The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

Among the more controversial questions about the U.S.’s Foreign Corrupt Practices Act has been the extent of its reach in enforcement actions against foreign-domiciled individuals. Two recent decisions from the Southern District of New York reached differing conclusions about the statute’s reach. One case rejected the individual’s motion to dismiss the FCPA enforcement action, while the second granted the individual defendant’s motion to dismiss. Both decisions were based on the court’s personal jurisdiction over the individuals. The difference between the two decisions sheds some light on the question of extent of the FCPA’s reach over foreign individuals.

 

The first of these two rulings involved three executives of Magyar Telecom. The company was accused of involvement in schemes to bribe government officials in Macedonia and Montenegro. The company and its corporate parent, which were subject to U.S. jurisdiction because their securities (in the form of ADRs) traded on U.S. exchanges, entered into a non-prosecution agreement and also agreed to pay over $95 million in criminal fines and civil penalties.

 

The SEC also filed an enforcement proceeding against three Magyar executives. The SEC alleged that the three authorized payments to an intermediary, knowing the payments would be forwarded to government officials. The SEC also alleged that the individuals made false statements to the company’s auditors by signing representations that the company’s books and records were accurate. All three executives are Hungarian citizens and residents. The three moved to dismiss the SEC’s complaint, arguing that the U.S lacked personal jurisdiction over them.

 

In a February 8, 2013 order (here), Southern District of New York Judge Richard J. Sullivan denied the defendants’ motion to dismiss. Judge Sullivan held that the SEC had met its burden of showing that the exercise of personal jurisdiction over the three was consistent with constitutional due process. Judge Sullivan based his ruling not on the individuals’ physical location but their actions on Magyar’s behalf. The complaint, Sullivan observed, alleges that the defendants “engaged in a cover up through their statements to Magyar’s auditors knowing that [the company’s securities} traded on an American exchange and that prospective purchasers” would “likely be influences by any false financial filings.”

 

With respect to the question of whether or not the defendants had sufficient “minimum contacts” to support the constitutional exercise of jurisdiction, Judge Sullivan noted that “the Defendants here allegedly engaged in conduct that was designed to violate United States securities regulations and was thus necessarily directed toward the United States, even if not principally directed there.” He added that “because these companies made regular quarterly and annual consolidated filings during that time, Defendants knew or had reason to know that any false or misleading financial reports would be given to prospective American purchasers of those securities.”

 

Judge Sullivan specifically noted that his ruling did not envision any sort of rule that would subject any overseas employee of a company alleged to have violated the FCPA to personal jurisdiction in the U.S. He noted that “although Defendants’ alleged bribes may have taken place outside the Unites States…their concealment of those bribes, in conjunction with Magyar’s SEC filings, was allegedly directed toward the United States.”

 

The FCPA Blog’s post about the ruling can be found here. The FCPA Professor’s blog post about the Judge Sullivan’s ruling can be found here.

 

In the second of the two decisions, on February 19, 2013, Southern District of New York Judge Shira Scheindlin granted the motion to dismiss of one of the seven individual Siemens executives named in a FCPA enforcement action. Judge Scheindlin’s opinion can be found here. Siemens of course has been embroiled in one of the largest bribery investigations of all time. The SEC filed a separate enforcement action against several Siemens executives in connection with alleged bribery activities in Argentina. One of the defendants, Herbert Steffen, moved to dismiss contending that the court lacked personal jurisdiction over him. Steffen, a German citizen, had been CEO of Siemens Argentina twice before his retirement in 2003. He never worked in the U.S. The SEC alleged that Steffen helped facilitate a bribe to the Argentinian president to help secure a large government contract by allegedly encouraging another Siemens official to authorize bribes of Argentinian officials

 

In granting Steffen’s motion, Judge Scheindlin found that Steffen lacked sufficient contacts with the U.S. and dismissed the case against him. Judge Scheindlin found that “Steffen’s actions are far too attenuated from the resulting harm to establish minimum contacts.” She noted that “the SEC does not allege that he directed, ordered or even had awareness of the cover ups … much less that he had any involvement in the falsification of SEC filings in furtherance of the cover ups.”

 

Judge Scheindlin went on to observe that the exercise of jurisdiction over foreign defendants based on their effects upon SEC filings is “in need of a limiting principle,” adding that “if this Court were to hold that Steffen’s support for the bribery contact satisfied the minimum contacts analysis, even though he neither authorized the bribe, nor directed the cover up, much less played any role in the falsified filings, minimum contacts would be boundless.”

 

In further considering whether it would be reasonable for the Court to exercise jurisdiction over Steffen, Judge Scheindlin noted that “Steffen’s lack of geographic ties to the United States, his age, his poor proficiency in English and the forum’s diminished interest in adjudicating the matter all weigh against personal jurisdiction.” She added that the SEC and the Department of Justice “have already received comprehensive remedies against Siemens” and “Germany has resolved an action against Steffen individually.”

 

The FCPA Blog’s discussion of Judge Scheindlin’s ruling (as well as a detailed discussion of the larger background regarding the anti-bribery enforcement proceedings involving Siemens) can be found here. Victor Li’s February 20, 2013 Am Law Litigation Daily article about the ruling can be found here.

 

These two cases reached differing results, although the differing outcomes obviously depended on some very case-specific factual differences. Outcomes of personal jurisdiction motions often are very fact specific. For that reason it could be argued that there is little significance to the fact that in one case the Court found that it had personal jurisdiction over the individual defendants and in another it did not.

 

Though personal jurisdiction rulings are notoriously fact-specific, there nevertheless are certain conclusions that can be drawn from these two decisions, particularly in consideration of the question when a foreign domiciled individual charged with an FCPA violation can be subject to personal jurisdiction in the U.S. As James Dowden and Nick Berg of the Ropes & Gray law firm noted in their February 27, 2013 Law 360 article entitled “Rare Guidance On FCPA’s Reach Over Foreign Nationals” (here, registration required), the two cases “reaffirm U.S. regulators’ long-standing position that the FCPA has broad applicability to foreign nationals, while also setting the outer limits of the civil scope of the FCPA.”

 

In that regard, Judge Scheindlin herself not only referred to Judge Sullivan’s ruling in the Magyar executives’ case, but she identified the critical distinctions between the two cases. She noted first that “there is ample (and growing support in the case law for the exercise of jurisdiction over individuals who played a role in falsifying or manipulating financial statements relied upon by U.S. investors in order to cover up illegal actions directed entirely at a foreign jurisdiction.” She cited Judge Sullivan’s ruling the Magyar executives’ case as an example where the court “exercised jurisdiction over individuals who orchestrated a bribery scheme … and as part of the bribery scheme signed off on misleading management representations to the company’s auditors and signed false SEC statements.”  However, as noted above, Scheindlin found that the Siemens executive in the case before her was not alleged to have been involved in the cover ups or the falsification of the SEC filings.

 

At a minimum, the two rulings signify that though U.S. courts may properly exercise personal jurisdiction over foreign individuals in FCPA enforcement action when the facts support jurisdiction, there is a also a point when a foreign-domiciled individual’s involvement in the alleged corrupt activity is too attenuated to support personal jurisdiction. The specific considerations that matter include the extent of the individual’s connection to the actual bribery, the extent of the individual’s role in any cover-up of the bribery, and the extent of the individual’s involvement in or contribution to the falsification of the company’s financial statements.

 

A February 2013 memorandum from the Arnold & Porter law firm discussing the two cases and entitled “Two Recent Decisions Address Jurisdiction Over Foreign Defendants in FCPA Cases” can be found here.

 

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One of the more challenging exposures that many companies face is the possibility of an FCPA enforcement action. Because of the risk of fines, potential prosecution and reputational damages, many companies understand the need to implement compliance programs to try to avoid these problems. In a guest post, Al Vondra (pictured), a partner in the Professional Services practice of PwC makes the case for active compliance monitoring. In his guest post, Vondra suggests that “companies that embrace the opportunity to shore up their compliance program by proactively monitoring policies and training to see if they have gained traction can gain a competitive advantage.”

 

I would like to thank Al for his willingness to publish his guest post on this site. I welcome guest posts from responsible commentators on topics of relevance to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly. Here is Al’s guest post.

 

The global anti-corruption movement continues to grow. Today’s business environment prominently features a near zero-tolerance stand when it comes to bribery and corruption. Plenty of companies have already initiated compliance programs and policies. But far too few are taking equally appropriate steps to confirm their effectiveness and adherence. If you are not actively monitoring and testing, you may not be prepared to compete in today’s increasingly interconnected world. Leadership should take heed. Government enforcement of the Foreign Corrupt Practices Act (FCPA) will not be slowing down anytime soon. The staffing level of FCPA prosecutors is at an all-time high, and major US Attorneys’ offices around the country are devoting significant legal resources to active cases, according to government officials.

 

Moreover, while the FCPA may be the most familiar, there is a continued, growing worldwide focus on non-US anti-bribery and corruption enforcement, including the 2011 UK Bribery Act and major initiatives by the Organisation for Economic Co-operation and Development, World Economic Forum, World Bank, and the United Nations Convention Against Corruption.

 

Government enforcement rigor, combined with the continued expansion of US companies into overseas markets, means that business leaders should enhance and continue their efforts to remain in compliance with FCPA or face potential prosecution, fines, and reputational damage.

 

Companies that embrace the opportunity to shore up their compliance program by proactively monitoring policies and training to see if they have gained traction can gain a competitive advantage.

 

The regulatory landscape: Reinforcing the focus on monitoring and testing

Regulators expect companies to assess their corruption risk, establish a compliance program, and actively monitor and test that program. Many businesses currently rely too heavily on corporate policies without field testing their efficacy. They can instead be actively monitoring and testing transactions to confirm compliance. Although many business leaders are more familiar with FCPA anti-bribery provisions, the DOJ and SEC are ever-more frequently citing violations of internal control and books and records provisions. These cases were settled primarily through private letter, deferred prosecution, or non- prosecution agreements.

 

The DOJ frequently uses deferred prosecution agreements and non- prosecution agreements as tools to help establish new leading practices for corporate compliance programs in numerous diverse industries and legal areas. Such agreements enable prosecutors and other government regulators to craft detailed compliance measures for one company in a given industry to serve as a benchmarking signal for other companies.

 

Many settlement agreements refer to agreed upon compliance programs that include active monitoring at foreign locations to avoid future prosecution. There is a strong and increasing regulatory expectation that companies will continuously monitor and test their compliance programs. This is not a new concept. The expectation is cited in the US Sentencing Guidelines, which call upon entities to confirm that their ethics and compliance programs are being followed and to perform ongoing monitoring and auditing to do so. SEC officials also are urging companies to focus on FCPA controls in testing their internal financial controls, even as the agency continues to bring charges against both companies and individuals.

 

 

The recent DOJ deferred prosecution agreement for a large pharmaceutical company addresses their expectation that anti-corruption reviews involving monitoring and testing will be performed proactively, with portions of the agreement containing more detailed compliance obligations than were previously issued.

 

A recent SEC complaint against a large software developer also discussed the company’s failure to audit certain anti-corruption controls, maintaining:

 

•              The entity was vulnerable to misuse of 'parked' funds on the part of employees.

•              The entity had failed to audit and compare the distributor’s margin against the end user price to confirm that the price structure did not house excess margins in the pricing structure.

•              The company neither targeted transparency, nor audited distributors’ third party payments on its behalf, despite policies that called for approvals for marketing expense payments.

 

Monitoring and testing: The business case

Active monitoring and testing can help to mitigate the risk that your entity will face costly, time-consuming investigations if potential violations are publically disclosed. In addition to responding proactively to the uptick in anti-corruption sentiment around the world, companies can derive significant benefits from FCPA monitoring and testing. Such efforts can enable them to:

 

•              Alert employees to the commitment of management and the board to ethical business dealings.

•              Reinforce company ethics policies.

•              Gain a better understanding of dealings with third parties and distributors.

•              Give management and the board a better sense of the effectiveness of and adherence to the company’s ethics policies.

•              Reduce employee and vendor fraud.

•              Establish credibility with regulatory bodies; for example, the DOJ recently disclosed its decision not to prosecute a large investment bank, in part because of its compliance program, specifically referencing the way the company tested its policies and procedures on a routine basis.

 

Despite regulatory expectations and the advantages to be gained through proactivity, many companies still are not responding with sufficient, thorough FCPA testing protocols. Operating in a world constrained by finite resources, many business leaders have not implemented effective self-audit programs to measure compliance.

 

The kind of monitoring and testing needed should also not be confused with typical financial statement or operational auditing. For one thing, there is no materiality limit on corruption violations under US law. For another, the monitoring and testing we are concerned with here requires a forensic mindset and delves into areas that usually are not reviewed.

 

Absent thorough active monitoring and risk assessment, including setting objectives, identifying and analyzing risks, and performing checks of related policies and controls, it is difficult to determine how well employees and third parties understand and comply with anti-bribery and corruption policies.

 

Effective policies, training, good tone at the top, and general supervisory authority are just a start. Leaders simply will not typically be able to effectively and quickly detect potential violations if they are relying on ineffective, inconsistent monitoring and testing. 

 

Potential violations, often buried in the company’s books and records, if not ferreted out, simply remain hidden. Account descriptions often are vague and include thousands of transactions that are consolidated in the company’s books. Improper payments can thus be masked from supervisory management reviewing the financial results.

 

In the rare instance that a company has minimal FCPA risk, for example, if it is not a public company and it has no international operations, there may be no need to do FCPA monitoring. However, for a public company with international operations, it becomes a lot harder to ignore the threat of corruption.

 

How are they doing? The monitoring and testing landscape

Where do most companies rank in terms of leading anti-corruption practices?

 

At the high end of leading practices are companies that have at some point already faced government scrutiny relating to a violation; they have paid a lot of money and invested significant management resources investigating and remediating their programs, which tend to be well developed and contain critical elements, including active monitoring and testing in high-risk areas.

 

They ‘get it’ and have already paid the price for an ineffective program.

 

The second group of companies, at the low end of the curve, includes companies that have not faced such scrutiny and may believe that they are ethical and do not have a problem that anyone needs to worry about. They may have a code of conduct posted on the company website, but their training is not very good; their policies are not very clear; and they do virtually no monitoring.

 

Finally, there are companies that fall somewhere in the middle, with some good and some not-so-good practices.

 

Why aren’t more businesses buying in?

Why aren’t more companies doing better monitoring? There are many reasons, including a lack of effective, qualified resources, attempts to save costs, and a lack of commitment by management or encouragement by the board or audit committee. They also may believe that they already are doing enough.

 

Most compliance professionals are capable when it comes to developing policies regarding anti-corruption and anti-bribery and getting those policies into the hands of the business people who need to follow them. But the challenge is this: How do you know that what has been sent out from the corporate or regional center is actually being followed? That is where many companies fall short.

 

They may not have taken the time and effort to adequately test and monitor their employees’ record of following the program.

 

Another challenge is a dearth of qualified testers; that is, there are relatively few people who really know how to do this well, and getting them into one of the higher-risk countries when and where you need them is not always easy. This requires qualified and experienced professionals who can speak the local language; understand local business customs, schemes and regulations; and have experience in transactional testing of local business records and documentation. Many companies struggle to implement the monitoring and testing aspect of the compliance program and then learn from the findings. If asked how detection controls have changed in the last two years because of the compliance program, some companies may not be able to answer. Some companies do it quite well; others have not even started.

 

Testing and analyzing those controls simply cannot be done from the corporate center. You have to go into the countries and review the books and records and see what is happening on site. Sometimes, there is too much of a tendency to believe that it is enough to train people and send them out with the right rules. But you will not know what is really happening unless you pick up the rocks and look underneath. After all, isn’t it better to know?

 

The case for proactivity

Why wait for whistleblowers to alert management and the board to FCPA issues? The CEO, CFO, and others responsible for making certifications surrounding internal control existence and effectiveness in periodic financial filings need to ask themselves: Am I really confident of what is in the books in Country X? Right now, if testing of internal controls for anti-corruption is not yet routine for your company, such comfort may be cold at best. As a result, management may be knowingly or unknowingly putting themselves at personal risk of violating Sarbanes-Oxley’s certification provisions.

 

Active monitoring and testing can better promote compliance by creating a culture where employees know they will regularly be held accountable for their actions — a proven method for strengthening internal compliance. Thorough analysis can enable both preventative and detective measures. An effective monitoring strategy can help confirm compliance with the books and records and internal control provisions.

 

Failing to monitor is like living in a home without a smoke alarm system. You won’t know about the fire until you notice the smoke and your house is gone. Transaction testing also can validate the completeness and accuracy of your books and records. Over time, a process for following up and resolving red flags may itself become a control and provide evidence of a sound compliance program.

 

A proactive program will demonstrate to the regulatory community and the growing global anti-corruption movement that your organization truly understands the importance of engaging ethically enterprise-wide and across your network of stakeholders. This can boost your credibility and even reduce adverse consequences should an unforeseen problem bring regulatory scrutiny your way. At the same time, running a well-established, monitored, and tested program will give you the confidence of knowing that as far as compliance is concerned, your policies are working effectively and as intended.

 

Simply stated, staying clear of corruption is good for your business and good for your brand. It is good to know — and to demonstrate — that you are in good company.

 

Acknowledgement

Albert A. Vondra is a Partner in the Forensic Services practice of PwC in Washington, DC and Cleveland, Ohio. Mr. Vondra is a CPA (licensed in Ohio, Virginia, and the District of Columbia), a Certified Fraud Examiner, Certified in Financial Forensics by the American Institute of Certified Public Accountants, and an attorney admitted to practice law in the State of Ohio. He can be reached at al.vondra@us.pwc.com or by calling (216) 496-7716.

 

Upcoming Event: Readers of this blog may be interested to know about a seminar that will be held at the St. John's School of Risk Management in New York on February 5, 2013 entitled "A Day at Lloyd's: An Introduction to teh Lloy's Market Structure and the Use of ADR to Manage Disputes Involving Lloyd's."  The event will be moderated by my good friend Perry Granof and includes a number of distinguished speakers, among them anotehr good friend, Nilam Sharma of the Ince & Co. law firm. The event, which will take place on the day prior to the beginning of the PLUS D&O Symposium,  runs from 12:30 to 5:00 pm. Further information about the event can be found here. You can register for the event here.

 

Break in the Action: The D&O DIary will be slowing down over the next few days in recognition of the holiday season. We will resume our normal publication schedule after the new year. Best wishes for a happy holiday season to all.

 

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An overabundance of airplane time and a shortage of Internet access (not the mention my day job’s unrelenting requirements) have kept The D&O Diary on the blogging sidelines despite a host of noteworthy events in recent days. The march of events moves ever onward, but before the sands of time envelop recent notable events altogether, we note them briefly here.

 

Alcoa Settles Bribery Suit With Alba: On October 9, 2012, Alcoa announced (here) that it had agreed to pay Aluminum Bahrain B.S.C. (better known as “Alba”) $85 million to settle the long-running RICO action that the state-owned Bahraini aluminum smelter had filed against the company in the Western District of Pennsylvania. The settlement is noteworthy in a number of respects, not the least of which the settlement’s size. The settlement is also noteworthy given the identity of the claimant, as discussed below.

 

As discussed here, in February 2008, Alba had sued Alcoa, one of its affiliates, and two individuals (one of whom was an officer of an Alcoa affiliate), alleging that the defendants had engaged in a 15-year conspiracy involving overcharging, fraud and bribery of Bahraini officials. The complaint alleges that one of the individual defendants, Victor Daladeh, funneled payments to one or more (unnamed) Bahraini officials as part of an alleged conspiracy to cause Alba to cede a portion of its equity to Alcoa, to pay Alcoa inflated prices for alumina, and to corrupt the integrity of senior Bahraini officials. Alba’s complaint sought to recover damages from the defendants based on the alleged violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), conspiracy to violate RICO, and for fraud.

 

The case was stayed for several years while related U.S. government investigations continued. (The government investigations are continuing.) However, in November last year, Alcoa’s lawyers persuaded the Western District of Pennsylvania Judge Donetta Ambrose to lift the stay so that the defendants could file a motion to dismiss. Among other things, the defendants argued, in reliance on the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, that the court should dismiss the case because the alleged wronging on which Alba relied in support of its claim took place entirely outside the U.S. and therefore not appropriately the subject of a lawsuit in the U.S. under U.S. laws. As discussed in Victor Li’s August 1, 2012 Corporate Counsel article (here), Judge Ambrose rejected defendants’ motion, finding that Alcoa’s Pittsburgh headquarters was the “nerve center” of the alleged scheme, because the control and decision-making of the alleged conspiratorial enterprise came from Pittsburgh.  

 

According to its October 9 press release, Alcoa will pay the $85 million settlement amount in two installments, with half to be made at the time of the settlement and the other half to be paid one year later. The press release also states that Alcoa and Alba have “resumed a commercial relationship” and entered into a long-term supply agreement, “demonstrating a mutual desire to work together going forward.” The settlement does not resolve Alba’s claims against Daladeh, who according to news reports, has been arrested in October 2011 by British officials and charged with bribing officials at Alba.

