Every day seems to bring news of a new or expanded bribery or corruption allegations and enforcement actions. In recent days alone, Avon announced that it was suspending four executives in connection with an internal investigation into alleged bribery in the company’s Chinese operations, and U.S. authorities announced they were joining German and Russian authorities in connection with an investigation involving alleged bribery by Hewlett-Packard executives in Russia.
If it seems as if the pace of antibribery and anticorruption activity has been picking up, that is only because it has.
According to an April 15, 2010 memorandum from the Wilkie Farr & Gallagher law firm (here), the level of Foreign Corrupt Practices Act (FCPA) enforcement in the first quarter of 2010 was "unprecedented." In the first three months of 2010 alone, the U.S. government brought or resolved FCPA charges against 36 companies and individuals, which is 30 more than in the first quarter of 2009 and 32 more than in the first quarter of 2008.
Moreover, according to the memo, the signs are that this heightened level of activity will continue for "the foreseeable future." Among other things, there are a variety of "new enforcement initiatives and prosecutorial tools" that have been initiated, including the creation within the SEC’s Enforcement Division of a new unit to focus on FCPA enforcement, and the enactment of the U.K’s Bribery Bill, which received royal assent on April 8, 2010. The Bribery Bill is similar to but broader than the FCPA. In addition, the draft financial reform bill introduced by Senator Chris Dodd contains a provision that, if enacted, would provide significant financial rewards to whistleblowers for providing information leading to a successful enforcement action.
These and other developments, including the recent DOJ-FBI sting operation involving individuals in the arms manufacturing industries, suggests, according to the memo, that antibribery enforcement activity is "likely to increase in both the short and the long run."
As I have noted in the past (refer for example here), among the risks associated with this types of investigative or regulatory actions is the possibility of follow-on civil litigations following in the wake of the governmental action. There have been many examples in the past of these kinds of follow-on actions, and a recently filed case shows that this threat of litigation following in the wake of an FCPA investigation is continuing.
This most recent example involves a shareholders’ derivative complaint (here) filed on April 15, 2010 in Harris County (Texas) District Court against Pride International, as nominal defendant, and against the eight individual members of Pride’s board of directors. Pride is one of the world’s largest offshore drilling companies. The derivative action arises from "the Board lack of internal control that permitted the Company to engage in years of systematic violations of the FCPA."
The complaint alleges that the company’s internal investigation "revealed that Pride paid over $4 million and kickbacks to government officials in every country in which the Company does business." The complaint further alleges that on February 16, 2010, Pride announced that the company was creating a $56.2 million reserve to resolve the FCPA violations. However, the reserve "will only cover the fines, penalties, and disgorgements" and does not include the costs the company has incurred in "investigating and remedying the damages done as a result of the Board’s failure to require that the Company install and maintain a system of internal controls for compliance with the FCPA."
The complaint, which seeks recovery for "breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment," alleges that "none of the defendants took any steps to prevent this colossal mistake."
UPDATE: This new lawsuit filed against Pride apparently is the second derivative action to be filed against the company relating to these issues. The FCPA Professor Blog had an earlier post (here) describing a prior derivative action that was filed last fall in connection with these same circumstances.
This case provides an example of what I have described in the past as the D&O link to FCPA activity. There would not be coverage under the typical D&O policy for the fines and penalties imposed in connection with an FCPA enforcement action, although defense fees incurred in connection with the action potentially could be covered under many policies, depending on the policy wording. But the filing of a civil lawsuit against members of the board of directors, as a follow on to the FCPA action, is an event much more directly linked to the D&O policy and much more likely to give rise to covered loss under the policy.
As the escalating levels of FCPA enforcement actions continues to increase, this type of potential Board liability exposure will continue to be a growing concern for Boards, their advisers, and their D&O insurers.
Those wondering exactly why we are seeing so many antibribery actions now will want to review the April 20, 2010 post, here, on The FCPA Blog.
Special thanks to a loyal reader for providing me with a copy of the Pride International complaint.