other than the possibility of being chosen as the pension fund’s lawyer in a class action."
Bennett noted that these practices are of particular concern at a time when pension funds "are reeling from the decline the financial markets."
You Can’t Make This Stuff Up: As part of the eternal vigilance required in order to maintain this blog, I am constantly scouring the media for important developments. Sometimes I run across items that are noteworthy, even if they are not particularly important. Just to make sure that my readers are not deprived of these vital items, I share the following:
"Drunk Badger Disrupts Traffic in Germany" (here)
"France Faces EU Lawsuit for Failing to Protect Endangered Hamster" (here)
"Iowa State Fair Rethinks Jackson Butter Sculpture" (here)
Non, Je Ne Regrette Rien: With apologies to Edith Piaf and with a hat tip to Francine McKenna on whose blog, Re: The Auditors (here) I first saw this video, here is a musical tribute to a funny and odd assortment of Internet regrets.