 

As I have previously noted on this blog, one of phenomena associated with the recent upsurge in FCPA enforcement activity has been related growth in follow-on shareholder litigation. However, by contrast to these more common types of follow-on civil suits, this action was not brought by Alcoa’s shareholders; rather, this lawsuit was brought by the alleged victims of the corrupt activity (and indeed, the suit was initiated before there had been any separate governmental enforcement action; the government action followed after the civil suit).

 

As anti-bribery enforcement activity has increased, the prospect for follow-on civil litigation has also grown. In that regard, the size of the settlement in this case and the claimant’s relative success in bringing its claim will not go unnoticed. The likelihood is that companies that become enmeshed in bribery allegations could also face related civil litigation, and in light of this sizeable settlement, the threat of civil litigation will include not only the possibility of claims from shareholders, but also possible claims from the purported victims of the alleged corrupt activity.

 

Pfizer Settles Celebrex-Related Securities Suit for $164 Million: According to papers filed with the Court, Pfizer has settled the long-running securities suit alleging that Pharmacia (which Pfizer acquired in 2003) had misrepresented the safety of its anti-inflammatory drug, Celebrex, for $164 million. A copy of the parties’ October 5, 2012 stipulation of settlement can be found here. 

 

As discussed here, shareholders first sued Pharmacia and certain of its directors and officers in 2003, alleging that the company had released only part of a long-term clinical study the company had commissioned on the side effects of the drug. The complaint also alleged that scientists affiliated with the company had used the partial data to write an article in the Journal of t he American Medical Association, while failing to reveal that only part of the data was used. When Pharmacia later sought to the FDA’s approval to market the drug without certain warning labels, the agency declined based on questions concerning the completeness of the study results, following which the company’s share price declined.

 

This case had a long and complex procedural history. District of New Jersey Anne Thompson had initially dismissed the case on statute of limitations ground. But as discussed here, in 2009, the Third Circuit reversed the district court, and the case returned to the District Court. The settlement comes as an October 22, 2012 trial date loomed. 

 

Nate Raymond and Ransdell Pierson’s October 9, 2012 Reuters article about the settlement can be found here.

 

This settlement is noteworthy in many respects, not least of which because of its size. However, in a world of class action securities lawsuit settlements measured in the billions, even a settlement of this size does not attract as much attention as it might have at one time. Indeed, according to my research, this $164 million settlement does not even break the top 50 of all time securities lawsuit settlements. It is not even the largest securities suit settlement, having been exceeded, among others, by Bristol Myers Squibb’s $300 million securities lawsuit settlement (about which refer here).  The settlement amount alone does not take into account the defense fees incurred, which, given the case’s long and complicated procedural history, also likely were substantial (particularly given the approaching trial date). 

 

It is not an original observation, but the total economic cost of this kind of litigation is truly astonishing. 

 

Breaking Lull, FDIC Files Latest Failed Bank Lawsuit: On October 2, 2012, in the first lawsuit the FDIC has filed since July in its capacity as receiver of a failed bank against the bank’s former directors and officers, the FDIC filed a lawsuit in the Northern District of Illinois against six former directors and officers of the failed Benchmark Bank of Aurora, Illinois. The FDIC’s complaint can be found here.

 

Benchmark Bank failed on December 4, 2009 (about which refer here). In its complaint, the FDIC alleges that the defendants breached their duties of care by approving certain high-risk acquisition, development and construction loans. The FDIC seeks to recover losses “of at least $13.3 million” allegedly caused by the defendants gross negligence, negligence and breaches of fiduciary duties.

 

The Benchmark Bank lawsuit is the fifteenth failed bank lawsuit the FDIC has filed during 2012 and the 33^rd overall that the FDIC has filed as part of the current bank failure wave. However, it is the first the FDIC has filed since mid-July and only the third the FDIC has filed since late May. The slow filing pace is all the more surprising as comes three years after what had been the period when bank closures were ramping up in earnest. All is equal, it seems as if there would have been more lawsuits filed like this one as the three year closure anniversary approached.

 

The slowdown is all the more surprising because the lull has come even though the FDIC has continued to indicate on its website (here) on a monthly basis that the number of lawsuits the agency has authorized has increased. Indeed, in its latest update (dated October 9. 2012), the FDIC indicated that it has authorized suits in connection with 80 failed institutions against 665 individuals for D&O liability. These figures are inclusive of the 33 filed D&O lawsuits involving 32 institutions, naming 272 former directors and officers. filed so far. 

 

As the number of authorized lawsuits has continued to accumulate and as the three year closure anniversary of an increasingly large number of banks has approached, it has seemed as if we would be seeing increasing numbers of lawsuits filed. Yet in the last five months there have only been three new suits filed, and this latest complaint is the first in three months. Knowledgeable participants in this process have advised me that part of the reason for the slowdown is that in a number of instances the FDIC is engaged in negotiations to see if the matters can be resolved without litigation. But as the number of lawsuits authorized continues to increase it does seem likely that sooner or later we will be seeing an upsurge in new complaints. It just hasn’t happened yet.

 

In the meantime, it is reassuring to note that the number of new bank closures has dwindled. There have been no new bank closures so far during October 2012, after only three in September 2012 and only one in August 2012. It certainly can be hoped that now, more than four years after the depths of the financial crisis, perhaps the wave of bank closures is finally about to come to an end.

 

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Among the many litigation threats companies face, a couple of specific kinds of cases have recently emerged: the civil action following on in the wake of an FCPA investigation or enforcement action, and the shareholder suit following after a negative “say on pay” vote. Many companies involved in an FCPA investigation or experiencing a negative say on pay vote have been hit with these kinds of suits However, as discussed below, more recently these cases appear to be failing to get past the preliminary motions stage.

 

FCPA Follow-On Civil Suit Dismissals

There is no private right of action under the Foreign Corrupt Practices Act. However, as I have noted previously on this blog, companies announcing an FCPA investigation or enforcement action often are hit with follow-on civil actions, in which the claimants typically allege that the company’s directors breached their fiduciary duties by failing to ensure that the company had adequate internal controls or compliance programs to have prevented the improper payments.

 

In at least a couple of recent instances, lawsuits involving these types of allegations have failed to get past the preliminary dismissal motions. The most example of this involved the shareholders’ derivative suit filed in the District of Massachusetts against Smith & Wesson, as nominal defendant, and members of its board of directors. The complaint followed after the indictment on FCPA allegations of the company’s former director of international sales.  (The indictment was later dismissed.) The claimants essentially alleged that the company’s directors breached their duty of care by failing to have effective FCPA controls and oversight. The claimants did not make a pre-suit demand on the company’s board, alleging instead that the demand would have been futile. The defendants moved to dismiss the complaint on the grounds that the claimants had failed to establish demand futility.

 

In a July 25, 2012 order (here), District of Massachusetts Judge Michael A. Ponsor granted the defendants’ motion to dismiss. Judge Ponsor found two reasons for concluding that the plaintiffs had failed to establish demand futility. The first is that a previous decision in a prior, unrelated state court derivative suit (involving allegations that the company had misrepresented its financial condition), the court had concluded that demand was not excused in that prior suit because there was a disinterested and independent board majority that could have considered the pre-suit demand. Applying principles of issue preclusion, Judge Ponsor concluded that the prior court’s conclusion about the independence of the board majority was determinative of the issue in this case.

 

Judge Ponsor did go on to note that even if there had been no prior determination of the issue, the plaintiffs in this case had failed to present the requisite particularized allegations to establish demand futility. He noted that “nothing offered in the complaint comes close to pushing the case” over the “difficult threshold” to establish that demand would be futile, adding that “the complaint is flatly devoid of any adequate justification for failing to make the required pre-suit demand.”

 

The decision in the Smith & Wesson case follows shortly after a similar decision in a case in the Eastern District of Louisiana involving Tidewater, Inc. In November 2011, and in settlement of FCPA allegations involving alleged improper payments in Azerbaijan and Nigeria, the company agreed to pay the SEC $8.1 million in disgorgement and pre-judgment interesting, and also agreed to pay the U.S. Department of Justice a $7.35 million penalty as part of a Deferred Prosecution Agreement.

 

A Tidewater shareholder filed a shareholder derivative action against Tidewater, as nominal defendant, and against its board, alleging that the directors had breached their fiduciary duty by disregarding the payment of bribes and by failing to ensure that the company had adequate internal controls to ascertain FCPA compliance. The defendants moved to dismiss on the grounds that the plaintiff had failed to make pre-suit demand on the board and that the plaintiff had not pled sufficient facts to establish demand futility.

 

In a July 2, 2012 order (here), Eastern District of Louisiana Judge Jane Triche-Milazzo granted the defendants’ motion to dismiss, finding that the “even taking all of plaintiff’s allegations as truth, he has failed to plead with particularity that demand on the board would have been futile.” However, Judge Triche-Milazzo did grant the plaintiffs’ leave to file a motion to amend their complaint.

 

In addition to these cases involving the pre-suit demand requirements, at a recent hearing in the Delaware Chancery Court involving civil litigation arising out of the recent Wal-Mart bribery scandal, Chancellor Leo Strine chastised the prospective lead plaintiffs for rushing to file their suits without first making a books are records request as allowed under the Delaware statutes.

 

As discussed in Lance Duroni’s July 16, 2012 article on Law 360 (here, registration required) about the Wal-Mart hearing, the purpose of the hearing was to determine which of the competing claimants would be named as lead plaintiff in the Delaware derivative litigation seeking to hold certain Wal-Mart directors and officers liable in connection with the company’s alleged improper payments in Mexico. Chancellor Strine rejected motions from both erstwhile lead plaintiffs, stating, according to the article, that “more energy has been spent by the dueling plaintiffs on who gets to be lead plaintiff and counsel than was spent investigating and writing these complaints.” At least one other claimant had in fact made a books and records request, and Strine said he would defer choosing a lead plaintiff until the company had responded to the request and the parties had beefed up their complaints. Alison Frankel also has a July 17, 2012 article on her On the Case blog (here) discussing Chancellor Strine’s ruling in the Wal-Mart case.

 

If nothing else, these cases show that claimants eager to pursue shareholder derivative suits following on FCPA investigations cannot dispense with the procedural prerequisites. The requirement to conduct pre-suit due diligence and then to make the requisite pre-suit demand are substantial requirements with which a failure to comply can be prohibitive. At a minimum, the requirement for pre-suit due diligence raises the cost for prospective litigants, and the enforcement of the requirement for a pre-suit demand could represent an insurmountable barrier in many cases.

 

These procedural requirements are of course not new. If however prospective litigants recognize that they are not going to be able to bypass these requirements, at least some prospective litigants may be deterred from filing their suits. If that were to happen, there might be fewer of these FCPA enforcement follow-on civil suits filed I n the first place.

 

Say on Pay Suits Fare Poorly

 During 2011, the first year in which companies held advisory shareholder votes on executive compensation as required by the Dodd-Frank Act, many of the companies experiencing negative shareholder votes subsequently were hit with shareholder suits, often filed in reliance of the negative “say on pay” vote (as I discussed in posts at the time, here and here).

 

Early on, these cases looked like they may have legs, particularly after a judge in the Southern District of Ohio denied the motion to dismiss in the shareholder suit filed against Cincinnati Bell and certain of its directors and officers after the company experienced a negative say on pay vote. As discussed here, Southern District of Ohio  Judge Timothy Black held in a September 2011 opinion that, where plaintiffs alleged that the company’s directors breached their fiduciary duty when they approved an executive pay package after a negative say on pay vote, “the plaintiff’s allegations create a reasonable doubt that the challenged transaction is the result of valid business judgment, and accordingly, the directors possess a disqualifying interest sufficient to render pre-suit demand futile and hence unnecessary.”

 

However, as discussed in a July 10, 2012 memo from the Vinson & Elkins law firm entitled “Say-on-Pay Lawsuits Losing Steam” (here), many courts considering these same issues after the Cincinnati Bell decision have reached a contrary conclusion, and have rejected the argument that a negative say on pay vote rebuts the business judgment rule or constitutes a disqualifying interest. The subsequent cases “indicate that Cincinnati Bell’s approach is quickly falling in to disfavor,” noting that “courts have repeatedly disavowed this approach.”

 

The article notes that these more recent decisions do not necessarily mean that “companies will cease to be sued for negative say-on-pay results.” However, the decisions “do suggest that derivative suits in the wake of an adverse say-on-pay vote may soon be less common than before.”

 

Both of these types of lawsuits – the follow-on FCPA-related civil action and the shareholder suit following a negative say-on-pay vote – seemed to attract a great deal of interest from certain parts of the plaintiffs’ bar. However, recent dismissal motion outcomes in these cases are beginning to suggest that these cases are not faring all that well in the courts. Even if these recent dismissal motion rulings do not discourage the filing of these cases altogether, it may deter some suits from being filed. In many instances these kinds of suits may not represent the opportunity that plaintiffs’ lawyers may have thought earlier on.

 

To be sure, many of the say-on-pay lawsuits may not have been about money. In some instances, the lawsuits may simply represent one more way that activist shareholders are trying to pressure corporate boards about executive compensation issues. To the extent that the lawsuits are simply one more tactical approach in a larger strategic battle about executive compensation, the adverse dismissal motion rulings may represent less of a deterrent. 

 

Community Banks and D&O Insurance: If you have not yet seen it, you may want to take a look at the June 2012 paper that Advisen has posted on its website entitled “Community Bank Lending: Practices and Failures, and the Role of Directors and Officers (D&O) Insurance” (here). The paper provides an interesting top level overview of the risks and exposures facing community banks and their directors and officers – particularly the former directors and officers of failed banks. A more current update of the statistical information in the paper can be found in my recent post on FDIC failed bank lawsuits here.

 

This is Going to Really Bug You: In his article “The Mosquito Solution” in the July 16, 2012 issue of The New Yorker (here), Michael Spector writes, with respect to mosquitos, that “there has never been a more effective killing machine” adding that “researchers estimate that mosquitos have been responsible for half of the deaths in human history.”

 

Malaria accounts for much of the mortality, but mosquitos “also transmit scores of other potentially fatal infections, including yellow fever, dengue fever, chikungunya, lymphatic filariasis, Rift Valley fever, West Nile fever and several types of encephalitis.” Mosquitos “pose a greater risk to a larger number of people than ever before.”

 

Spector’s article describes an experimental approach to try to combat mosquitos, by releasing genetically altered male mosquitos into the wild. The modified males mate but their progeny are genetically programed to die quickly after hatching. This approach has shown early promise by reducing the mosquito populations in controlled release areas. However, the proposal to release genetically altered bugs into the wild has proved to be controversial, as described in the article.

 

This is an interesting and important article.

 

Three Thoughts About the London Olympics:

 

1. Her Royal Majesty Queen Elizabeth II as a Bond  girl. Sheer brilliance. The rest of the opening ceremony looked a lot like chaos dressed up in period costumes.

 

2. After waiting four years to see Olympic sports competition, and after an entire day of Olympic competition in which numerous medals were awarded, we turn on our TV in prime time, and what does NBC choose to show us? A preliminary round of Beach Volleyball. And Ryan Seacrest. Oh. My. God.   

 

3. Ryan Lochte wins Olympic gold in the 400 meter individual medley. Switch to a commercial break with three ads featuring Ryan Lochte. And to think that Jim Thorpe once had to forfeit his Olympic medals for violating the principles of amateurism because he had played semi-pro baseball to earn a living.

 

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As a result of developments during 2011, there is a “growing sense of urgency amongst FCPA practitioners as to the direction the statute will take in the coming years,” according to a law firm’s year-end FCPA report. The January 3, 2011 memo from the Gibson Dunn law firm, entitled “2011 Year-End Update,” can be found here. Whatever else might be said, according to the report, “these are interesting times for the FCPA.”

 

According to the report, FCPA enforcement activity remains near all time highs. In terms of FCPA enforcement actions initiated by the Department of Justice and the SEC, 2011 “was the second most prolific ear in the history of FCPA enforcement.” The 23 DoJ actions and the 25 SEC actions are “outmatched only by the juggernaut that was 2010.” However, the report notes, the 2010 statistics were “elevated substantially” by the 22-defendant SHOT  show arrests.

 

The report notes a number of interesting FCPA enforcement trends during 2011, including the increasing practice of U.S. regulators to pursue enforcement actions against individual defendants after negotiated settlements with the individuals’ employer. As an example, the report cites the recent enforcement actions brought against seven former Siemens executive and two former Siemens third-party agents. Among other things the report notes, the nine targeted individuals are all foreign nationals. In other words, the parent company, the alleged wrongful activity and the targeted individuals all took place or are domiciled outside the United States, which illustrates the U.S. regulators’’ willingness to “polic conduct beyond [U.S.] borders that it perceives as affecting U.S. markets.

 

The report also referenced the SEC’s willingness to bring unsettled FCPA enforcement actions as evidence of the agency’s “more aggressive enforcement stance.” In the past the agency “has not been known to file many FCPA cases absent an advance agreement to settle the matter.” But during 2011, the SEC brought 10 unsettled FCPA enforcement actions, more than in the previous 33 years of FCPA enforcement combined.”

 

FCPA enforcement actions during 2011 also reinforced the “imperative that acquisitive companies conduct thorough pre-acquisition due diligence and equally robust post-acquisition compliance integration.”

 

The report also notes the DoJ’s recent initiative to pursue foreign government officials who received the bribes paid by FCPA defendants. The FCPA itself does not criminalize the receipt of bribes by foreign officials, but the Department of Justice has tried to use two tools to reach the recipients: money laundering statutes and civil forfeiture actions. These aggressive efforts are still in their early stages.

 

The report notes that though the FCPA itself does not provide for a private right of action, “enterprising plaintiffs have circumvented the FCPA’s lack of a private redress mechanism by filing derivative lawsuits, securities fraud actions, tort and contract law claims, employment lawsuits, and private actions under the Racketeer Influenced and Corrupt Organizations (RICO) Act.” Among other cases the report cites is the FCPA-related derivative lawsuit involving Avon Products (refer here, footnote 5 to the financial statements), and the FCPA-related derivative lawsuits involving Bio-Rad Laboratories (refer here) and Tidewater, Inc. (refer here). Avon is also the subject of an FCPA-related securities class action lawsuit as well (refer here).

 

The report also canvasses the various pending legislative and policy developments that could lead to changes to the FCPA itself or its enforcement during 2012. The report also catalogues global anti-corruption enforcement developments. Overall, the report is interesting and well-written, and well worth reading in its entirety.

 

Readers of this blog will be most interesting in the report’s commentary about FCPA-related civil litigation. The follow-on litigation provides what I have called in the past the link to the D&O insurance policy. 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 readers who want a more comprehensive overview of both the historical and current state of FCPA enforcement will want to refer to the Shearman and Sterling law firm’s mammoth 692-page January 3, 2011 “FCPA Digest” (here). The Shearman and Sterling report has a more detailed statistical overview and an exhaustively detailed case summarization. The Shearman & Sterling report also sets out in specific case detail a catalog of follow-on civil actions arising out of FCPA enforcement activities (refer to pages 538 through 620 of the report). The value of the Shearman & Sterling approach is that it is not limited just to actions filed or pending in 2011, but is historically all-encompassing – although some readers may find the report’s sheer size intimidating.

 

The Morrison  Foerster law firm has a January 5, 2012 client alert (here) detailed the fines and penalties assessed under the FCPA in 2011. A January 6, 2011 Corporate Counsel article reviewing the Gibson Dunn and Shearman & Sterling memos can be found here.

 

Readers interested in the phenomenon of FCPA follow-on civil litigation will want to read the very interesting post on the FCPA Professor Blog (here) about the $45 million settlement that Innospec in an antitrust lawsuit brought by a competitor following Innospec’s $25.3 million settlement of an FCPA enforcement action. Professor Mike Kohler has some very provocative observations about the case and the settlement.

 

Finally, for reference purposes, The FCPA Blog has a comprehensive list (dated January 4, 2012) of all severity-eight companies that have disclosed in their respective SEC filings currently pending FCPA investigations.

 

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In a May 27, 2011 post on the FCPA Compliance and Ethics Blog (here), Tom Fox has some interesting observations about the ongoing FCPA gun sting trial. (Readers will recall that this prosecution involves numerous individuals from the armaments industry who were caught up in a government sting operation that included extensive wiretaps and an FBI agent posing as a representative of an African government.)

 

Among other things, Fox comments that this prosecution is a “game changer” because of the government’s use of “organized crime fighting techniques in very mundane white collar crime.”

 

Fox’s point is a serious one, particularly in view of the government’s use of wiretaps in several other recent high-profile prosecutions. The insider trading conviction of Raj Rajaratnam depended critically on extensive government wiretaps. The prosecution of the former big law associate who had passed along inside information gained from the law firms where he worked also relied on use of wiretaps.

 

The government’s use of these aggressive crime-fighting techniques underscores how seriously the government is taking its responsibility to enforce these laws. The government’s willingness to use these techniques also has important implications for anyone concerned about the potential exposures for companies and their executives. The most obvious lesson is that the government is vigilant and will actively pursue criminal activity. For that reason, corporate compliance efforts are critically important.

