In my year-end survey of corporate and securities litigation, one of the trends I noted regarding the litigation that had been filed in 2013 was the rise in lawsuit filings following in the wake of governmental investigations and regulatory actions, particularly with respect to investigations and regulatory actions outside the United States. If two recently filed lawsuits are any indication, this lawsuit filing trend has continued as we have headed into the New Year.
On January 21, 2014, plaintiffs’ lawyers filed a securities class action lawsuit in the District of Utah against Nu Skin Enterprises and its CEO and CFO in the wake of news reports that governmental authorities in China are investigating the sales practices of the company’s representatives of that country. The plaintiffs’ lawyers January 21, 2014 press release about the lawsuit can be found here.
The Wall Street Journal reported on January 16, 2014 (here) that the previous day the China People’s Daily newspaper had published reports that the company was operating an illegal pyramid scheme in the country. The Journal alsoreported that the allegations were being investigated by China’s State Administration of Industry and Commerce. In a January 16, 2014 press release (here), the company responded to the allegations. The company’s share price declined sharply on the news of the investigations.
In their complaint (here), the plaintiff shareholders allege that Nu Skin and its executives “failed to disclose either its fraudulent sales practices and non-compliance with laws and regulations in China, or their potential impact on the company.” The complaint alleges further that the defendants “knew that the Company’s operations in China were an illegal pyramid scheme in violation of Chinese law and, as such, the business operations and prospects were false and would tumble [sic] when the illegal practices came to light.” The plaintiffs allege that the defendants’ misrepresentations and omissions violated Sections 10(b) and 20 (a) of the Exchange Act as well as Rule 10b-5.
In a separate lawsuit, on January 15, 2014, plaintiffs filed a shareholders’ derivative action in Cook County (Illinois) Circuit Court against certain current and former directors and officers of Archer Daniels Midland Company, as well as against the company as nominal defendant. The plaintiff’s complaint relates to the company’s December 20, 2013 settlement with the U.S. Department of Justice and the SEC in connection with allegations that between 2002 and 2008 the company’s subsidiaries in Germany and Ukraine had been involved in a scheme to bribe Ukrainian officials in order to obtain tax refunds from the Ukrainian government, in violation of the Foreign Corrupt Practices Act (FCPA).
As reflected in the company’s December 20, 2013 press release (here), entered into a non-prosecution agreement with DOJ and a consent decree with SEC and has agreed with these agencies to monetary relief totaling approximately $54 million. The SEC’s press release regarding the settlement can be found here.
In their complaint (redacted version here), the plaintiff shareholder allege that the individual defendants – despite operating in countries with “less-developed legal and regulatory frameworks” — allowed the company “to operate in these countries without implementing or maintaining any of the internal controls for the Company’s compliance with the requirements of the FCPA” The complaint further alleges that “as should be expected when there is no one ensuring compliance, ADM repeatedly violated the FCPA.”
The complaint alleges that “the defendants’ failures to implement any internal controls at ADM designed to detect and prevent FCPA violations have severely damaged the FCPA,” referencing the company’s settlements with the DoJ and the SEC. The complaint asserts claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment. The complaint seeks to compel the company to institute remedial measures, as well as the entry of a judgment “against the Individual Defendants and in favor of the company for the amount of damages sustained by the company as a result of the Individual Defendants’ breach of fiduciary duty, waste of corporate assets, unjust enrichment, and aiding and abetting breaches of fiduciary duties.”
There are several noteworthy things about these lawsuits, including the fact that both of the lawsuits were filed after the defendant companies had been hit with regulatory actions involving company operations overseas. It is also worth noting that both of these companies have extensive overseas operations and that both of them derive a significant portion of their revenue from their overseas operations. In a world in which regulators both inside and outside the U.S. are increasingly active in investigating and enforcing regulations in connection with companies’ operations outside the U.S., companies that operate globally are facing a growing prospect for regulatory and investigative actions involving their overseas operations. As these cases highlight, among the risks for U.S. companies associated with this growing investigative and regulatory exposure is the likelihood of follow on civil litigation in the U.S.
To be sure, the possibility of a follow-on civil action in the wake of an FCPA investigation is nothing new; indeed, it is a phenomenon that I have frequently noted over the years on this blog (refer for example here). I have even previously noted that actions of this type, while frequently filed, are not always successful (refer for example here). But while this type of follow on suit is not new, these kinds of actions are representative of and part of the rise in civil lawsuits in the U.S. against U.S. companies following on after an investigative or regulatory action involving operations outside the U.S.
The Nu Skin action is particularly noteworthy in several respects. First, it arises out of the investigation of the overseas operations of a U.S. company by an overseas regulator. Second, it involves an area of regulatory oversight and scrutiny that in the past may not have been as likely to give rise to a regulatory investigation, but that may represent the increasing regulatory and investigative exposure that U.S. companies face in connection with their overseas operations.
As both U.S. and non-U.S. regulators focus increased regulatory scrutiny on operations in these countries outside the U.S., the likelihood is that regulatory investigative and enforcement actions will continue to increase. As these regulatory and investigative actions increase, the likelihood is that the follow in civil action will continue to increase as well.
In earlier posts (here and here) I detailed the growing threat of regulatory enforcement outside of the U.S., including in particular the rise of cross-border regulatory and enforcement collaboration.
Knowing it When You See It: An article in the January 20, 2014 New Yorker entitled “The Billionaire’s Playlist” (here) describes how Russian oligarch and philanthropist Leonard Blavatnik first accumulated his wealth by acquiring aluminum assets in the aftermath of the collapse of the Soviet Union. Blavatnik had a number of American investors in his enterprise at the time, including the billionaire entrepreneur Sam Zell.
The article cites Zell as saying that he “found the climate extraordinarily difficult.” Zell described his involvement by saying “We were making small investments, doing a lot of different things to see if we could function [in Russia].” Zell said, “We concluded that we could not.” Asked we not, Zell said, “Start with the Foreign Corrupt Practices Act and go from there.”