 

Another, perhaps more chilling implication is that presuming confidentiality for even the most private conversations and communications could be dangerous. There is probably a larger essay for another day here. Suffice it to say that the line between necessary vigilance and intrusive surveillance is a fine one, and the government’s involvement in monitoring its citizen’s activities is fraught with difficulties. Some might say it is only those involved in criminal activities that have any thing to fear.  I note that we only hear about the wiretaps that result in criminal prosecutions. One can only wonder about the extent of governmental intrusion into purely lawful communications.

 

Independent Director Liability Insurance: Do independent directors need a separate liability insurance policy? The IDL insurance product has been around for years, though relatively few companies buy it. The problem is that sometimes when things go wrong, things go catastrophically wrong. Though IDL continues to attract relatively few buyers, there are occasions when it could be critically important. A May 26, 2011 article from Corporate Secretary magazine (reprinted here) takes a closer look at the IDL product. (Full disclosure, I was interviewed for the article).

 

Take Two: Perhaps there are no panaceas, but there may be one thing Americans could do to solve many of their problems -- everything “from stuck zippers to the national debt” -- according to a recent report you might have missed.

 

The American Scene: A series of recent trips has reminded me that there are a multitude of beautiful places in this big country. Among other delightful places I have visited are several that are well worth the journey, including Davidson, North Carolina; Lake Tahoe, California; Denver, Colorado; and Lexington, Virginia.

 

My most recent sojourn, a Memorial Day weekend  trip to South Carolina for a wedding, introduced me to Greenville, which is yet another delightful surprise. The cluster of restored buildings and pedestrian bridges surrounding the waterfalls on the Reedy River and the blocks of shops and restaurants along the tree-lined Main Street make the town a pleasant and enjoyable place to explore. Greenville is only one of several U.S. cities that recently have made big investments in reorienting themselves toward their riverine setting, including Dubuque, Iowa and Jacksonville, Florida.

 

Travel has its stresses and headaches, but it also occasionally affords agreeable discoveries that reward the exertion. Truly, you could explore this country endlessly and never exhaust its aesthetic possibilities.    

 

 

Greenville, South Carolina  May 28, 2011

 

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Since late last year, reports have been circulating that the U.S. government is investigating whether drug companies paid bribes overseas to increase sales and to obtain regulatory approvals. Some firms have now announced that they have reached settlements with enforcement authorities. And now the first civil lawsuit relating to these investigations has been filed, as discussed below.

 

According to press reports and company filings, a number of companies have disclosed last year that they were being investigated for possible FCPA investigations involving a broad range of possible violations including bribing government-employed doctors; paying sales agent commissions that are passed along to doctors, paying hospital committees to approve drug purchases and paying regulators to win drug approvals. Additional press coverage regarding the breadth of this industry probe can be found here.

 

The first enforcement action and  settlement related to this investigation emerged last month, when governmental regulators announced that Johnson & Johnson had agreed to pay more than $70 million dollars to settle FCPA-related allegations. The SEC’s April 8, 2011 litigation release can be found here, the U.S. Department of Justice’s April 8, 2011 press release can be found here and the U.K. Serious Fraud Office’s press release can be found here.

 

As reflected in the enforcement authorities’ various press releases, Johnson & Johnson’s subsidiaries, employees and agents were alleged to have paid bribes to public doctors and administrators in Greece, Poland and Romania and kickbacks to Iraq to win business there. Johnson & Johnson’s payments to settle the various probes included $48.6 million to the SEC in disgorgement and prejudgment interest, a $21.4 million criminal penalty to the Justice Department and a £4.8 million ($7.8 million) to the U.K. Serious Frauds Office. A detailed overview of the allegations and the settlements can be found on the FCPA Professor’s Blog (here). According to the FCPA Blog (here), the Johnson & Johnson settlement is the tenth largest FCPA settlement ever.

 

Moreover, it appears that other settlements arising out of the probe may soon follow. Last week, Eli Lilly. disclosed that it is in “advanced discussions” to settle bribery related allegations. According to news reports, the activities under investigation involve alleged improper payments in Poland and possibly include activities in other countries as well.

 

The ongoing investigation is affecting ordinary business operations in companies caught up in the probe. For example, SciClone Pharmaceuticals announced earlier this week that its compensation committee would defer decisions on executive compensation until its board receives a report of a foreign bribery probe. The internal investigation is said to be parallel to that of the U.S. enforcement authorities.

 

And now it appears that the ongoing drug company bribery probe has also produced its first civil lawsuit. On May 2, 2011 investors filed a shareholders’ derivative suit in the District of New Jersey against Johnson & Johnson, as nominal defendant, and eleven board members, relating to the company’s settlement of the bribery charges. The complaint, which can be found here, alleges that the individual defendants breached their duty of loyalty by “failing to cause J&J to implement an internal controls system for detecting and preventing bribes to public doctors and administrators in Greece, Poland, and Romania, and kickbacks to Iraq to win business there.”

 

The complaint asserts claims for breach of fiduciary duty, mismanagement, abuse of control, corporate waste, unjust enrichment and violations of the federal securities laws.” The complaint seeks to hold the individuals liable to the company for damages, which the complaint alleges, referring to the fines, disgorgement and interest that the company has agreed to pay, exceed $70 million.

 

The FCPA itself does not provide for a private right of action. But as I have observed in previous posts (refer for example here) , one of the frequent accompaniments of an FCPA enforcement action is a follow on civil action, of the type filed against the Johnson & Johnson officials. And while the fines, disgorgements and penalties paid in connection with the FCPA settlement would not typically be covered un der a D&O policy, the defense costs incurred in connection with the follow on civil action would be covered, and settlements and judgments entered in the civil action would at least potentially be covered, subject to all of the applicable policies terms and conditions.

 

With the signs suggesting that there may be further enforcement actions and settlements in connection with the ongoing pharmaceutical industry bribery probe, there is an accompanying concern that as the overall investigation moves forward, there may also be a parallel wave of follow on civil litigation. This possibility is not only an added concern for the affected companies themselves and their senior executives, but is also a concern for the D&O insurance carriers.

 

There are a number of interesting features of the Johnson & Johnson settlement that may be significant in connection with the continuing investigations against the other drug companies. The first is that in connection with the Johnson & Johnson enforcement action, the governmental authorities took the position that the FCPA was relevant with respect to payments made to doctors in the counties specified. The position of the SEC and the other enforcement authorities is that because the health system in the counties involved is a government operation, the doctors involved are “foreign officials” within the meaning o f the FCPA, which , as discussed on the FCPA Professor blog here and here, is noteworthy issue of considerable interest and concern.

 

The other interesting about the Johnson & Johnson settlement relates to the comments in the DoJ’s press release with respect to Johnson & Johnson’s cooperation. The DoJ noted not only the company’s “timely voluntary disclosure” but also noted the company’s “significant assistance in the industry-wide investigation.” The press release also states that the company received a reduction in its criminal fine” as a result of its cooperation in the ongoing investigation of other companies and individuals.” The clear implication is not just that the probe is ongoing but that other companies and individuals are under investigation. The upshot may well be, as suggested above, that there will be further enforcement actions and possibly further settlements ahead.

 

The DoJ’s press release also underscored the extent to which the investigation of corrupt activities is a global, cross-border undertaking. In its press release, the DoJ noted not only the investigative collaboration with other U.S enforcement agencies and with the U.K. serious fraud office, but also recognized the helpful assistance of investigative bodies in Greece and Poland. These circumstances highlight both the collaborative international scale of the investigations but also how seriously the matters are being taken by a wide variety of governments and governmental authorities.

 

Finally in light of the magnitude of the Johnson & Johnson settlement (and the fact that the settlement made the Top 10 List) it is probably worth reflecting that the company reached this settlement while, at least according to the DoJ, receiving a reduction in its penalties not only because of the cooperation noted above, but also because of the company’s “pre-existing compliance and ethics programs, extensive remediation, and improvement of its compliance systems.” That the company should still face fines and penalties of the magnitude to which it agreed notwithstanding the credits the company received for these efforts is a striking development.

 

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On March 30, 2011, the U.K. Ministry of Justice released its long-awaited Guidance with respect to The Bribery Act of 2010, detailing the Act’s scope and jurisdictional applicability. The Guidance, which can be found here,  has quickly been criticized in some quarters for “watering down” the Act, particularly with respect to the jurisdictional scope of the Act’s commercial bribery provisions. The Serious Fraud Office’s prosecution guidance, also released on March 30, 2011, can be found here.

 

From the time the Act received Royal Assent, one of its features that has been the focus of particular concern has been Section 7 of the Act. Section 7 creates a new offense which can be committed by commercial organizations that fail to prevent persons associated with them from committing bribery on their behalf. Commentators have been concerned that this provision seemingly would subject any firm --even non-U.K. companies that have operations in the U.K. – to liability under the Act for violative conduct taking place any where in the world.

 

The newly-issued Guidance proposes a “common sense” approach to the question of applicability of this provision to firms organized outside the United Kingdom. While noting that ultimately the courts will determine whether or not a firm has a sufficient U.K. presence to warrant the Act’s application, the document goes on to say that the Act would not apply to firms that “do not have a demonstrable business presence” in the U.K.

 

As an example of the kinds of activities that would not be sufficient to constitute the carrying on of business in the U.K., the document states that “the mere fact that a company’s securities have been admitted to the U.K. Listing Authority and therefore admitted to trading on the London Stock Exchange” is not sufficient “to qualify that company as carrying on a business or part of a business in the U.K.

 

The document further specifies that merely “having a U.K. subsidiary will not, in itself, mean that a parent company is carrying on a business in the U.K.,” as “a subsidiary may act independently of its parent or other group companies.”

 

The primary thrust of the Guidance document is to identify procedures that companies can put in place to take advantage of the defense available under the Act, which provides that a firm cannot be held liable under the Act if it has adequate procedures in place to prevent persons associate with it from bribing.

 

 The document describes a principles based rather than a rules based framework, built around six guiding principles. The six principles are: proportionate procedures; top-level commitment; risk assessment; due diligence; communication; and monitoring and review.

 

The document also provides clarification about hospitality, stating  that “bona fide hospitality and promotional expenditures” are an “an established and important part of doing business” adding that “it is not the intention of the Act to criminalize such behavior.” The document specifically cites as example of such payments that would not typically run afoul of the Act’s provisions as “the provision of airport to hotel transfer services to facilitate an on-site visit or dining and tickets to an event.”  Introductory comments in the document from the Secretary of the State for Justice Kenneth Clarke add that “no one wants to stop firms from getting to know their clients by taking them to events like Wimbledon or the Grand Prix.”

 

The Act will now come in to force on July 1, 2011. The provisions in the Guidance document have been welcomed by some commentators, who note that the proportionate approach reflect in the document should be “good for business.” At the same time other commentators have criticized the guidance as having introduced “loopholes.”  Others have criticized the government for “watering down” the Act’s provisions.  

 

My own view is that while the Guidance has provided some clarification, it has not provided absolute clarity either, and the lack of clarity remains a concern. The examples given about what kind of activity would not be sufficient to support liability under the Act are helpful as far as they go, particularly that merely having a U.K. listing or a U.K. sub is not enough to support liability against a listed firm or the sub’s parent. Those activities are not sufficient, but what level of activity is sufficient?

 

The clarification that the government will be pragmatic and that the government will be guided by principles of proportionality is reassuring. However, the government’s Guidance document does not by any means put to rest all concerns. The upcoming applicability of the Bribery Act should remain an issue of focus and concern for companies with a business presence in the U.K I worry about the first non-U.K. company whose activities will become the test case under the Act.

 

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If you are one of those people who still need persuading that the increasing crack-down on corrupt behavior is a big deal, you will want to take a look at The FCPA Blog’s recent breakdown of the top ten Foreign Corrupt Practice Act settlements, which can be found here. As Dick Cassin, the blog’s author elaborated in a subsequent post, the top ten settlements collectively total $2.8 billion, but the top six, all of which took place just in the last 20 months, represent 95% of the total. Four of the top six settlements were reached just in 2010.

 

As if this past activity were not enough, the newly effective Dodd-Frank Wall Street Reform and Consumer Protection Act seems likely to lead to even further enforcement activity. As noted in a July 20, 2010 memorandum from the Proskauer law firm, Section 922 of the Dodd-Frank Act contains new provisions designed to encourage whistleblowers to report securities law violations. Among other things, the Section provides that if the whistleblower’s information leads to the imposition of sanctions in excess of $1 million, the whistleblower will receive between ten and thirty percent of the total.

 

The law firm memo comments that "if the whistleblower provisions Congress previously provided in other areas are an accurate indication, the Dodd-Frank Act will increase dramatically the likelihood that suspected violators of the securities laws will face costly enforcement actions."

 

This threat, the memo notes further, is "particularly great" with respect to FCPA violations, precisely because of the massive scale of the settlements that the SEC has been achieving in this area. Given the size of these settlements, the potential rewards for whistleblowers are enormous. The potential rewards are so massive that some commentators have referring to these provisions as the "whistleblower bounty provision."

 

A detailed overview of the Dodd-Frank Act’s whistleblower provisions can be found on the FCPA Professor blog, here. Among other things, Professor Mike Koehler, the blog’s author, points out the danger that these whistleblower provisions represent, because the standards for violation of the FCPA are so ill-defined and because so many companies find it expedient to settle FCPA allegations rather than to try to test them in Court. Against this backdrop, he questions the wisdom of offering whistleblowers rewards of up to 30%.

 

However, Professor Koehler, unlike many commentators, conjectures that the whistleblower provisions may have a "negligible impact." in part because the whistleblower provisions are only triggered when public company issuers are involved, whereas many companies targeted in FCPA enforcement actions are private companies. He also points out that the whistleblower provisions create huge incentives for companies to self-report violations. If a company has self-reported, then the whistleblower’s information is not "original" and the whistleblower is not entitled to the bounty.

 

By contrast, and as Ross Todd reports in a July 21, 2010 article on the AmLaw Litigation Daily (here), many commentators, including the former head of FCPA enforcement at the Department of Justice, are advising that we should expect the size and scope of FCPA enforcement cases to increase.

 

Meanwhile, there are important developments across the ocean with respect the UK Bribery Act, which received Royal Assent on April 8, 2010. On July 20, 2010, the U.K. Ministry of Justice released its timetable for the implementation of the Bribery Act, setting April 2011 as the effective date. The Act is widely viewed as in several important respects more "far-reaching" than the FCPA, and is likely to have significant impacts on business that either are based in the U.K. or have significant parts of their operations in the U.K.

 

The April 2011 effective date represents something of a delay, as noted in a July 20, 2010 memo from the Morgan Lewis law firm. The FCPA Professor blog has a detailed discussion here of the possible reasons behind the delayed implementation. Essentially, the extension is intended to allow business to become familiar with the law and to permit the U.K. government to launch a "shore consultation exercise" to provide "guidance" firms can adopt to prevent bribery.

 

Though the U.K. provisions may be somewhat delayed and though the impact of the new Dodd-Frank Act whistleblower provisions may be uncertain, there is no question that this is an area where many things are happening. Anti-corruption enforcement represents a significant and growing area of liability exposure for corporate officials, especially in light of the government’s apparent willingness to resort to sting tactics and other prosecutorial techniques as part of the heightened enforcement.

 

These developments also have significance for purposes of the structure and implementation of insurance calculated to enforce corporate officials. The fines and penalties associated with these kinds of enforcement actions typically would not be covered under a D&O policy, but the defense fees, at least for the individuals might well be. However, the Dodd-Frank Act whistleblower provisions, for example, may raise concerns under the typical D&O policy’s insured vs. insured exclusion.

 

The potential implications of these developments within the D&O insurance context represent a significant area of concern for D&O insurance professionals. It is worth noting that I will be participating in a panel entitled "Foreign Corrupt Practices Act: Unexpected Liabilities for D&O Insurers" at the November 2010 PLUS International Conference. I will be participating on the panel, which will be chaired by my friend, Joe Monteleone of the Tressler law firm.

 

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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.

 

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On February 5, 2010, BAE Systems announced (here) that it has entered separate settlements with the U.S. Department of Justice and the U.S. Serious Frauds Office, pursuant to which the company will pay a total of nearly $450 million to settle long-standing investigations of improper payments.

　

Under the U.S. plea deal, the company will pay $400 million to settle one charge of conspiring to make false statements and under the U.K. deal the company will pay a penalty of £30 and plead guilty to one charge of breach of duty to keep accounting stemming from a payment to a former consultant in Tanzania. A February 6, 2010 Wall Street Journal article discussing BAE’s entry into these deals can be found here.

 

The investigations surrounding BAE’s improper payments have been both very high-profile and very controversial. As discussed at length in a prior post (here), the most sensational aspects of the investigation have involved allegations involving the Al-Yamamah Saudi Arms deal, which allegedly involved improper payments to Prince Bandar bin Sultan, a member of the Saudi royal family. The propriety of the Serious Fraud Office’s decision to terminate that aspect of the BAE investigation was particularly controversial and eventually made its way to the House of Lords, which, as noted here, concluded that the SFO had properly exercised its authority to terminate the investigation, after a lower court had previously ruled that the SFO must reconsider its decision to terminate the investigation. The DoJ continued its investigation of the controverisal arms deal, however.

 

Given the controversy surrounding the BAE investigation, it is hardly surprising that, notwithstanding the sheer size of BAE’s deals resolving the investigation, questions about the resolution of the investigation have arisen.

 

Among others concerns that have been noted, it is very difficult to discern from BAE’s press release and from the SFO’s release (which can be found here) which exactly the company is admitting to having done. Neither document contains words or phrases you might, under the circumstances, expect to see, including, for example, "bribery" "corruption" or even "improper payments" or "improper influence." As the FCPA Professor blog notes here, "can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?"

 

The criminal information that the Department of Justice filed in the District Court for the District of Columbia is a little more specific, as it as least refers to improper payments that the company made in connection with military aircraft transactions involving the governments of the Czech Republic and Hungary. The criminal information also specifically references "undisclosed payments associate with the sale of Tornado Aircraft and other defense materials to the Kingdom of Saudi Arabia." The criminal information also specifically references "substantial benefits" provided to one unnamed Saudi official "who was in a position of influence" regarding the aircraft deals.

 

According to the FCPA Blog (here), the Al-Yamamah arms deal, about which the blog has additional information (including a link to video footage) is "at the heart" of the criminal information, though the details are slight.

 

The paucity of detail almost ensures that controversy will continue to surround the investigation. The tenor of the controversy is succinctly captured by the FCPA Professor blog’s comment in connection with the BAE deals that "transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today."

 

But though questions will continue to be raised, the sheer size of the payments BAE has agreed to make in order to resolve these investigations should not be overlooked. Along with the staggering amounts to which Siemens agreed to pay in connection with its own separate corrupt practices investigation, these payments demonstrate that corrupt practices investigations represent a very significant risk exposure. It should also not be overlooked that in the case of Siemens and BAE, as well as a number of other companies that U.S. authorities have targeted, these corrupt practices investigations often involved companies domiciled outside of the United States.

 

As I have previously noted (here), one parallel threat accompanying threat of regulatory investigations concerning corrupt payments is the possibility of follow-on civil litigation in U.S. courts. BAE systems was itself the target of a shareholders’ derivative suit regarding the corrupt payments investigation, although as noted here (scroll down after linking), the BAE Systems derivative suit was later dismissed due to the claimants lack of appropriate standing to bring the action.

 

Other foreign targets of FCPA investigations have also been subject to civil litigation in U.S. courts, as demonstrated by the recent securities lawsuit filed against Panalpina and certain of its directors and officers concerning its disclosures and accounting for certain alleged improper payments.

 

The point is that not only does the threat of an improper payments investigation represent a significant risk exposure for companies active in the global economy but that threat includes the risk of civil litigation in U.S. courts. This litigation threat all of these issues important considerations for purposes of D&O insurance, as I discussed in a prior post, here.

 

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Longtime readers know  I have frequently argued that claims related to the enforcement of the Foreign Corrupt Practices Act are a growing source of liability exposure for companies and their senior officials, a stand that has made me the subject of occasional derisive comments. One reader recently suggested to me that I am "obsessive" about the topic. But after yesterday’s massive indictment of 22 individuals as a result of an FBI sting -- the DoJ’s largest FCPA-related investigative action ever -- I think my occasional critics will have to agree that enforcement activities really do represent a significant corporate exposure that must be taken very seriously.

 

As reflected in the Department of Justice’s January 19, 2010 press release (here), the 22 individuals were indicted for engaging in schemes to bribe foreign government officials. The indictments are the result of an FBI undercover operation that focused on allegations of foreign bribery in the military and law enforcement products industries.

 

The 16 separate indictments can be found here. Only individuals are named in the indictments; no companies have been named. The individuals worked for companies in the U.S, the U.K and Israel. All but one of the individuals was arrested while attending an industry convention in Las Vegas.

 

According to the DoJ’s press release, the indictments represent "the largest single investigation and prosecution against individuals in the DoJ’s enforcement of the Foreign Corrupt Practices Act." The press release also quotes the Assistant Attorney General as saying that the "ongoing investigation" is "the first large-scale use of undercover law enforcement techniques to uncover FCPA violations."

 

If you have any doubts about the government’s willingness to commit resources to enforce the FCPA, you should know that, as part of this investigation, 150 FBI agents executed 14 search warrants in at least twelve locations around the country.

 

The investigation also reflects a frequently common aspect of these kinds of enforcement actions – that is, crossborder cooperation between investigative agencies. Specifically, in this case, the City of London’s police executed seven search warrants in connection with their own investigation of the foreign bribery conduct that formed the basis of the indictments.

 

The DoJ’s press release describers how the FBI’s sting operation worked:

 

the defendants allegedly agreed to pay a 20 percent "commission" to a sales agent who the defendants believed represented the minister of defense for a country in Africa in order to win a portion of a $15 million deal to outfit the country’s presidential guard.  In reality, the "sales agent" was an undercover FBI agent. The defendants were told that half of that "commission" would be paid directly to the minister of defense. The defendants allegedly agreed to create two price quotations in connection with the deals, with one quote representing the true cost of the goods and the second quote representing the true cost, plus the 20 percent "commission." The defendants also allegedly agreed to engage in a small "test" deal to show the minister of defense that he would personally receive the 10 percent bribe.　

 

The indictments were returned on December 11, 2009 by a grand jury sitting the District of Columbia and were unsealed yesterday.

 

The indictments allege that the individuals conspired to violate the FCPA, conspired to engage in money laundering, and engaged in substantive violations of the FCPA.

 

The maximum prison sentence for the conspiracy count and for each FCPA count is five years. The maximum sentence for the money laundering conspiracy charge is 20 years in prison. The indictments also seek criminal forfeiture of the defendants’ ill gotten gains.

 

The FCPA Blog has a summary regarding the indictments here. The FCPA Professor Blog also has a post about the indictments here.

 

According to statements quoted in a January 19, 2010 Bloomberg article (here), the investigation has been underway for 2 ½ years, and "is continuing." The official quoted in the article declined to say whether there would be further indictments as a result of this investigation. However, the official noted that there are over 140 open investigations into violations of the bribery laws and he added that ""I can assure you there will be more charges as a result of some of those investigations."

 

The involvement of criminal charges against so many individual defendants raises many questions, including whether or to what extent D&O insurance might respond in these circumstances. The issue will of course depend to a large extent on the precise wording of the policies involved. The criminal forfeitures would not in any event be covered under any policy. However many policies include within their definition of claim the filing of criminal charges in an indictment, which at least for policies with that language might hold open the possibility that the policies might provide at least defense cost coverage.

 

Whether any specific policy would provide coverage for criminal defense expenses will depend in large part on the wordings of other policy provisions, including in particular any potentially relevant policy exclusions. Though they do not appear in many contemporary policies, some older policy forms contain certain exclusions that (if not removed by endorsement) could potentially operate to preclude coverage for FCPA-related criminal defense expenses.

 

But as I have frequently pointed out, the greatest relevance of the D&O policy in connection with bribery related legal proceedings may be in connection with any follow-on civil action that may arise. The FCPA itself does not contain a private right of action, but investors and others sometimes raise claims that company’s senior officials did not take appropriate steps to protect against the improper conduct, or that the company misrepresented its financial condition.

 

The sheer magnitude of this most recent FCPA criminal enforcement action, taken together with the existence of 140 open FCPA-related investigations and the likelihood of further enforcement actions ahead, underscores the seriousness of FCPA exposures for senior company officials. And as highlighted by my brief discussion above of the way the D&O policy may respond in connection with FCPA claims, it is critically (and increasingly) important that these issues are taken into account at the time the D&O policy is formed.

 

Year-End Securities Litigation Review Webinar: On January 22, 2010 at 11 am EST, I will be participating in a webinar sponsored by Advisen entitled "Review of Securities Litigation 2009 and Expert Views for the Year Ahead." Joining me for the hour-long webinar will be Jeffrey Lattman of Beecher Carlson and Mark Lamendola of Travelers, as well as David Bradford and Jim Blinn of Advisen. You can register for the webinar here.

 

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In many prior posts (refer here), I have suggested that FCPA-related losses could represent a growing D&O exposure. In a recent demonstration of just how significant these kinds of exposures can be, Siemens disclosed  earlier this week that it has reached a 100 million euro settlement with its D&O insurers in connection with the claims arising from the company’s bribery scandal. The filing, which incorporates the insurance settlement documentation, raises a number of interesting issues.

 

In its December 8, 2009 filing of Form 6-K (here), Siemens reports that on December 2, 2009, the company reached a settlement agreement with its D&O liability insurers, while simultaneously announcing that it had also reached settlements with a number of its former directors and officers against whom it has asserted damages claims arising out of the bribery scandal. The settlements include the agreement of the company's former CEO Heinrich von Pierer to pay 5 million euros, and of his successor, Klaus Kleinfeld, to pay 2 million euros. Other former board members agreed to pay amounts ranging from 1 million euros to 3 million euros.

 

The filing explains that Siemens had a total of 250 million euros of D&O insurance coverage, arranged in five layers of 50 million euros each. Each layer had a lead insurer as well as participating coinsurers. The settlement agreement, which can be found in Annex 10 to the filing, identifies the lead insurers and the participating coinsurers for each layer.

 

The insurance settlement requires a payment to Siemens of up to 100 million euros, consisting of two parts: a payment of 90 million euros (against which prior defense payments of 5.5 million euros are to be credited) and as well as the payment of an additional fund of 10 million euros. The 10 million euro fund is to be maintained for the defense of future claims as well as for the satisfaction of "justified claims." that are asserted against former Board Members based on the bribery allegations or that have no connection with bribery allegation but for which coverage would have otherwise have been available under the D&O insurance program.

 

All of the layers in the Siemens D&O insurance program participated in the settlement, with each successive layer contributing a proportionately smaller percentage of the layer's 50 million euro limit.. (The percentage participations applicable to each layer are specified in the settlement agreement.) The 10 million euro fund is to be managed by the lead insurer on the primary layer on behalf of all the insurers.

 

The settlement agreement recites that the insurance settlement was the result of "intensive discussion" and that the Insurers had previously indicated that coverage might be denied on the grounds of, among other things, "pre-contractual knowledge and/or fraudulent/intentional violations of duties, and/or certain rights by unilateral declaration [that] can be exercised, which would lead to retroactive rescission of the D&O insurance." The parties reached the settlement in order to avoid the need to litigate these issues as well as to avoid the need for Siemens to pursue an action against … former Board Members who settled with Siemens in order to establish their liability as a precondition for the obligation to provide coverage."

 

Siemens’ SEC filing also reflects the settlement agreements reached separately with various former company officials. The filing recites that in connection with the individual settlements the individuals have agreed "not to draw on the D&O insurance coverage" in connection with their agreed payments to the company.

 

The agreement is subject to shareholder approval, which will be determined at the company’s January 26, 2010 shareholder meeting. (The shareholders will also vote on the individual settlements as well). The agreement clarifies that upon the effectiveness of the settlement, the insurance policies will be "retroactively terminated."

 

If it is "determined by a non-appealable court decision that individual Former Board Members intentionally or knowingly … violated their duties," then the Insurers shall be entitled to ask for reimbursement of defense costs paid to the respective former Board Member. The lead primary insurer is designated to administer this portion of the agreement.

 

There are a host of interesting things about this settlement.

 

The first is the marginal note accompanying the settlement stating that Michael Diekmann, a member of Siemens’ Supervisory Board, is the chairman of the Management Board of the parent holding company of the lead insurer on Siemens’ primary D&O insurance policy. The filing states that "Mr. Diekmann did not participate in the consultations and decisions pertaining to the Coverage Settlement." Call me cynical, but even if he didn’t participate in the consultations, this connection didn’t exactly impede the settlement either, if you take my meaning. To me this fact seems like it might help explain how there was any settlement at all, rather than the mother of all European D&O coverage lawsuits.

 

The second interesting thing is the way the D&O insurance policies are responding. The insurers are making a claims payment directly to the company, for claims that have been asserted by the company against its former officers. Unless the company’s European-issued insurance policies lack the kind of Insured vs. Insured exclusion that is standard in D&O policies issued in the U.S., there is something very peculiar about this payment. Even if the company itself is not an insured under the policy, it would seem like there would be an exclusion to protect against the possibility of collusive claims. Of course, there might have been such as exclusion in Siemens program and it was simply compromised as part of the settlement. (Readers who can help rationalize this apparent Insured vs. Insured problem are cordially invited to clarify, using this blog’s comment function.)

 

UPDATE: A knowledgeable European reader who prefers anonymity sent me a note with the following observation:"Regarding the payment towards the company we usually don´t carry IvI-exclusions over here in Germany. Most of the claims are made by the companies against individual directors and officers, word is that it´s around 80% or more of the times. We are basically still in the fledging stages of D&O litigation over here, D&O coverage was allowed in 1986, distribution really didn´t took off until the end of the 90s. The mentality over here regarding the pursue of claims against your directors and officers is totally different than in the US. Until the middle of the 90s, courts hadn´t even ruled on supervisory boards being forced to pursue claims against directors and officers."

 

The other thing about the insurers’ 90 million euro payment (less defense expenses previously paid) is the question of what exactly it represents. Simultaneously with the insurance settlement, Siemens settled its claims against most of the former company officials. So those claims have been resolved by individual payments for which the individuals are prohibited from seeking insurance. There are remaining claims against other individuals, but that is what the 10 million euro fund is for. So what exactly is the 90 million euro (less prior defense expense) payment for? Of course, the company has incurred literally billions of costs, expenses, fines and penalties in connection with the bribery scandal, but I don’t think the insurers are paying for the company's own scandal related expenses. 

 

The settlement agreement recites that, among other things, the insurance settlement relieved the company of the need to file and pursue actual lawsuits against former board members. I guess the internal logic of the settlement agreement is that the company could have pursued the lawsuits, and if they did, each would have to be litigated and separately settled, and the insurer would have to pay (assuming the claims were covered). The insurance settlement in effect says that we are just going to cut out all the intervening steps and compromise everything for a single payment.

 

The third feature is the way the settlement incorporates a settlement fund for future losses. It is on the one hand an escrow fund, but on the other hand it is more like insurance, or perhaps the residue of insurance with certain insurance-like attributes (e.g., it only applies to "justified" claims) The insurers are in effect providing a limited amount of insurance, but in a bargained down amount, with many fewer conditions.

 

Fourth, to the extent the insurance policies provided any type of insurance coverage for securities claims, the compromise and termination apparently precludes the availability of insurance in connection with the securities class action lawsuit filed in the Eastern District of New York last week, in which the plaintiffs alleged violations of U.S. securities laws solely against Siemens. (The $10 million fund would not be available in connection with this claim, because the claim was filed solely against the company, but the fund was set up only for claims asserted against former board members.)

 

Finally, I wonder what this settlement and the company’s settlements with the individual former company officials do to the derivative lawsuit that was filed in New York earlier in connection with the bribery scandal (refer here, see page 18). It is entirely possible that that case fell by the wayside earlier on, or that it was preempted by the claims the company itself asserted against the individuals. But it is an interesting question what impact these developments would have on the New York derivative lawsuit if it were still an active case. (Readers who may have any insight into the status of the derivative lawsuit are encouraged to provide updated information via the comment feature of this blog.)

 

Whatever else may be said about the settlement, it clearly represents a massive hit to the European D&O insurers. Hits on this scale may have become almost commonplace in the U.S., but this type of loss is still represents an extraordinary D&O insurance development in Europe. I wonder if this settlement is a game changer for the European D&O insurance community. UPDATE: Readers have advised me that massive D&O settlements on this scale are unfortunately becoming all too common in Europe as well; one example cited is the recent 57.5 million euro settlment involving EM.TV.

 

Finally, it is worth noting that the massive amount of the insurance settlement underscores the extent of the exposure that bribery-related claims represent. Though the Siemens case is extraordinary on many levels, the kind of insurance losses on claims related to bribery-related allegations are becoming increasingly common. As the Siemens insurance settlement demonstrates, the exposures are clearly not limited just to the United States.

 

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More than three years have passed since the first blockbuster revelations about corrupt payments at Siemens, yet litigation arising from the scandal continues to emerge. On December 4, 2009, plaintiffs’ lawyers filed a securities class action lawsuit in the Eastern District of New York against Siemens, based on alleged misrepresentations following initial revelations of the improper payments. The complaint, which can be found here, has a number of interesting features and it potentially raises complicated issues.

 

As reflected in a prior post (here), the bribery scandal at Siemens hit the front pages of the world’s financial papers in late 2006 after more than 200 German police raided the offices and homes of over 30 current and former Siemens employees. The ensuing investigation and enforcement action culminated in the December 15, 2008 announcement (here), that Siemens had agreed to pay a total of $350 million in disgorgement to the SEC, a criminal fine of $450 million to the U.S., and a fine of 395 euros to the office of the Prosecutor General in Germany.

 

The recently filed securities suit refers extensively to the SEC’s enforcement complaint against the company. But though the class action complaint is inextricably linked to the company’s bribery revelations, the complaint is not about the bribery disclosures as such. Rather, the complaint purports to be based on company statements about its business prospects and its ability to compete without making improper payments.

 

That is, the complaint alleges that the company claimed that it "had cleaned up [the] corporate-wide scandal and that it would meet its publicly announced revenue and earning projections" – but, the complaint further alleges, "Siemens ability to generate revenues and achieve earnings expectations was clearly dependent on its corporate-wide bribery activities."

 

Consistent with the theory that the complaint is not about the bribery itself but about the company’s claims about how it would fare as a bribery-free competitor, the proposed class period does not commence at some time prior to the bribery revelations. Instead, the proposed class period begins more than a year after the scandal first emerged, in November 2007, when new management projected significant growth for the company.

 

During the class period, the complaint alleges, management sought to dispel concerns that the lingering bribery investigation would have an adverse impact on the company’s ability to meet its earnings projections. The proposed class period ends at the end of the company’s 2008 second fiscal quarter, when the company announced a sharp drop in second quarter profits.

 

So while the plaintiff’s complaint consists almost exclusively of a detailed recounting of the bribery scandal and its regulatory aftermath, the complaint isn’t about the bribery or even the revelations about the bribery at all; instead, the plaintiffs seek damages based on what the company allegedly said about whether it could meet its goals now that it was no longer getting business by paying bribes.

 

Plaintiffs will obviously face certain challenges demonstrating that their claimed damages are due to these statements about Siemens’ prospects without bribing officials, as opposed to ongoing revelations concerning the bribery investigation – which continued both during and after the proposed class period. Indeed, the class period ends at the same time as the company disclosed certain findings of the law firm the company had hired to investigate the bribery allegations.

 

In one sense it seems as if the plaintiffs arguably are trying to have it both ways with respect to damages. They do not allege what harm was due to the company’s supposedly misleading projections; rather they allege only that "as a result of defendant’s fraud and misconduct, Siemens’ shareholders have suffered, and will continue to suffer, billion of dollars of damages." These broad damages claims are arguably at odds with the complaint’s relatively narrow class period and narrow range of alleged misrepresentations.

 

The complaint may also be susceptible to challenges that it does not sufficiently allege scienter. In that regard, it is interesting to note that the sole defendant named is the company. No individuals are named as defendants. Without any individual defendants, the possibility for the complaint to survive a dismissal motion will depend on some kind of "collective scienter," based on the supposed knowledge or recklessness of responsible corporate officials.

 

Critically, for the plaintiff’s complaint to succeed, they will have to show that during the class period, senior company officials knew (or were reckless in disregarding) that the company could not make its earnings targets without resorting to bribery. To put it as neutrally as I can, it is unclear from the complaint what allegations the plaintiffs intend to rely upon to show that the company’s senior officials knew during the class period that without improper payments Siemens could not meet its earnings projections.

 

The complaint could also face certain hurdles with respect to the claims of so-called "f-cubed" claimants. The proposed class period is not limited solely to the claims of investors who purchased their Siemens securities on the NYSE. To the extent the class purports to include the claims of foreign-domiciled investors who bought their shares in Siemens on a foreign exchange, the complaint could present the same kinds of jurisdictional issues as were raised in the National Australia Bank case, in which the U.S. Supreme Court recently granted a petition for writ of certiorari.

 

Perhaps in anticipation of these kinds of concerns, the new class complaint quotes liberally from the SEC’s allegations concerning the "nexus" between the improper payments and the U.S. However, the misleading statements that are the basis of the new class action complaint clearly appear from the face of the complaint to have been made in Germany. It is therefore possible that the claims of "f-cubed" class members could be susceptible to jurisdictional challenge.

 

In any event, and at a minimum, this case presents yet another concrete example of the way in which regulatory or enforcement investigations into corrupt payments can lead to civil litigation, which many readers will recognize as a recurring theme on this blog.

 

The fact that no individuals are named as defendants in the lawsuit is unusual, and could generate any number of interesting D&O coverage issues. For example, at least in the early days when company coverage first began to be added to insurance policies that previously only protected individuals, the company’s coverage was only available if there were also claims against individuals. These co-defendant requirements largely have fallen by the wayside over time, but the policy’s bias towards protecting individuals in preference to the company still survive in a various respects.

 

A related question about the company’s coverage is whether or not the company’s various admissions in connection with the prior regulatory or other settlements would trigger the conduct exclusions found in most D&O policies. I suppose that if the exclusion is sufficiently narrow, the company could argue that whatever else the company may have admitted, it did not make any admissions about the statements alleged in this complaint to be fraudulent. However, if the exclusion has a broader preamble, a carrier might well argue that the wrongful acts alleged in this complaint arise out of, related to or are based upon improper conduct to which the company as admitted.

 

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A recent SEC enforcement action alleging Foreign Corrupt Practices Act violations against Nature’s Sunshine Products and two of its officers may represent a new and disturbing liability threat to corporate officials. The SEC asserted claims directly against the two individuals even though they were not alleged to have either involvement in or knowledge of the alleged misconduct, based solely on their "control person" responsibilities. These allegations, which experts say may represent the first of its kind to be alleged, could represent a troublesome new liability exposure for officers and directors.

 

The SEC’s Enforcement Action

As reflected in the SEC’s July 31, 2009 litigation release (here), the SEC filed a complaint (copy here) in the Central District of Utah against the company, alleging that in 2000 and 2001, the company had made $1 million in payments to Brazilian customs officials in order to facilitate the company’s importation of certain of its products. The complaint alleged that the company had violated the FCPA’s antibribery, books and records, and internal control provisions.

 

The complaint also alleges claims against Douglas Faggioli, the company’s CEO who at the time had been the company’s COO and a member of its board of directors, and against Craig D. Huff, who is no longer with the company but who served as the company’s CFO at the time.

 

With regard to Faggioli, the SEC alleged that his position gave him supervisory responsibility for the senior management of and policies regarding the worldwide distribution of the company’s products. The SEC alleged that Huff had supervisory responsibility for the senior management of and policies regarding the company’s books and records. Both were alleged to have failed to adequately supervise the company’s personnel in 2000 and 2001 to keep the company’s book and records accurately and to devise and maintain a system of books and records sufficient to adequately monitor company activities.

 

Neither the company nor the individuals admitted wrongdoing, but the company agreed to pay a civil penalty of $60,000 and the individuals each agreed to pay a civil penalty of $25,000

 

Discussion

According to an August 11, 2009 memorandum from the Shearman and Sterling law firm (here), the significance of the case is that control person liability allegations have "rarely (if ever) been used by the SEC in FCPA cases."

 

The memo also notes that the SEC did not allege that Fagiolli or Huff were involved the payments or even aware of the improper accounting for the payments. As the memo states, "the SEC’s decision to charge Faggioli and Huff with control person liability without alleging that either of them participated in or had personal knowledge of the FCPA violations raises the disturbing spectre [sic] of strict liability for executives."

 

In a separate interview published in the National Law Journal on August 20, 2009 (here), Philip Urofsky of Shearman and Sterling noted that at least in the civil context, control person liability "has been used against a much wider variety of corporate officers and even directors," so there is even a potential for control person allegations for FCPA violations to be raised against directors, "at least where the directors are very active and involved in the operations of the company."

 

The possibility that directors and officers could be held liable for FCPA violations without any culpable involvement or even knowledge of the misconduct represents a disturbing new potential liability threat to corporate officials. This threat is all the more troublesome because the SEC, under pressure to reestablish its regulatory credentials, has made it clear that FCPA enforcement will be a high priority.

 

Indeed, in an August 5, 2007 speech (here), Robert Khuzami, the SEC’s new Division of Enforcement head, among other things announced the formation of a new FCPA unit, saying that "more needs to be done" to enforce the FCPA. He described the unit’s goals as "being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations."

 

There is no private right of action under the FCPA itself. However, civil litigants have long relied control person liability allegations in claims against corporate officials. Whether these civil litigants can use these theories of control person liability for FCPA violations remains to be seen, although that seems unlikely give the absence of private right of action for FCPA violations.

 

However, as I have frequently noted (most recently here), one of the exposures facing corporate officials related to FCPA enforcement activity is the possibility of follow-on civil litigation – indeed, Nature’s Sunshine Products is itself the subject of a securities class action lawsuit in which investors have alleged that the company and certain of its directors and officers made misrepresentations about the company’s internal controls and financial statements as a result of the overseas FCPA violations. As discussed here, the case previously survived the defendants’ motion to dismiss.

 

To the extent corporate officials are held liable by the SEC for FCPA violations on control person liability theories, they could also potentially be susceptible to claims by private litigants based on alleged fiduciary duty breaches. In addition, other civil claims, including claims based on alleged violations of disclosure duties under the securities laws, could be bolstered by an SEC enforcement action alleging control person liability claims.

 

In short, these developments may represent a significant new area of D&O liability exposure, or at least a significant extension of previously existing exposures. The typical D&O liability insurance policy would not likely cover any fines or penalties imposed on corporate officials for their control person liability, but their expenses incurred in defending against the claims likely would be covered under the typical policy, as would their defense expenses and any settlements or judgments against them in any follow-on civil litigation. Because of these possibilities, these developments potentially could represent a significant new loss exposure for the D&O insurers, too – or at least an expansion of a previously existing exposure.

 

One final note is that there seems to be a disturbing new trend where the SEC is seeking to use its authority to impose liability on or to effect recoveries upon corporate officials even where the individuals themselves are not alleged to have engaged in culpable misconduct. As I noted here, the SEC recently took steps to try to clawback executive compensation form the CEO of CSK Auto even though he was not alleged to have any knowledge or involvement in the events that required the company to restate its previously issued financial statements. In the Nature’s Sunshine Products case, the SEC sought to impose control person liability on the two individual defendants despite their lack of culpable participation in or awareness of the FCPA violations.

 

I recognize that the SEC is under pressure to show that it is tough and that it is a trustworthy regulatory guardian, but I find this new willingness to try to impose liability on individuals who are not themselves alleged to have engaged in culpable misconduct troubling. I recognize the theoretical appeal of a "captain of the ship" type approach to corporate misconduct, but I still think individuals without culpable participation in or even awareness of misconduct ought not to be subject to the burden, humiliation and expense of governmental enforcement activity. The pursuit of persons lacking culpability seems to me like the essence of overzealous regulatory action.

 

That said, I note that the law firm memo linked about does recite certain background features of the Nature’s Sunshine Product case that may go a long way toward explaining why the SEC sought to impose control person liability in this particular case. It is entirely possible that the claims asserted are simply a reflection of the facts involved, and nothing more.

 

Special thanks to the several readers who sent me links regarding the Nature's Sunshine Products case.

 

Has Global Financial Turmoil Increased FCPA Risks?: The FCPA prohibits corruptly offering or providing anything of value to "foreign officials." As a result of the global financial crisis, government ownership in a wide variety of enterprises has proliferated. According to an August 10, 2009 New York Law Journal article by Stephanie Melzer and Christopher Tierney of the Cadwalader law firm entitled "Has Economic Uncertainty Expanded the Reach of the Foreign Corrupt Practices Act?" (here), the number of "foreign officials" may have dramatically increased, in ways that could have transformed long-established business practices into conduct violative of the FCPA.

 

The authors show that the published guidance and case law resources do not really establish conclusively what level of governmental involvement or ownership in an enterprise is required in order for an entity’s representative to be a "foreign official." Various settlements do show that U.S. authorities have been willing to extend the FCPA to "conduct involving payments to employees of entities that are less than majority-owned or controlled by foreign governments."

 

Accordingly, the authors conclude that given the massive amounts that governments have injected in a wide variety of enterprises, "a legitimate question arises whether employees of previously private enterprises will be viewed as ‘foreign officials’ under the FCPA." In short, "the current financial crisis may have turned some previously private employees into ‘foreign officials.’" – creating the unsettling possibility that previously acceptable and appropriate business entertainment or other ordinary business activities could now be alleged to constitute conduct violative of the FCPA.

 

Does FCPA Enforcement Encourage Corruption?: It may sound counterintuitive, but a recent paper (here) by attorney and scholar Andy Spaulding suggests that among the "unintended consequences" of aggressive FCPA enforcement may be that it could cause corruption to proliferate unimpeded in emerging markets.

 

As reflected in an August 5, 2009 Wall Street Journal article discussing Spaulding’s paper (here), Spaulding contends that FCPA enforcement might be deterring corporations from investing in developing countries where corruption is rampant. But if U.S. corporations stop investing in emerging markets, entities from other nations that are not as committed to fighting corruption will step in. As Spaulding puts it, "’black knights’ will move in to fill the void," as a result of which "the world economy could slowly begin to bifurcate into two economies: one in which bribery is tolerated and one in which it is not."

 

Spaulding concludes that "the FCPA is thus revealed to be a large-scale study in the law of unintended consequences."

 

Portrait of a Corrupt Society: An August 22, 2003 Wall Street Journal article entitled "Pride and Power" (here), about the current political and economic conditions in Russia, reported the following about the culture of corruption in that country:

 

One of the major obstacles to conducting business in Russia is the all-pervasive corruption. Because the government plays such an immense role in the country's economy, controlling some of its most important sectors, little can be done without bribing officials. A recent survey by Russia's Ministry of the Interior revealed, without any apparent embarrassment, that the average amount of a bribe this year has nearly tripled compared to the previous year, amounting to more than 27,000 rubles or nearly $1,000.

 

And Finally: For those readers who like me are fascinated with these emerging FCPA-related issues, The FCPA Blog is an absolutely essential daily read. The blog’s author, Richard Cassin, regularly updates the key developments in anticorruption activities around the globe. For example, Cassin’s take on Spaulding’s provocative paper about the FCPA’s unintended consequences can be found here.

 

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For some time, I have been asserting (refer here, for example) that increasing levels of Foreign Corrupt Practices Act enforcement activity represents an important development in the world of D&O insurance. During a conversation at the American Bar Association Annual Meeting in Chicago this past week, a senior claims executive from one of the leading D&O insurers expressed skepticism to me on this topic, essentially suggesting that D&O insurance doesn’t have anything to do with FCPA enforcement.

 

It is certainly true that fines and penalties imposed as a result of an FCPA violation would not be covered under the typical D&O insurance policy. But in many instances, defense costs incurred in defending against the enforcement action, which could be quite substantial, are likely to be covered under many D&O policies, so even just to that extent, increased FCPA enforcement activity could represent a significant D&O insurance development.

 

But perhaps even more significant for D&O insurance purposes than expenses incurred in defense of the enforcement activity itself is the exposure presented by the possibility of a follow-on civil lawsuit. As I have previously noted (most recently here), a separate civil action by shareholders or others is an increasingly frequent accompaniment of the FCPA enforcement activity. A recently filed case provides the latest example of this phenomenon.

 

On July 23, 2009, investors in Panalpina World Transport (Holding) Ltd. filed a securities lawsuit in the Southern District of Texas against the company, certain of its current and former directors and officers, and the foundation that owned the company prior to its September 2005 IPO. The investors’ complaint can be found here.

 

Panalpina is a Swiss company which the complaint alleges has "substantial operations in the Southern District of Texas." The complaint describes the company as "the market leader in freight forwarding services for the oil and gas industry." The complaint alleges that the company "concealed" that its Nigerian operations "depended on bribes to customs agents in Nigeria," in violation of the FCPA. The complaint further alleges that in its public reports the company "has essentially conceded its violations of the FCPA."

 

The complaint further alleges that when the illegal practices were revealed, the company "was forced to cease them," and its financial results and share price were "materially and negatively impacted." The complaint alleges that since disclosing its illegal activities in Nigeria on July 24, 2007, and subsequent disclosures regarding the material impact of the Nigerian business, the company’s common stock has lost over 78% of its value.

 

The complaint alleges violations of the Sections 10(b) and 20 of the Securities Act; Common Law Fraud; Aiding and Abetting Common Law Fraud; and Negligent Misrepresentation.

 

There are several interesting things about this new complaint. First, the case is an example of the ways in which FCPA-related activity can result in, for example, securities litigation against a company and its directors and officers. Subject to the terms and conditions of the applicable coverage, the expense of defending this kind of claim, as well as any subsequent settlement or judgment, would likely by covered by the typical D&O insurance policy. This case is just the latest example of how the growing FCPA enforcement activity represents a significant development from a D&O claims perspective.

 

But there are other interesting aspects of this suit, separate and apart form this primary consideration. Among other things, the complaint does not appear to be brought as a class action lawsuit. Rather, the action appears to have been brought solely on behalf of four apparently related investment partnerships, based in Connecticut and in the Cayman Islands.

 

The absence of class action allegations could be due to the fact that though Panalpina is a publicly traded company, its shares do not trade on any U.S. exchanges. (Its publicly traded shares trade only on the Swiss Exchange.) As a foreign domiciled company whose shares trade only on a foreign exchange, many of its shareholders likely are also domiciled outside the U.S., and so an action on behalf of a class of Panalpina shareholders could present a classic example of the f-cubed claimant problem (that is, foreign investors who bought their shares in a foreign company on a foreign exchange). Though the named plaintiffs include at least on foreign domiciled fund, several of the named plaintiffs are based in Connecticut and thus to that extent the f-cubed problem may be averted.

 

There may yet be some interesting jurisdictional questions in this case. Not only is the company foreign domiciled, and not only are its shares traded elsewhere, but the supposed bribery took place outside the U.S. And, without plumbing the depths of the factual allegations, it would seem that many of the alleged misrepresentations took place outside the U.S., notwithstanding the fact that the company may have substantial U.S. operations. The case seems to present circumstances quite analogous to the facts involved in the securities suit against National Australia Bank case (refer here), in which the Second Circuit ultimately concluded that the U.S. courts lacked subject jurisdiction over the matter.

 

Jurisdictional issues notwithstanding, this case in and of itself represents yet another example of a recurring phenomenon, one that I think will continue to gain importance in the months ahead, as a result of increasing FCPA enforcement activity.

 

The latest information regarding the increasing levels of FCPA enforcement can be found here.

 

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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.

 

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Regular readers know that a recurring theme on this blog is the increasing prevalence of civil litigation following on in the wake of FCPA enforcement actions (refer for example here.) In the latest example of the phenomenon, on May 14, 2009, the Policemen and Firemen Retirement System of the City of Detroit has filed a derivative lawsuit in Texas (Harris County) District Court against Halliburton Company and KBR as nominal defendants, and against the companies’ present and former directors and officers, to recover civil damages, inter alia, in connection with the companies’ recent high-profile FCPA enforcement settlements.

 

By way of background, and as reflected here, on February 11, 2009, KBR and Halliburton agreed to pay $177 million in disgorgement in connection with SEC charges that KBR subsidiary Kelly Brown & Root LLC bribed Nigerian officials over a 10-year period in violation of the FCPA. In addition, Kelly Brown & Root agreed to pay $402 million to settle parallel criminal charges. Halliburton’s press release regarding the settlement can be found here.

 

The recently filed Texas civil action seeks "to hold Defendants responsible for the reign of terror their reckless failure to monitor the Companies’ internal controls permitted to take place at the Companies."

 

The plaintiffs’ Petition alleges that "the Companies were permitted to engage in conduct so notorious that the name ‘Halliburton’ has become virtually synonymous with corruption, just as Enron became the poster-child for fraud."

 

The complaint further alleges that KBR and its employees and agents "engaged in a course of conduct that includes bribery, gang rape, human trafficking, illegal operations in Iran, mishandling of toxic materials, and systemic overbilling."

 

The plaintiffs allege that the defendants were either complicit with or lacked oversight over these actions.

 

The increasing likelihood of civil litigation following on after an FCPA enforcement action, of which the new Texas lawsuit is but one example, represents a growing liability exposure for directors and officers of public companies and for their insurers. The fines and penalties in the underlying enforcement action would not be covered under the typical D&O insurance policy, although many of the costs of defending against allegations could well be covered. However, the costs of defense and in all likelihood any settlement of the follow-on civil litigation would be covered under most D&O policies. As a result, as I have discussed in prior posts, these kinds of lawsuits could represent a growing area of exposure for D&O insurers.

 

An AmLaw.com article regarding the lawsuit can be found here. A May 15, 2009 Bloomberg article regarding the lawsuit can be found here.

 

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A recurring theme on this blog has been the growing threat of civil litigation following in the wake of increased Foreign Corrupt Practices Act enforcement activity. (Refer for example, here.) A recent study both establishes both the overall scale of FCPA enforcement activity and quantifies the magnitude of the FCPA follow-on securities litigation.

 

The January 28, 2009 NERA Economic Consulting study, entitled "FCPA Settlements: It’s a Small World After All" (here) reports that since 2002, SEC and DOJ litigation and class actions involving the FCPA have "increased steadily," with over "$1.2 billion in settlements and penalties involving more than 30 countries during that period."

 

While this impressive number is inflated by the $800 million penalty and disgorgement recently imposed on Siemens, it also apparently does not include the pending $559 million settlement to which Halliburton recently agreed.

 

The Report, which draws on a database of all FCPA settlements between 2002 and 2008, includes a list of the ten largest regulatory settlements (again, not including the pending Halliburton settlement), which range between $16 million and $800 million. These figures include settlements with both the SEC and the DOJ.

 

What makes this Report really interesting is its analysis of settlements of securities class action lawsuits based on FCPA-related allegations.

 

The Report states that in securities fraud class action lawsuits arising from alleged FCPA violations a total of $84.4 million has been paid in settlements between 2002 and 2008. The Report further notes that if the outsized Siemens settlement is removed from the analysis, the settlements related to securities class action lawsuits represent 21% of all of the total FCPA-related civil and regulatory settlement by public companies during the period 2002 through 2008.

 

Based on the author’s review of several recently settled FCPA-related class action settlements, the Report concludes that "the behavior connected to the alleged FCPA violation can sometimes have a lasting impact on the company’s business." The class action settlements demonstrate "the link between alleged FCPA violations, ongoing revenue and the potentially large impact on firm value."

 

The Report also contains a table reflecting the market-adjusted price reactions to FCPA-related news and announcements. Analysis of the data shows that "the majority of companies that exhibited statistically significant price reactions at the 5% level to FCPA-related news had resulting 10b-5 actions filed against them."

 

The Report concludes by stating that as a result of globalization trends, coordinated regulatory activity and record-keeping requirements, FCPA enforcement is a growing priority around the world, and states that "as FCPA-enforcement against domestic and foreign issuers increases, it is likely that related securities litigation will be an issue in many of these cases."

 

The NERA Report’s detailed analysis is very interesting and is also quite consistent with my own analysis of the growing liability threat that FCPA enforcement activity represents. The Report also provides statistical support for my view, expressed here, that "the proliferation of this type of litigation activity and the significant involvement of the leading plaintiffs’ firms suggests that this category of emerging litigation may represent an increasingly important area of potential liability to directors and officers."

 

This growing liability exposure also raises a number of potentially significant D&O insurance coverage issues, which I discussed at length in the June/July 2008 issue of InSights, which can be found here.

 

My  recent post analyzing the opinion in the InVision case, in which the Ninth Circuit affirmed the dismissal of a securities class action lawsuit that had been based on FCPA-related allegations, can be found here.

 

A recent post with a year-end 2008 FCPA update can be found here.

 

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I encourage those that questioned my inclusion of FCPA issues in my list of top ten 2008 development to refer to the January 5, 2009 memo from the Gibson Dunn law firm entitled "2008 Year-End FCPA Update" (here).

 

As the memo puts it, 2008 was ‘by any measure …a monster year in Foreign Corrupt Practices Act (‘FCPA’) enforcement." The memo goes on to note that "2008 saw the FCPA’s enforcement regime mature like never before," adding that "there were no unimportant FCPA enforcement actions this year."

 

The memo highlights several enforcement trends. First, with particular emphasis on the recent massive Siemens FCPA fine, the report notes the trend toward escalating corporate financial penalties.

 

The memo reports that the Siemens fine eclipsed the prior record FCPA fine by nearly twenty times; in fact, the memo notes, the Siemens fine substantially exceeds "the aggregate of every dollar collected by the U.S. government in connection with FCPA settlements over the statute’s thirty-one year history." The memo also emphasizes the staggering costs that Siemens incurred in connection with the investigation. The memo notes that the company’s investigation and corporate remediation costs exceeded $1 billion.

 

To show that "enormous foreign prior settlements are certain not to be a fluke of 2008," the memo cites ABB’s recent announcement that it has reserved $850 million for potential costs associated with the continuing investigation of alleged improper practices.

 

The memo also addresses a theme I have frequently sounded (most recently here), that FCPA enforcement actions increasingly are accompanied by follow-on civil litigation. The memo notes that FCPA investigations increasingly have "spurred a variety of collateral civil suits, including securities fraud actions, shareholder derivative suits, and lawsuits initiated by foreign governments or business partners." Companies "can no longer assume that making peace with DOJ and the SEC will end the pain associated with their alleged FCPA violations."

 

With respect to securities litigation following on after FCPA investigations, the memo notes that "in recent years, courts have been trending towards finding that plaintiffs adequately alleged false or misleading statements, thereby meeting the heightened pleading standard under the PSLRA." However, as I noted in a recent post (here), the Ninth Circuit in the InVision Technologies case made it clear that "there are limits on the types of allegations that will meet this threshold."

 

The memo also reproduces an interesting bar graph showing the foreign jurisdictions having the "dubious distinction of being the most-referenced setting for FCPA allegations." Among the top countries are Nigeria, Iraq, China, Vietnam and Ecuador.

 

The memo, which is detailed and interesting, identifies a number of other important trends, including the increased internationalization of foreign anti-corruption endorsement.

 

Answer: Less Than One Day: In my January 7, 2009 post (here) regarding the accounting scandal dramatically disclosed at the Indian technology company Satyam Computer Services, I raised the question of how long it would take for plaintiffs’ lawyer to initiate a securities class action lawsuit against the company in a U.S. court.

 

The answer is – less than a single day.

 

Even before the close of business on January 7, plaintiffs’ lawyers announced (here) that they had filed a securities class action lawsuit in the Southern District of New York on behalf of purchasers of the company’s ADRs (which are traded, or at least were traded, on the NYSE) against the company and certain of its directors and officers. A copy of one of the Satyam complaints that has been filed can be found here.

 

The well of scandal is an ever-flowing stream, providing the plaintiffs’ bar with a constantly replenished source of new litigation targets. So much for the notion that the pool of potential securities litigation defendants is "fished out."

 

New Year’s Resolution: Some people resolve lose more weight, other people resolve to get more exercise. Even though I need to spend more time fooling around with technology like I need a hole in my head, my New Year’s resolution is to try to get more plugged into the new social media.

 

Along those lines, you will note that I have added a button in the right hand sidebar that links to my LinkedIn profile. I encourage everyone to check out my profile by clicking on the button. I would also like to strongly encourage other readers that are active on LinkedIn to "connect" with me. I am still trying to figure out what the site will lead to, but at least if readers of this blog start connecting we can try to work through it together.

 

In addition, I have recently signed up for Twitter. Again, I am still feeling my way along with the new technology, but I will say that I have used Twitter several times over the past couple of days to alert "followers" (in effect, subscribers) to developments before I had a chance to get a post up on my blog. For example, as soon as I saw the link to Cornerstone’s year end report, I posted a "tweet" on Twitter. I also added a "tweet" about the new Satyam lawsuit as soon as I learned about it. I encourage readers who may also be active on Twitter to sign up for future updates.

 

Finally, I welcome readers’ thoughts and comments on these new media. As I said, I am still trying to figure all of this out, and I am particularly interested in thoughts and comments about how best to take advantage of these new technologies.

 

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From this week’s news, it almost appears as if there had been some kind of an unannounced competition for most outrageously fraudulent or corrupt scheme. First, there was Marc Dreier’s incredibly brazen plot to peddle bogus notes to hedge funds using assumed identities. Then there was Illinois Governor Rod Blagojevich’s apparent attempt to flog Barrack Obama’s vacant Senate seat for personal enrichment. And finally there was New York financier Bernard Madoff’s massive Ponzi scheme, which may have taken investors for as much as $50 billion.  

 

The scale of the corruption and deception involved in these schemes is almost incomprehensible. It could be said of the three perpetrators of each of these scandals, as Time Magazine said (here) of Blagojevich, he is “either delusional, stupid or some combination of both.” But as astonishing as these developments may all be, they really don’t represent anything new.

 

 

Buried underneath the week’s headlines were the latest developments in an older but equally unsavory tale, which may serve as a reminder that there is, regrettably, nothing new about massive schemes of deception and corruption.

 

 

According to a December 12, 2008 Bloomberg article entitled “Siemens Agrees to Pay Fine to Settle Bribery Charges” (here), Siemens AG has agreed to plead guilty to Foreign Corrupt Practices Act violations and pay $800 million to settle U.S. charges that it paid $1.36 billion in bribes to government officials in at least a dozen countries.

 

 

The FCPA Blog (here) has an extensive review of the charges against Siemens, as well as links to the supporting documents, including the criminal information filed against Siemens and the DoJ’s sentencing memorandum. As the FCPA Blog puts it, the criminal charging documents detail “years of systematic and intentional violations of the internal controls and books and records provisions. It's a story of fraud, deceit and concealment -- filled with phony contracts, fake invoices, slush funds, and a boardroom feigning ignorance. “

 

 

A hearing on the deal under which Siemens would pay a $450 million fine and forfeit $350 million in profits will take place on December 15. If accepted, the penalty would be by far the largest FCPA penalty ever, far eclipsing the prior record payment of $44 million in the Baker Hughes case (about which refer here).

 

 

The Siemens case is a reminder that, as startling as this past week’s revelations have been, there is nothing new about fraudulent schemes or deceptive behavior. In the timeless words of the Book of Ecclesiastes (here), “What has been will be again, what has been done will be done again; there is nothing new under the sun.”

 

 

Next Up: The Litigation: One inevitable byproduct of the developments like those of the past week is litigation, and so it comes as no surprise that a lawsuit against Bernard Madoff and his firm has already emerged.

 

On December 12, 2008, an investor initiated a purported securities class action lawsuit in the Eastern District of New York against Madoff and his firm (BMIS), on behalf of “all persons and entities who purchased securities sold by or through” Madoff and his firm, “from the early formation of BMIS in the 1960s until December 12, 2008.” Refer here for news coverage of the lawsuit.

 

The complaint (reproduced below) alleges that its claims arise “from one of the most damaging Ponzi schemes in the history of Wall Street and the United States,” and that the defendants “swindled investors out of monies estimated to exceed $50 billion.” The complaint alleges breaches of the federal securities laws, civil RICO violations, and related state and common law violations.

 

Meanwhile, other plaintiffs’ firms have announced (for example, here) that they are investigating the alleged “massive fraud.” UPDATE: Please refer here to access my regularly updated list of all Madoff investor litigation, including in particular "feeder fund" lawsuits.

 

The filing of this lawsuit may not be surprising, and there may be further litigation yet to come. As detailed in the lead story in the December 13, 2008 Wall Street Journal (here), the victims of Madoff’s scheme include a host of institutional investors, hedge funds, and funds of funds. It may well be that these entities’ investors, eager to recoup losses as well as to assign blame, will also file lawsuits in a daisy-chain of litigation based on the Madoff firm’s collapse.

 

Hat tip to the Dealbook blog (here) for the text of the Madoff class action complaint, which can be viewed here:

 

Class Action Lawsuit Against Madoff

 

Another Friday Night Special: December 12, 2008 was a Friday, and that can only mean one thing – after the close of business, the FDIC announced another round of bank closures.

 

First, the FDIC announced (here) that state banking regulators had closed, and the FDIC had been appointed receiver of, Haven Trust Bank of Duluth, Georgia. Next, the FDIC announced (here) that state regulators had closed, and the FDIC had been appointed receiver of, Sanderson State Bank of Sanderson, Texas.

 

These two closures represent, respectively, the twenty-fourth and twenty-fifth bank failures so far this year. The FDIC’s complete list of failed banks during the period October 2000 to the present can be found here. Haven Trust is the fifth Georgia bank to close this year, which represents the highest total for any one state. The Sanderson bank’s closure is the second in Texas this year.

 

As I have noted before (here), the pace of bank closures has accelerated as the year has progressed. Of the 25 bank closures in 2008, 21 have taken place since July 1, eight of them just since November 1. The trend certainly suggests that there will be further bank closures in the weeks and months to come. And, pertinent to the preceding discussion, there likely will also be further bank-related litigation (refer here).

 

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In a November 26, 2008 opinion (here), the Ninth Circuit affirmed the lower court’s dismissal of a lawsuit asserting securities law violations against InVision and certain of its directors and officers based on FCPA-related disclosures. The case is noteworthy not only for its involvement of FCPA-related allegations, but also for the appellate court’s consideration of "collective scienter" issues, as well as of the significance of Sarbanes-Oxley certification issues.

 

Background

On March 15, 2004, InVision announced it would be acquired by GE in a cash-for-stock transaction. That same day, the company filed its annual filing on Form 10-K to which the merger agreement was attached. On July 30, 2004, InVision announced that an internal investigation had revealed possible violations of the Foreign Corrupt Practices Act (FCPA). The company voluntarily reported the activities to the SEC and the DOJ. The company later entered negotiated arrangements with the DOJ and the SEC (refer here). GE later consummated the pending merger.

 

Shortly after InVision announced the FCPA concerns, shareholders initiated a securities class action lawsuit against the company and certain of its directors and officers. (Refer here for further background regarding the case). The plaintiffs based their claims on three alleged misstatements in the merger agreements, which InVision had attached to its 10-K.

 

The plaintiffs alleged that the merger agreement misleadingly stated that the company was "in compliance … with all applicable law"; in compliance with the "books and records" provision of the FCPA; and that that neither the company nor any of its officers, directors or employees had knowledge that the company had violated the FCPA’s antibribery provisions.

 

The district court dismissed the complaint and the plaintiffs appealed.

 

The Ninth Circuit’s Decision

The appellate court essentially assumed that the plaintiff had satisfied the requirement to plead falsity with respect to the three alleged misrepresentations stating that "even if [the plaintiff, Glazer] properly pled falsity, the district court’s dismissal would still be appropriate if Glazer failed to plead scienter adequately with respect to the three statements."

 

In order to satisfy the scienter requirement, the plaintiff urged the Ninth Circuit to adopt the "collective scienter" theory, following the Second Circuit’s recent decision in the Dynex Capital case (refer here) and the Seventh Circuit’s recent decision in the Tellabs case (refer here). Under this theory, as articulated by the Seventh Circuit, "it is possible to draw a strong inference of corporate scienter without being able to name the individuals who concocted and disseminated the fraud."

 

After reviewing the case law concerning corporate securities liability, including its own prior decision in the Nordstrom v. Chubb case (a decision that will be familiar to many of this blog’s readers), the Ninth Circuit ultimately concluded that this case did not require the court to decide whether or not to adopt the theory of collective scienter.

 

The court concluded that because of "the limited nature and unique context of the alleged misstatements" involved in the case, the "collective scienter" issue was not before the court. In reaching this conclusion, the court noted that

 

Glazer rests its securities fraud claim on three statements, all of which appear in a sixty-page legal document. If the doctrine of collective scienter excuses Glazer from pleading individual scienter with respect to these legal warranties, then it is difficult to imagine what statements would not qualify for an exception to individualized scienter pleadings. In fact, because the merger agreement warranted that the company was in compliance "with all laws," then under the collective scienter theory urged by Glazer, so long as any employee at InVision had knowledge of the violation of any law, scienter could be imputed to the company as a whole. This result would be plainly inconsistent with the pleading requirements of the PSLRA.

 

Accordingly, the Ninth Circuit held that in order to succeed on his claim, the plaintiff had to establish that individual defendants acted with scienter in making the statements in the merger agreement. The court said that "we see no way that [the defendant] could show that the corporation, but not any individual [director or officer] had the requisite intent to defraud." Only the company’s CEO and CFO had signed the merger agreement, and the plaintiff alleged scienter only with respect to the CEO, Magistri.

 

The court found with respect to Magistri, however, that Glazer had not pled any facts to demonstrate that "Magistri was personally aware of the illegal payments or that he was actively involved in the details of the details of InVision’s Asian sales."

 

The Ninth Circuit also refused to infer scienter from the CEO’s and the CFO’s signature of the Sarbanes-Oxley certifications, holding that the mere signature, without more, is insufficient to raise a strong inference of scienter.The Ninth Circuit followed prior decisions of the Eleventh and Fifth Circuits, concluding that there was no evidence that the SOX certification requirements were intended to alter the PSLRA’s pleading requirements. The Court said that "the Sarbanes-Oxley certification is only probative of scienter if the person signing the certification was severely reckless in certifying the accuracy of the financial statements.

 

Discussion

The Ninth Circuit’s decision is noteworthy for its discussion of the "collective scienter" issue, although in the end it is of limited significance on this point given the court’s conclusion that it did not need to reach that issue. The decision is also noteworthy for its discussion of the Sarbanes-Oxley certification issue, but in that respect it also merely followed existing precedent.

 

But perhaps the greatest significance about the Ninth Circuit’s opinion may be what it suggests about securities cases based on FCPA-related disclosures. The Ninth Circuit’s refusal to allow the claim to proceed in the absence of allegations that senior officials were aware of the improper conduct could present a significant hurdle for FCPA-related securities claims, at least in the circuits that have not adopted the "collective scienter" theory.

 

As the Ninth Circuit noted in the InVision case, "the surreptitious nature of the transactions creates an equally strong inference that the payments would have deliberately kept secret – even within the company." Obviously, payments of this kind invariably are of a surreptitious nature and of a kind that would be kept secret, even within the company. The implication is that in order for a securities claim alleging FCPA-related disclosures to survive the initial pleadings stage, the claimants may have to plead that the company officials who prepared the company’s public disclosures were aware of the improper activities.

 

In prior posts (most recently here), I have noted the increasing prevalence of follow-on civil litigation accompanying FCPA investigations, including the increasing frequency of follow-on securities litigation alleging misrepresentations in the FCPA-related disclosures. The Ninth Circuit’s decision in the InVision case suggests that, at least in jurisdictions that have not recognized the collective scienter theory, the ability of these follow-on securities lawsuits to get past the pleading stage may depend on the existence of allegations that senior company officials were aware of the improper payments. Given the invariably "surreptitious nature" of these payments, claimants may find this a challenging requirement to satisfy.

 

The SEC Actions blog has a thorough analysis of the Ninth Circuit’s discussion of the pleading issues in the InVision case, here. The FCPA Blog also has a good discussion of the case, here.

 

Special thanks to Neil McCarthy of Lawyerlinks.com for providing me with a copy of the Ninth Circuit’s opinion.

 

Another New Wave Securities Lawsuit: In a recent post (here), I noted that there have been several recent securities class action lawsuits in which the companies involved have been hit with significant losses due to wrong way bets on commodities or currencies.

 

The latest example of this type of securities litigation involves a case filed on November 26, 2008 in the Southern District of Florida against Brazilian forest products manufacturer Aracruz Cellulose S.A. and certain of its directors and officers on behalf of investors who purchased the company’s American Depositary Receipts on the NYSE., as well as purchasers of the company’s common stock, which trades on the Sao Paulo Bovespa.

 

According to the plaintiffs’ lawyer November 26 press release (here), the complaint alleges that

 

During the Class Period, Aracruz entered into undisclosed currency derivative contracts to purportedly hedge against the Company's U.S. dollar exposure. The Company characterized the use of these contracts as protection against foreign interest rate volatility and assured investors that this type of trading did not represent "a risk from an economic and financial standpoint." However, these contracts violated Company policy in that they were far larger than necessary to hedge normal business operations. As a result of Aracruz's clandestine and speculative currency wagers, credit rating agencies downgraded Aracruz, the Company's CFO resigned, and Aracruz's stock suffered a severe decline, plummeting to the lowest levels in 14 years.

 

As I noted in my prior post, many companies were also exposed to sudden and unexpected losses by dramatic changes in the commodities and currencies markets earlier this year. For example, the November 29, 2008 Wall Street Journal reported (here) on several airlines that have recently reported the negative impact from fuel cost hedges that generated huge losses. These kinds of developments and other unexpected fallout from the crisis roiling global financial markets are likely to affect a wide variety of companies, some of which may be subject to securities litigation.

 

It is interesting to note that the plaintiffs’ lawyers in the Aracruz case appear to have made a conscious decision to include within the class the Brazilian company’s common shareholders. Within this group are likely to be a number of shareholders domiciled outside the U.S. that bought their shares against the foreign company on a foreign exchange. The presence of these so-called "foreign-cubed" litigants could pose subject matter jurisdiction issues, at least as to those claimants.

 

My recent post discussing the Second Circuit’s recent "foreign-cubed" litigant ruling in the National Australia Bank case can be found here. The November 24, 2008 Southern District of New York decision granting the motion to dismiss the securities class action lawsuit that had been filed against Vodafone for lack of subject matter jurisdiction, in reliance upon the National Australia Bank decision, can be found here. (Note: Special thanks to the reader who pointed out that I had incorrectly referred to the Vodafone case as the Vivendi case. My apologies for any confusion.)

 

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FDIC Report: More Bank Failures Coming?: The FDIC’s Quarterly Banking Profile for the third quarter 2008 (here), released on November 25, 2008, paints a dismal picture of the banking industry.

 

Among other things, the Report notes that during the third quarter the number of insured institutions on the FDIC’s "Problem List" increased from 117 to 171, and the net assets of "problem" institutions rose from $78.3 billion to $115.6 billion. This represents the first time since the middle of 1994 that assets of "problem" institutions have exceeded $100 billion.

 

These grim statistics suggest further bank failures ahead. A November 25, 2008 CFO.com article discussing the FDIC’s report (here) quotes FDIC chairperson Sheila Bair as saying "we expect more banks to fail."

 

In its November 25 press release (here), the FDIC also notes that "community banks – those with total assets of under $1 billion – are beginning to exhibit stresses similar to those facing the industry as a whole." However, the press release also comments that "capital levels and reliance on retail deposits remain higher at those banks than the industry average."

 

My recent post detailing the latest bank failures and possible implications can be found here. My earlier post addressing the possibility of a new wave of "dead bank" litigation can be found here.

 

Big FCPA Penalties Ahead: According to statements reported in a November 25, 2008 Law.com article (here), the SEC’s deputy enforcement division director expects the imposition in the next two to six months of Foreign Corrupt Practices Act (FCPA) penalties that will "dwarf the disgorgement and penalty amounts that have been obtained in prior cases."

 

The biggest FCPA penalty to date is the $44.1 million settlement Baker Hughes paid last year to settle charges of bribery and other improper conduct in six countries (about which refer here).

 

One probe attracting particularly attention is the investigation involving Siemens, which in 2006 disclosed that it had uncovered more than $1 billion in bribes paid in over a dozen countries in order to win contracts. The potential magnitude of this fines and penalties Siemens could be facing may be inferred from Siemens’ recent 1 billion euro provision for the expected settlement with U.S. and German authorities of bribery allegations (about which refer here).

 

A "twist" noted with respect to the forthcoming cases is that a "significant" number involve violations that were not self-reported by the companies. In the recent past, many of the FCPA enforcement cases have arisen when companies themselves discovered and reported violations. However, many of the newer cases "were generated by other leads," such as the SEC’s own investigatory work or whisteblowers.

 

As I have noted in prior posts (most recently here), one of the risks increasingly associated with FCPA enforcement actions is the threat of follow-on civil litigation. For example, Siemens itself is the subject of a purported shareholders’ derivative suit in the U.S. related to its ongoing bribery investigations. As the scale of FCPA enforcement activity grows, the threat of FCPA-related civil litigation will also increase.

 

Litigation Funding Developments: In a November 2008 report on Transatlantic Trends in Business and Litigation (here), the Lloyd’s insurance market, among other things, examines the growing prevalence of third-party litigation funding, whereby investors financially support a claimant in return for a share of the damages. (My recent post discussing the role of litigation funding in the Australian class action against Centro Properties can be found here.)

 

The Lloyd’s report concludes that businesses on both sides of the Atlantic "should expect third party litigation funding to rise," and that "current economic conditions may actually accelerate the growth."

 

Meanwhile, a start-up venture is planning to try to launch an IPO in what may be one of the more creative attempts to try to fund litigation. According to a November 18, 2008 Pensions & Investments article (here), VR Holdings, Inc. is planning the offering to try to "provide liquidity" for the suit’s 2,500 claimants, 2,000 of whom are older than 65 and concerned that they may not live to see the suit settled. (For reasons specified below, these concerns may be well founded.)

 

According to the company’s President, the IPO will "give the claimants a vehicle to hopefully generate some funds for themselves." The offering is a "way to sell stakes in the eventual payout," in that the shares will be "like an option that sells for around $1 but has a potential upside of $12 or $14." (I guess this fellow believes the company is not yet in the quiet period.)

 

The suit, which has been filed against several investment firms, alleges that the defendants conspired to "take over, liquidate, and bankrupt" (I presume not necessarily in that order) a concert T-shirt maker.

 

In addition to possible legal objections to this litigation funding arrangement, the prospective IPO may face a more immediate practical obstacle. That is, the case, which was pending in the Northern District of Illinois, has already been dismissed with prejudice. It is unclear from the article whether a timely notice of appeal was filed. (No, I am not making any of this up.)

 

The prospective IPO sponsors may want to reconcile themselves to the possibility that investors may not exactly fall all over themselves to get a piece of this action.

 

And Finally: The Securities Docket blog has an interesting interview (here) with trailblazing blogger Mike O’Sullivan of the Munger, Tolles & Olson law firm, whose trendsetting Corp Law Blog showed the way for many blogs that followed, including The D&O Diary. After running his blog for some time, O’Sullivan ultimately stopped adding new posts in 2004.

 

In discussing the reasons why he discontinued the blog, O’Sullivan notes that he was facing "existential doubts" of the kind that will be familiar to any blogger, including yours truly: "Why am I doing this? What do I really have to say? Why are you reading this?"

 

In commenting on the current crop of corporate and securities blogs, O’Sullivan mentions that one blog he "slavishly" follows is Broc Romanek’s (and now Dave Lynn’s) Corporate Counsel blog (here), which I mention here because it is a blog that I read every day as well.

 

Hats off to Bruce Carton for the interview and for his new Securities Docket site (here) which has quickly also become a daily (or even several times daily) must-read.

 

Blogging Off: The D&O Diary likely not be adding any new posts for the next few days. We will resume our "normal" publication schedule after December 1.

 

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Two developments involving major European companies illustrate both the challenges and uncertain progress of global efforts to combat corruption.

 

First, on July 29, 2008, Siemens announced (here) that its Supervisory Board has resolved to claim damages from ten former members of the company’s Managing Board executive committee, including two former CEOs and a former CFO. The claims are “based on breaches of their organizational and supervisory duties in view of the accusations of illegal business practices and extensive bribery that occurred in the course of international business transactions and the resulting financial burdens to the company.”

 

The former executives will be “invited to respond to the claims before legal action is taken.” A July 30, 2008 Financial Times article describing the Siemens board action can be found here.

 

Second, in a July 30, 2008 opinion (here), the U.K. House of Lords overturned the April 10, 2008 ruling of the Queen’s Bench Divisional Court that the decision of the Serious Frauds Office Director to discontinue the investigation of possible corrupt activity involving BAE Systems was unlawful. (My prior post discussing the April 10 decision at length can be found here.)

 

The discontinued SFO investigation involved possible bribery in connection with the Al Yamamah arms contract between BAE Systems and the Saudi government. As detailed in the House of Lords opinion, the investigation proceeded despite Saudi resistance until investigators' attempt to subpoena certain Saudi account information from Swiss banks led to direct threats that the Saudis would withhold cooperation with British antiterrorism efforts. Among other things, the threats included the explicit possibility that “British lives on British streets were at risk.”

 

In reaching its conclusion that the SFO director properly exercised his discretion to discontinue the investigation, the senior law lord, Lord Bingham of Cornhill, wrote:

The Director was confronted by an ugly and obviously unwelcome threat. He had to decide what, if anything, he should do….The issue in these proceedings is not whether the decision was right or wrong, nor whether the Divisional Court or the House agrees with it, but whether it was a decision which the Director was lawfully entitled to make….In the opinion of the House the Director’s decision was one he was lawfully entitled to make. It may be doubted whether a responsible decision-maker would, on the facts before the Director, have decided otherwise.

Baroness Hale of Richmond added in a concurring opinion that “it is extremely distasteful that an independent public official should feel himself obliged to give way to threats of any sort….Although I wish the world were a better place where honest and conscientious public servants were not put in impossible situations such as this, I agree that his decision was lawful.”

 

A July 30, 2008 article in The Guardian (here) describing the House of Lords opinion quotes counsel for the SFO as saying that “the SFO director was convinced that Saudi Arabia wasn’t bluffing.”

 

These significant developments have important implications both for companies and for continuing efforts to enforce anticorruption provisions.

 

First, the decision of the Siemens Supervisory board to pursue claims against the company’s former officials underscores the growing threat, which I have discussed at length in prior posts (most recently here), of follow-on civil litigation arising out of anticorruption enforcement activity. Although Siemens officials already are the target of a shareholders’ derivative lawsuit in the U.S., the Supervisory Board’s decision to take up claims against the former officials highlights the potential seriousness of the civil litigation threat.

 

The House of Lords decision also has great significance and represents an outcome that can only be regretted. To be sure, if it is assumed that the Saudi threats were serious (that is, if they were in fact not bluffing) then the threat to British lives justifies the decision to discontinue the investigation as well as the House of Lords opinion. Nevertheless, the capitulation to a threat of this kind represents a subordination of the rule of law to forces of a kind and character that should have no role in free societies.

 

The BAE Systems case clearly tested the limits of what any government might be willing to risk in resisting corruption. The implication of the decision to terminate the investigation is that if corrupt forces are sufficiently rich and powerful, they have nothing to fear from the force of law, and that anticorruption laws are enforceable only against those too weak or powerless to resist.

 

In its June 2008 Progress Report (which I discuss here), Transparency International noted that antibribery enforcement is “critical in draining the supply of bribe money that distorts public decision making in some of the world’s poorest states, with disastrous consequences for the decision making.” The outcome of the BAE Systems case suggests that it is not only in the world’s poorest countries that corrupt activity disrupts the processes of an ordered society.

 

The FCPA Blog has a post discussing the House of Lords opinion here. The FCPA Blog notes that the U.S authorities are continuing their investigation of the BAE Systems sales to Saudi Arabia.

 

Finally, and to bring this discussion full circle, the BAE Systems investigation is also the subject of follow on civil litigation, as discussed at greater length here.

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The latest issue of InSights, entitled “The Foreign Corrupt Practices Act: A 70’s Revival?” (here), presents an overview of a frequent topic on this blog – the growing significance of FPCA enforcement activity. Not only is the heightened activity a regulatory and operational concern for all companies with overseas operations, but it also presents a growing source of potential liability in the form of follow-on civil litigation.

 

Many of the themes discussed in the InSights article are underscored in a July 7, 2008 Gibson, Dunn & Crutcher memorandum entitled “2008 Mid-Year FCPA Update” (here). The memo reports that the “frenetic pace” of FCPA enforcement activity “has carried through the first half of 2008.” Year to date prosecutions are up “substantially” from “last year’s record-setting totals.” Indeed, the memo notes that in the first half of 2008, there were more FCPA prosecutions than in any prior full year except 2007.

 

Among the many topics addressed in the Gibson Dunn memo is a theme I have frequently sounded on this blog and that I reviewed at length in the InSights article, which is the threat of civil litigation following along in the wake of an FCPA enforcement action. The Gibson Dunn memo characterizes the level of this litigation activity as an “outburst,” adding that “our recurring advice to clients and friends has been to expect and prepare for ‘tag along’ civil litigation when a new governmental FCPA investigation becomes public.”

 

In addition to the specific FCPA-related securities class action lawsuits I note in the InSights article, the Gibson Dunn memo also cites the recent settlement in the FARO Technologies securities litigation. According to the company’s press release (here), the company’s D&O insurers paid $6.875 million to settle securities law claims alleging, among other things, that the company or its representatives had made payments in connection with the company’s Asian sales in possible violation of the FCPA. The company apparently was also named as nominal defendant in a related shareholders’ derivative lawsuit.

 

As an aside, and in addition to the FCPA-related litigation described in the Gibson Dunn memorandum, a loyal reader advised me of yet another FCPA securities class action lawsuit settlement of which I was previously unaware, involving Titan Corporation. (Background regarding the lawsuit can be found here.) The plaintiffs in that case alleged that Titan Corporation, in order for its planned merger to go forward, had failed to disclose that foreign consultants had made improper payments to foreign officials in violation of the FCPA, and that the company had improperly accounted for funds used in those payments. The case settled in 2005 for $61.5 million.

 

In addition to the FCPA-related shareholder lawsuits, the Gibson Dunn memo also notes a “new diversity of FCPA-inspired civil litigation theories.” The memo specifically notes the arrival of civil litigation brought by foreign governments alleging that U.S. companies had corrupted the government’s own officials. The memo specifically references the Alcoa action, which I discussed in a prior post, here.

 

The memo also refer to an action brought in June 2008 by the Republic of Iraq against Chevron and ninety other companies, alleging that the defendants conspired with Saddam Hussein’s regime to corrupt the Oil-for-Food program by diverting as much as $10 billion to Hussein’s government. Iraq claims that the defendants violated RICO, as well as other fraud and money laundering statutes.

 

These FCPA-related cases and others are proceeding even though there is no private right of action under the FCPA itself. However, the Gibson Dunn memo notes that on June 4, 2008, Rep. Ed. Perlmutter (D. Colo.) introduced the “Foreign Business Bribery Prohibition Act of 2008” (H.R. 6188), which would provide for a limited private right of action under the FCPA. However, potential litigation targets are limited to “foreign concerns,” so the class of potential defendants is restricted to foreign persons unaffiliated with U.S. stock exchanges. While the Bill itself is still before the relevant Congressional committees, it represents yet another part of the increasing focus on corrupt activity as well as the increasing risk of civil litigation arising out of  that process.

 

The Gibson Dunn memo concludes that the trend of “continually increasing enforcement is here to stay for the near future.” 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 the D&O policy, the policy could be called upon to respond to the costs of defending against an FCPA enforcement action. In any event, any follow-on civil litigation would also trigger the company’s D&O coverage, subject to all of the policy’s terms and conditions.

 

The growing importance of this litigation activity makes this an increasingly important issue to be considered in connection with the policy placement process. The specific issues involved are discussed at greater length in the InSights article.

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In prior posts, I have examined the increasing importance of anticorruption efforts and their significance for purposes of corporate governance. But a recent report by a global watchdog group suggests that not all governments are actively enforcing their anticorruption commitments, with potentially serious consequences for the developing world.

 

Transparency International describes itself as a “global civil society organization leading the fight against corruption.” Among other things, the group issues an annual progress report on the enforcement of the OECD Convention on Combating Bribery of Foreign Officials.

 

On June 24, 2008, the group issued its 2008 Progress Report (here), which states that there has been a “dangerous stalemate on enforcement” and that “less than half” of the OECD Convention signatories “are living up to their commitments.” The report further states that while there has been “significant enforcement by 16 governments,” there is “little or no enforcement by 18 governments.”

 

The watchdog group is particularly worried about the “mixed message” that these uneven enforcement efforts may be sending. One commentator for the group is quoted as saying that “strong enforcement action against Siemens signaled to German business that foreign bribery will no longer be tolerated. But the backtracking of other countries, including the UK’s termination of an investigation into BAE Systems’ deals in Saudi Arabia, reinforces doubts about government commitment to enforce the Convention.”

 

The report leave no doubt about the importance of anticompetitive enforcement; as the report states, “compliance by signatory states is critical in draining the supply of bribe money that distorts public decision making in some of the world’s poorest states, with disastrous consequences for their citizens.”

 

My most recent post discussing the BAE Systems investigation can be found here, and my most recent post discussing the Siemens investigation can be found here.

 

Hat tip to the SOX First blog (here) for the link to the Transparency International report.

 

Siemens might not only have problems with the anticorruption laws, but also with its complexion, according to a June 24, 2008 Financial Times article reporting on comments from Siemens' current head, in an article entitled "Siemens is 'too white, German and male'" (here).

 

Another Options Backdating Securities Class Action Settlement: On June 24, 2008, Brooks Automation announced (here) that it had settled the securities class action lawsuit that was pending against the company and certain of its directors and officers. The defendants’ motion to dismiss the lawsuit had previously been denied, as I discussed in a prior post, here. The case settled for $7.75 million dollars, all of which is to be paid by the company’s liability insurance carrier.

 

In any event, I have added the Brooks Automation settlement to my table of options backdating-related lawsuit dismissals, denials and settlements, which can be accessed here.

 

“Aggregator” Standing: Ordinarily this blog would not pause to comment on a “justiciability” case, at least one outside the context of directors and officers liability. But we found some of the commentary about the U.S. Supreme Court’s June 23, 2008 decision in Sprint Communications v. APCC Services (here) particularly interesting, and we thought we would pass it along for the benefit of those readers as interested as we are in procedural and jurisdictional matters.

 

George Washington University Law Professor Jon Siegel has a post on his blog Law Prof on the Loose (here) discussing the decision and the question whether “aggregators” who compiled the claims of payphone operators against long-distance carriers can demonstrate a sufficient injury to have standing to sue. The Supreme Court decided that they do. Siegel’s post does an interesting and humorous job explaining the case, the issues, and the decision, and he also explores the interplay between the majority and dissenting opinions. Read and enjoy.

 

Attention Deficit: We all suffered through those undergrad classes that seemed like they would never end, but the Chronicle of Higher Education has a June 20, 2008 article entitled “Short and Sweet: Technology Shrinks the Lecture”(here) reporting that after all these years, academia may finally be doing something about it.

 

Apparently, many Profs who have made their living droning on and on have finally seen themselves on video, as part of the effort to put their lectures on line. Appropriately enough, the experience seems to have been a wake-up call for many professors. As one Prof observed, “You wanted to kill yourself after about 20 minutes.” (I am not sure, but I think that particular Prof may have taught my Econ 101 class.)

 

So as part of their transition to online teaching, many professors are breaking their sessions into 20-minute segments. I guess the 20 minute time frame was selected to minimize the number of boredom-induced suicides.

 

At least some of the professors have managed to make the mental leap: “Shorter may work better in the classroom, too.” Tragically, this breakthrough comes too late to benefit the current generation, but at least our children and grandchildren can hope for a better tomorrow.

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The growing importance of global anticorruption enforcement efforts was underscored this past week by the revelation of a cross-border investigation involving the French industrial giant Alstom and by developments in the continuing investigation involving Siemens. Moreover, the Siemens developments highlight the increasing significance of liabilities arising from anticorruption exposures for the D&O insurance industry.

First, in a May 6, 2008 article entitled “French Firm Scrutinized in Global Bribe Probe” (here), the Wall Street Journal reported that French and Swiss authorities are investigating whether officials acting on behalf of Alstom paid hundreds of millions of dollars between 1995 and 2003 to win contracts in Brazil, Venezuela, Singapore and Indonesia.

Then on May 9, 2008, German prosecutors announced that they will pursue a civil enforcement action against former Siemens chairman Heinrich von Pierer and several other (unnamed) former Siemens board members. (Refer here for background regarding the Siemens investigation). von Pierer served as Siemens’ chief executive from 1992 to 2005, and as its Chairman until April 2007. Prosecutors apparently have elected for the time at least not to pursue criminal charges against von Pierer.

According to a May 10, 2008 Wall Street Journal article (here), the company itself has also said that “it may seek financial compensation from former managers but didn’t name individuals.”

According to the Journal article about the Alstom investigation, the Alstom and Siemens investigations “suggest that Europe’s prosecutors have begun taking a tougher line on business practices that their U.S. counterparts have long treated as criminal.” It is not merely coincidental that these investigations are now emerging; they are in fact an outgrowth of relatively recent changes in the laws of both Germany and France.

For many years, under the laws of the two countries, corrupt payments were not only legal, but the amount of the payments were tax deductible. But both countries are signatories to the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions. To implement the Convention, in 1999 Germany passed the German International Bribery Act. According to the Journal, “France outlawed bribery of foreign officials in July 2000.”

Both companies seem to have had difficulties adapting to the new legal prohibitions, as the conduct under investigation both preceded and followed the enactment of the new laws.

One particularly interesting aspect of the Alstom investigation is the way that the circumstances under review came to light. The investigation apparently arose as a result of an audit commissioned by the Swiss Federal Banking Commission of Tempus Privatbank AG, a small private bank. The audit uncovered documents concerning Alstom-related transactions that detailed the flow of about 20 million euros from Alstom to shell companies in Switzerland and Lichtenstein.

These investigations underscore the growing significance of cross-border anticorruption actions and highlight the fact that anticorruption efforts are no longer just a U.S. priority. Moreover, the potential exposures and liabilities are enormous. Siemens itself has already paid a fine of 201 mm euros.

There are also important implications arising from Siemens’ suggestion that it may pursue claims against its former managers. According to a May 5, 2008 Business Insurance article entitled “German Insurers Brace for Siemens Claim” (here), the company has notified its D&O insurers that it intends to file a claim under its D&O policies relating to the company’s antibribery related exposures. The article reports that the company carries D&O limits of 250 million euros. The article does not detail the specifics of the insurance claim or the matters for which the company claims or intends to claim coverage, so there is no way to assess the likelihood of the company’s eventual recovery under the policies.

It is far from certain that the company’s policies would actually cover the claimed amounts. But to the extent the policy’s limit is exhausted by the claims for coverage, it could, at least according to the Business Insurance article, have a substantial impact on the German market for D&O insurance.

The potential insurance implications from the developments in the Siemens investigation demonstrate the growing significance for the D&O insurance industry of the liabilities arising from anticorruption enforcement activity. As investigations like those involving Alstom and Siemens emerge and develop, and as litigation like that involving Alcoa (about which refer here) continues to arise, these issues necessarily will become a significant priority for companies and for D&O insurers. As I have previously suggested (here), anticorruption violations may well represent the “next corporate scandal.”

The May 9, 2008 Financial Times has an interesting editorial about the Alstom investigation and the expansion of anticorruption efforts, here.

Speakers’ Corner: On May 14, 2008, I will be speaking at the American Conference Institute’s D&O Liability Insurance Conference (refer to the agenda, here). I will be participating on a panel with my good friend Dan Bailey in a session entitled “Emerging Exposures Roundup: Fiduciary Litigation, Global Warming and More.”

Then on May 15, 2008, I will be in Toronto to participate in the Professional Liability Underwriting Society (PLUS) Canadian Chapter’s educational event regarding the subprime crisis. Information about the Toronto event can be found here. The other panelists include Dr. Arturo Cifuentes of R.W. Pressprich & Co., Denis Durand of Jarislowski Fraser, and Robert Murray of Chubb.

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In a powerful affirmation of the rule of law, two justices of the U.K.’s High Court of Justice ruled in an April 10, 2008 opinion (here) that the British Serious Fraud Office (SFO) must reconsider its decision to discontinue its bribery investigation into the award of a weapons contract between Saudi Arabia and BAE Systems plc. My prior post regarding the BAE investigation can be found here.

The SFO announced its decision to discontinue the investigation in December 14, 2006. The investigation had been ongoing for some time and had even withstood a prior attempt in October 2005 to have the investigation stopped. However, in July 2006, apparently when the SFO was about to obtain access to certain Swiss bank accounts, the British government received “an explicit threat made with the intent of halting the investigation.”

In the proceedings before the court, the government refused to characterize the threat, but the opinion quotes news reports that what happened was that Prince Bandar bin Sultan bin Abdul Aziz of al-Saud “went to Number 10” and told the Prime Minister’s Chief of Staff to “get it stopped” or the military weapons contract ‘was going to be stopped and intelligence and diplomatic relations would be pulled.” (Prince Bandar, the Saudi ambassador to the United States from 1983 to 2005, is now and in 2006 was the Secretary-General of the Saudi National Security Council.)

Following the July 2006 threat, an internal governmental review process unfolded, including high level consultations with the British ambassador to Saudi Arabia and others, culminating in a previously confidential December 8, 2006 memorandum by then-Prime Minister Tony Blair to his Attorney General Peter Goldsmith that “developments” had “given rise to the real and immediate risk of the collapse of UK/Saudi security, intelligence and diplomatic cooperation.” This, the Prime Minister said, would “have seriously negative consequences for the UK public interest in terms of both national security and our highest priority foreign policy objectives in the Middle East.” The government was particularly concerned with the Saudis continued counter-terrorism support, without which, it was feared, British lives could be in danger.

According to news reports (here), in August 2006 (that is, one month after Prince Bandar’s visit to “Number 10”), BAE won a $8.7 billion order from the Saudi government for 72 Eurofighter Typhoon warplanes, purportedly the latest component of the Al Yamamah arms deal, which dates back to 1985 and is the largest British export contract ever.  

The legal challenge to the decision to terminate the investigation was presented by two public interest groups, Corner House Research and the Campaign Against Arms Trade. They challenged the SFO’s decision to accede to the threat as “contrary to the constitutional principle of the rule of law,” as well as on other grounds. By contrast, the government argued, as the court summarized, that “the law is powerless to resist the specific, and as it turns out, successful attempt by a foreign government to pervert the course of justice in the United Kingdom.” (The court said of this argument that “so bleak a picture of the impotence of the law invites at least dismay, if not outrage.”)

The April 10 opinion was written by Lord Justice Alan Moses. After a detailed review of the background to the SFO’s decision to terminate the investigation, the Court considered the claimants’ challenge, which Lord Justice Moses said did not question the government’s assessment of the national security risk. The threat that was the basis of the decision to terminate the investigation “was not simply directed at the company’s commercial, diplomatic and security interests, it was aimed at its legal system.”

The threat was made “with the specific intention of interfering with the course of the investigation.” The court noted that “had such a threat been made by one who was the subject of the criminal law of this country, he would risk being charged with an attempt to pervert the course of justice.” Surrender to such threats “merely encourages those with power, in a position of strategic and political importance, to repeat such threats.” The court concluded that “in yielding to the threat, the [SFO director] ceased to exercise the power to make the independent judgment conferred on him by Parliament.” As a result, the court concluded that the submission to the threat was “unlawful.”

The court’s opinion reviews a host of other considerations, including in particular the U.K’s obligations as a signatory Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (which specifies that investigations “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”). But the court’s essential conclusion is that the decision to terminate the investigation was contrary to the principles of the rule of law. “It is difficult,” the court said,” to identify any integrity on the role of the courts to uphold the rule of law if the courts are to abdicate in response to a threat from a foreign power.”

The full opinion is lengthy but it is well worth the read. The details surrounding the government’s consideration of how to respond to the threat are fascinating, and the court’s analysis of the legal considerations involved is thought-provoking, particularly its consideration of how imminent a threat of loss of life must be before a court might consider yielding. The inherent tension in the court’s decision arises from the fact that this case tests the limits of what any government might be willing to risk in resisting corruption; the lesson the court rejected is that if the corrupt forces are rich and powerful enough, they have nothing to fear from the force of law.

It remains to be seen, however, whether the investigation will go forward in the end; the court did not rule that the investigation must proceed, only that the December 2006 decision to terminate the investigation was unlawful. According to an April 11, 2008 article in The Guardian (here), “the high court will reconvene in a fortnight to decide what remedy to award the two groups of anti-corruption campaigners who brought the judicial review of the Serious Fraud Office decision to end the inquiry.”

As I have noted in a number of prior posts, most recently here, many governments around the world (including the U.S. government) are increasingly committed to enforcing anti-corruption laws. BAE is also being investigated in the U.S. and in Switzerland, and is only one of several current high-profile corruption investigations. The April 10 opinion underscores the seriousness of the issues involved, as well as the stakes. Courts will continue to grapple with the challenges these cases present, but it is important for companies to understand that the risks involved with corrupt practices include the threat of civil litigation, as I discussed here. BEA is in fact already the target of a shareholders’ derivative lawsuit in the United States. The growing threat of this type of litigation suggests why corrupt activity may represent the “next corporate scandal.”

Press coverage of the April 10 decision can be found here and here. The FCPA Blog’s post on the decision can be found here.

Subprime Litigation Webcast: On Friday April 11, 2008, at 11:00 a.m., I will be a panelist on a webcast sponsored by Risk Metrics on the topic “Subprime Litigation and Liability.” The panel will be moderated by Adam Savett, author of the Securities Litigation Watch blog, and will include defense attorney Darryl Rains, of the Morrison and Foerester firm, and plaintiffs’ attorney Mark Lebovitch, of the firm Bernstein, Litowits, Berger & Grossman. Registration for the webcast (which is free) can be accessed here. Further information, including links to background papers by Risk Metrics, can be accessed on the Securities Litigation Watch, here.  

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In prior posts (most recently here), I have commented on the growing threat of follow-on shareholder litigation ensuing in the wake of Foreign Corrupt Practices Act (FCPA) enforcement actions. A lawsuit recently filed in the United States District Court for the Western District of Pennsylvania represents an entirely different kind of threat arising from allegations of foreign corrupt activities, in the form of a civil action brought directly against the alleged wrongdoer(s) by the alleged victims of the corrupt activity, without any preceding FCPA enforcement action.

On February 27, 2008, Aluminum Bahrain B.S.C. ("Alba") filed a lawsuit against Alcoa, an Alcoa affiliate, and two individuals, one of whom was an officer of an Alcoa affiliate. Alba (owned by an entity in which the Bahrain government has a 70% ownership interest), alleges that the defendants engaged in a 15-year conspiracy involving overcharging, fraud, and bribery of Bahraini officials. A copy of the complaint can be found here. Alba is in the aluminum smelting business, and it has depended since 1990 on Alcoa affiliates for its supply of alumina, a key ingredient in the production of aluminum.

The complaint alleges that beginning in 1993, over $2 billion in payments were funneled through companies (located in Singapore, Guernsey, Switzerland and elsewhere) owned or controlled by a Canadian businessman of Jordanian descent named Victor Dahdaleh, who is named as a defendant in the complaint. A portion of these payments were secretly directed to one or more (unnamed) Bahraini government officials as part of an alleged conspiracy to cause Alba to cede a substantial portion of its equity to Alcoa, to pay inflated prices for alumina, and to corrupt the integrity of senior Bahraini government officials.

A front-page February 28, 2008 Wall Street Journal article describing the complaint (here) states that the lawsuit emerged from Bahrain’s own effort "to root out misbehavior." The Journal also reports that last year Bahrain retained Kroll Associates, which "had uncovered cases of corruption in its state-owned enterprises, and numerous individuals had been arrested."

The FCPA prohibits corrupt payments to foreign officials, but, as pointed out in a post on The FCPA Blog (here) commenting on the Alba case, "there is no private right of action under the FCPA." So enforcement of the FCPA is exclusively the province of the Department of Justice and the SEC. But as the Department of Justice notes in its Lay Person’s Guide to the FCPA, "conduct that violates the antibribery provisions of the FCPA may also give rise to a private cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO) or to actions under other federal or state laws." Alba’s complaint, in fact, seeks to recover damages from the defendants based on their alleged violations of RICO, conspiracy to violate RICO, and for fraud.

The Alba complaint underscores the civil liability exposure that may potentially arise from foreign corrupt practices. While I have previously emphasized the potential threat of lawsuit filed by shareholders against company management as a follow-on to government FCPA enforcement actions, the Alba lawsuit illustrates the threat of direct civil litigation based on foreign corrupt activity without any prior enforcement activity.

This kind of litigation may represent a significant corporate threat for companies engaged in business in countries whose cultures encourage or even seemingly compel this type of corrupt activity. This threat may also extend beyond the corporation and its corporate affiliates to individuals, as well. Only one of the individual defendants named in the Alba lawsuit appears to be an officer of an Alcoa affiliate, but the complaint does also specifically allege that Alcoa’s Chairman and CEO traveled to Bahrain in connection with Alcoa’s efforts to obtain an equity ownership position in Alba. The complaint alleges that this effort was corrupted by the bribery-induced intervention of a Bahraini government official.

Individual directors and offices who find themselves the target of corruption-based civil litigation may face challenges in securing insurance protection in connection with these allegations. Certainly, a determination of liability for the kinds of corrupt conduct alleged in the Alba complaint could run afoul of the typical D & O liability policy’s conduct exclusions. In addition, some D & O policies still retain a commissions and payments exclusions specifically calculated to preclude liability for improper payments. However, individual director or officer defendants could have a strong basis on which to argue that their defense expenses incurred in connection with this kind of litigation should be covered. They could even have a basis on which to try to argue that settlement amounts, in the absence of an actual finding of liability, ought to be covered.

With respect to the corporate entity defendants in these kinds of lawsuits, the picture is slightly different. The typical public company D & O policy provides entity coverage only for claims based on alleged violations of the securities laws. None of the allegations in the Alba complaint arise under the securities laws, so there would not appear to be coverage under the typical public company D & O policy, even for defense expense. Even were entity coverage to extend beyond securities claims (as is the case for many private company D & O policies), the conduct exclusions and any applicable commissions and payments exclusion would preclude coverage for damages imposed on the basis of an adjudication of liability

But in any event, given the increasing globalization of trade and the increasing significance being given to anticorruption efforts in many jurisdictions, the possibility exists for further civil litigation based on alleged corrupt activity, even in the absence of prior enforcement actions. This litigation threat represents another way in which corrupt activity exposure may possibly represent, as I recently wrote, the "next corporate scandal."

Now This:

According to Wikipedia (here), Bahrain is "slightly larger than the Isle of Man, though it is smaller than … King Fahd International Airport" in Saudi Arabia.

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In prior posts (most recently here), I have discussed the growing threat that Foreign Corrupt Practices Act (FCPA) enforcement may present for companies doing business overseas. This trend became even more pronounced in 2007, and at least one legal commentator has suggested (here) that the increasing FCPA enforcement trends raise the possibility that FCPA violations "may be this year's corporate crime of the century."

The one thing that is clear is that FCPA enforcement activity is escalating. As discussed in the January 28, 2008 Fenwick & West memorandum entitled "The Foreign Corrupt Practices Act: The Next Corporate Scandal?" (here), 2007 was "a watershed year for FCPA enforcement." Among other things, the memo notes that that "the number of enforcement actions brought by the DoJ and the SEC doubled compared with the number brought in 2006."

The memo also notes that "public companies disclosed over 50 pending government investigations." In addition, the DoJ and the SEC imposed the largest combined civil and criminal fines in history in 2007, the total fines of $44 million imposed against Baker Hughes and its subsidiaries (as discussed in my prior post, here).

There are a number of important trends driving this increased FCPA enforcement. Obviously the globalization of business activity provides an important context, but globalization alone does not explain the increased enforcement. The enforcement activity is being driven by a number of trends and patterns.

First, the DoJ and the SEC have developed a practice of targeting specific industries, through an industry-wide investigation. For example, a January 25, 2008 Sidley Austin memo entitled "FCPA Enforcement Trends During 2007" (here) notes that the authorities have targeted "sales and marketing practices of companies in the medical device industry in Europe." A January 24, 2008 Jenner & Block memorandum entitled "Recent Enforcement Activity Under the Foreign Corrupt Practices Act" (here) also cites the recent enforcement actions involving the "companies participating in the U.N. Iraq Oil for Food program." The Fenwick & West memo cited above also notes that the FCPA is now "being actively enforced against technology companies."

Second, the authorities have targeted companies doing business in countries where bribery is part of the local business culture. The Jenner & Block memo notes that the authorities have "continued to press enforcement as to companies doing business in Nigeria." Business activities in China have also drawn scrutiny, which is certainly a challenge given that many companies are finding it indispensible to have a China strategy.

Third, the U.S. authorities have shown an increased willingness to cooperate with foreign governments in joint investigations, even, the Jenner & Block memo notes, where the target companies "are already the subject of law enforcement investigation or sanction in their home country." The most prominent example of this latter phenomenon is the current investigation involving Siemens (which I discussed in prior posts, here and here). Another example is the investigation of BAE Systems (which has been surrounded by some significant controversy, as discussed here).

Fourth, increased M & A activity has led to the discovery and disclosure to the authorities of a number of FCPA violations. The Sidley & Austin memo referenced above cites the entry of Delta & Pine into a $300,000 FCPA settlement following its merger with Monsanto (refer here) and York International's FCPA settlement following its merger with Johnson Controls, whereby York agreed (here) to a $10 million criminal penalty, a $2 million civil penalty, and the disgorgement of $10 million profit.

The Sidley & Austin memo notes that "acquisition due diligence is an essential program, and the failure to adequately assess potential liabilities can result in serious consequences." The Fenwick & West memo notes that "FCPA issues can be a major sticking point in negotiations with the acquiring party, often causing delay of the deal or a change in the price terms."

Fifth, as a result of changing priorities and increased resources, the authorities are no longer dependant on self-reporting alone as the means by which FCPA violations are identified. In recent year, the combination of the increased self-scrutiny SOX requires and corporations' desire to obtain cooperation credits have led companies to self-report, providing the authorities with the bases for many of the FCPA enforcement investigations. But, as the Jenner & Block memo notes, "the Government is increasingly interested in developing cases affirmatively, without relying on disclosures." Both the DoJ and the SEC have increased their staffing in this area, and the agencies have said repeatedly said publicly that they will be more "proactive."

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In prior posts (most recently here), I have noted the threat of Foreign Corrupt Practices Act (FCPA) investigations as a growing area of corporate risk. Several recent reports substantiate this concern and help explain why this area of risk continues to grow, and also highlight some of the barriers to antibribery enforcement.

A June 26, 2007 memorandum prepared by the Shearman & Sterling law firm entitled "Recent Trends and Patterns in FCPA Enforcement"(here) reports that "there has been a dramatic increase in new investigations" and that "both the DOJ and the SEC have become increasingly aggressive." According to the memorandum, there are now 55 open FCPA investigations (at least that have been publicly reported by the companies under investigation).

Part of the reason for the increased investigative activity is the increase in governmental resources devoted to foreign bribery investigations. According to a July 16, 2007 Law.com article entitled "Why Are More Companies Self-Reporting Overseas Bribes?" (here), the SEC has "added about 700 staffers to help enforce all compliance laws," and the DOJ and the FBI have both added substantial staff focused exclusively on FCPA investigations.

The more important factor for the growth of FCPA cases may potential corporate defendants desire for leniency under federal sentencing guidelines. A corporation's cooperation can produce substantial benefits; the Law.com article linked above describes in detail the substantial efforts to cooperate that Baker Hughes recently undertook in connection with its ongoing FCPA investigation (about which see my prior post, here), as a result of which Baker Hughes apparently avoided paying "an additional $27 million in fines."

These kinds of incentives have motivated companies to come forward and self-report (as I have previously noted, here). According to the Shearman & Sterling memo, during the period 2005 to 2007, some 23 of 26 new FCPA cases were self-reported. The memo notes that these numbers "underscore the trend toward companies taking on the onus of reporting or accountability and may indicate that companies now perceive the act of self-reporting to be favorable to the ultimate outcome of the investigation." An interesting additional statistic the memo notes is that many of the voluntary disclosures came after violations were unearthed in the due diligence process for a merger or acquisition. (The memo cites the recent ABB, InVision and Titan Corporation investigations as examples.) As the M & A pace continues, there may be more of these M & A related self-disclosures.

The international scope of the crackdown on corrupt practices is documented on the 2007 Progress Report (here) of Transparency International (here) on enforcement of the Convention on Combating Bribery of Foreign Public Officials (here) of the Organization for Economic Co-Operation and Development (OECD) (here). The OECD Convention, first established in 1997, is a compact of now 37 countries (including the United States) to adopt and enforce antibribery laws. The Report shows that while there has been some progress in the battle against bribery and corruption, "there has been little or no enforcement in twenty countries, demonstrating significant lack of political commitment by over half the signatories."

The Report specifically cites the UK's termination of its investigation of bribery allegations against BAE Systems on the Al Yamamah arms project in Saudi Arabia (see my prior post here) as a "serious threat to the convention," and states that the UK's "national security concern" explanation for terminating the investigation "opens a dangerous loophole that other parties could assert when investigations may offend powerful officials in important countries." Because of these concerns, the Report notes that the Convention may be "at a crossroads."

Despite these concerns, the Report does also note that during the prior year foreign bribery investigations were brought in twenty countries out of then thirty-four active signatory countries, as opposed to only seventeen out of thirty-one countries the preceding year. In addition, during the prior year there were bribery prosecutions bourght in sixteen of the thirty-four then-active signatories.

These numbers, as well as the growing number of Convention signatories, suggest that notwithstanding troublesome setbacks and lapses in political will, enforcement of antibribery laws remains an important factor in the global business marketplace. As I have noted previously (here), this exposure represents a substantial area of D & O risk, particularly with respect to the threat of follow on civil litigation based on antibribery investigations. These recent reports suggest that this could become even more significant in the months ahead.

Special thanks to a loyal reader for the link the Law.com article. Hat tip to the SOX First blog (here) for the link to the Transparency International report.

A Backdating Case Dismissal: In an order dated July 16, 2007 (here), in the consolidated options backdating related Ditech Networks derivative litigation, Judge Jeremy Fogel of the Northern District of California granted (with leave to amend) the individual defendants' motion to dismiss based on the insufficiency of the plaintiffs' pleading. The Opinion states:

As currently pled, the Complaint alleges fraudulent conduct by labeling various grants as backdated and describing them as having been made at low points within certain defined periods....While counsel for Plaintiffs represented at oral argument that the statistical likelihood of the options having been granted properly is very low, that theory is not alleged in the Complaint or in a document that the Court may consider on this motion. Even assuming that the factual allegations of the Complaint are true, many explanations other than options backdating exist for the coincidence of the grants and a low share price. The following factual detail likely would strengthen the Complaint: the degree to which the options were granted at the discretion of the compensation committee or the board, versus at fixed, preestablished times; the actual grant dates of the options and the appropriate price of the options; the date that the options were exercised; whether required performance goals were met before the options were granted; the presence or absence of other major corporate events, such as an acquisition, at the time of the grants; and the results of any request by Plaintiff for information.

Because of the inadequacy of the plaintiff's allegations, Judge Fogel noted that it would be "premature" to address federal statute of limitations and Delaware state law demand futility issues. (It should be noted that the Ditech opinion is designated as "not for publication" and "may not be cited.")

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for the link to the Ditech Networks opinion.

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With its announcement (here) that it is the target of a Department of Justice antibribery investigation, BAE Systems added its name to the growing list of foreign-domiciled companies targeted by U.S. officials for alleged violations of U.S. anticorruption laws. The recent high-profile investigation of Siemens (about which refer here), as well as investigations involving Total, the French oil company, and Magyar Telecom of Hungary, not to mention a long list of domestic companies, are all part of an increasingly tough stance by U.S. regulators and prosecutors toward allegedly corrupt business activities.

The BAE disclosure says that the U.S. investigation relates "to the company's compliance with anticorruption laws including the company's business concerning the Kingdom of Saudi Arabia." News reports (here) state that the investigation involves a 20-year old transaction involving the Al-Yamamah Saudi arms deal, and encompasses two areas of activities. The first is the alleged use of a supposed slush fund that BAE used to transfer tens of millions of dollars of hospitality benefits to Saudi officials. The second is the allegation that Prince Bandar bin Sultan, the former Saudi ambassador to Washington, received a total of up to 1 billion British pounds in the form of deposits to a Saudi embassy bank account at Riggs Bank in Washington, D.C. In addition to the Department of Justice investigation, the Financial Times reports (here) that BAE is also the target of an SEC investigation focused on potential violations of the books and records provisions of the Foreign Corrupt Practices Act (FCPA).

The British government previously brought a halt to an investigation by the Serious Frauds Office because of national security concerns. (Saudi Arabia apparently threatened to end intelligence collaboration with Great Britain if the investigation continued.) Beyond these concerns, there are additional complications to the circumstances under investigation. The first is that the Saudi government's relation the Saud royal family is highly interwoven, creating a complicated issue over the question, for example, of who rightfully was the beneficiary of the deposits to the Riggs Bank account. And while Prince Bandar undoubtedly was, as the Saudi Ambassador to Washington, and as Saudi Arabia's current national security chief, a government official, it could prove very difficult to show that even very large amounts of cash actually bought influence, since he is a an extremely wealthy person (his 56,000 sq. ft. Aspen mansion is on sale for $135 million).

But while there are these complicating factors, it is apparently not a constraint on any enforcement action against BAE that it is foreign domiciled and the alleged corrupt activity aimed at influence outside the U.S. Even if the involvement of the Riggs bank account were not a sufficient nexus, the U.S. authorities have already demonstrated their willingness and ability to pursue foreign domiciled companies for corrupt activities abroad. Indeed, last year, the Department of Justice forced Statoil, the Norwegian state oil company, to pay a $21 million fine for bribery activities involving Iranian government officials, even though the company had already paid a $3 million fine in connection with a Norwegian investigation. (The company did get a credit for the prior payment).

The current high profile investigations against Siemens and now BAE are significant in their own right, but the larger significance is that these two prominent cases may be that they are only a part of more than 55 public companies the Financial Times reports (here) that U.S. officials are currently investigating for overseas corruption. These investigations can of course result in fines and penalties that may be significant in and of themselves. But as I have pointed out in prior posts (most recently here), these investigations can also lead to follow on civil lawsuits alleging improper disclosures or accounting inadequacies as a result of the underlying activities or the investigations themselves.

With over 55 publicly traded companies under investigation, the possibility of follow on civil litigation could represent an increasingly significant D & O risk. These risks extend to foreign domiciled companies whose shares trade on U.S. exchanges, as well as domestic companies with significant overseas operations or activities. In an increasingly global economy, this risk could become an important part of the D & O liability exposure, particularly given the U.S regulators' and prosecutors' increased focus on anticorruption issues.

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Add Bed Bath & Beyond to the growing list of companies whose options backdating related shareholders' derivative lawsuits have been dismissed because of the plaintiffs' failure to adequately plead demand futility. According to a May 22, 2007 article in the New York Law Journal (here), a New York Supreme Court Justice dismissed the Bed Bath & Beyond lawsuit because the plaintiffs failed to show that demanding action from the company's board would be futile.

The New York court focused on the fact that, because the majority of the company's board had not received backdated option grants, the plaintiffs needed to allege with particularity why these directors also had an interest in the backdating transactions. "The mere presence of directors on committees is not particular as to their individual participation or alleged collusion with interested directors in the backdating of stock options," the Judge said.

The Bed Bath & Beyond case joins the CNET (here) and Computer Sciences Corp. (here) lawsuits as instances where the courts have found that plaintiffs' demand futility allegations were insufficient. However, in two notable Delaware cases (here), the court denied dismissal motions and held that the demand futility requirements had been met. (A good overview of the demand futility requirement in derivative actions generally can be found here.)

Another interesting aspect of the Bed Bath & Beyond decision relates to the Court's remarks about the company's remedial measures. The company has adopted reforms to its options grant policy and revised the dates of certain grants. It also adjusted its balance sheet to reduce its shareholders' equity by $66 million and took a $7.2 million charge to quarterly income. According to the article, the Court said that "the voluntary actions could have rendered the derivative suit moot." The possibility that remedial measures might moot backdating related derivative lawsuits could potentially have a significant impact on the many pending cases, since many of the companies involved in the lawsuits have also taken similar remedial measures. It will be interesting to see whether other courts conclude that remedial measures would moot pending derivative lawsuits.

Dismissal Denied in FCPA Follow-On Lawsuit: I have frequently noted (most recently here) the growing risk of civil actions following on Foreign Corrupt Practices Act investigations or enforcement proceedings. Another example of an FCPA follow-on action is the securities class action litigation involving Nature's Sunshine Products. A May 21, 2007 order in the case (here) denied the defendants' motion to dismiss, in a case that arises out of allegedly improper foreign payments.

In opposing the motion, the plaintiffs relied heavily on a letter the company's former auditor, KPMG, had sent to the SEC. In the letter, KPMG asserted that the company's CEO was aware of "fraud in international operations of the company," yet represented otherwise to the auditors in audit representation letters; that the CEO had approved a payment that violated the FCPA; that the CEO had sought to cover up the fraud; and that the fraud had a material impact on the company's prior financial statements. The plaintiffs also relied on the Company's March 20, 2006 8-K (here)in which the Company stated that it had contacted the U.S. Department of Justice about potential violations of law. The plaintiffs also alleged that the CEO gave false reassurances to investors that the company's financial statements were accurate when he was aware of the fraud, and was aware that KPMG had raised issues concerning the fraud. According to the plaintiffs, following the reassuring statements, the CEO and others sold large portions of their holding in the Company's stock.

In ruling on the motion to dismiss, the court concluded that the plaintiffs had sufficiently identified false and misleading statements and had adequately pled materiality and scienter. The court did, however, shorten the class period.

The Nation's Sunshine Products case not only represents another instance of the FCPA follow-on action, but it also presents another example of the reason why these kinds of cases could become more prevalent. That is, the investigation was the result of the company's own self-reporting. This phenomenon of self-reporting is resulting in more FCPA investigations and enforcement actions. And increasingly, civil actions follow.

A May 21, 2007 Salt Lake Tribune article describing the Nature's Sunshine Products decision can be found here.

Speaking of Follow-On Lawsuits: It sure didn't take long after the resignations of Jonathan Weil and Lynn Turner from proxy advisory firm Glass Lewis for the lawsuits to come in. It has barely been 24 hours since the news broke (refer here) that the two prominent executives had quit the firm after questions were raised over whether its parent, Xinhua Finance Media, had withheld unfavorable information about its chief financial officer from investors. In his resignation letter, Weil said he was "uncomfortable and deeply disturbed by the conduct, background and activities of our new parent company Xinhua Finance Ltd., its senior management, and its directors." Weil said further that"to protect my reputation, I no longer can be associated with Glass Lewis or Xinhua Finance." (Xinhua acquired the 80% of Glass Lewis it did not already own earlier this year.) A May 22, 2007 Wall Street Journal article discussing the resignations, as well as Glass Lewis' relationship to Xinhua, can be found here (subscription required).

The resignations seem to relate to the recent resignation of Xinhua's Chief Financial Officer, over the company's failure to report in its March2007 IPO documentation that the CFO was under a cease and desist order from NASD for violating securities laws at another organization for which the individual was also CFO.

A press release distributed late in the day on May 22, 2007 (here) states that the plainiffs firm of Bernstein Liebhard and Lifshitz had commenced a securities class action lawsuit against Xinhua in Manhattan federal court. The claim reportedly alleges that Xinhua failed to disclose in its March 2007 prosectus and subsequently the true circumstances involving the CFO, including the existence of the cease and desist order.

This all strikes me as very unseemly for a proxy advisory firm, a point the Journal also makes in the article linked above. Special thanks to a loyal reader for the class action press release link.

The venerable Lies, Damn Lies blog had an interesting post late last year (here) about the alacrity with which securities class action complaints sometimes follow on bad news.

Did Culture Enable Backdating?: Bloomberg.com has a long, interesting May 22, 2007 article entitled "Billionaires from Jakarta, Shanghai Undermined by Options" (here) examining the options backdating scandal at Marvell Technology Group. The article explores the company's history from its earliest days, and examines how Sehat Sutardja built up the company after coming to the U.S., working with his brother, Pantas, and his wife Weili Dai. The article also goes in depth into the company's backdating woes.

While the article focuses primarily on Marvell itself, it also explores the Silicon Valley culture out of which the options backdating scandal grew. The article contains the following comment, which I found quite arresting:

``Silicon Valley has a bad case of exceptionalism that we're so special and important to American society that some of the rules do not apply or ought to be loosely interpreted,'' says Kirk Hanson, executive director of the Markkula Center for Applied Ethics at Santa Clara University. ``That's a slippery slope that leads to various forms of misbehavior, and backdating is the best current example.''

Hanson is later quoted in the same article as saying ``Backdating is a product of the bubble,'' Hanson says. ``There was so much money awash in the streets of Silicon Valley that less thoughtful executives were trying to sweep as much into their pockets as possible.''

While these statements are noteworthy and attention grabbing, it is also fair to note that options backdating may perhaps have been more common in Silicon Valley, it was by no means confined to Silicon Valley.

The article is long but it merits a complete reading. Special thanks to a loyal reader for the link the Bloomberg article.

Speakers' Corner: I will be speaking at the Reinsurance Association of America (RAA) Current Issues Forum at the Four Seasons Hotel in Philadelphia, Pa. on Thursday May 24, 2007, on the topic "D & O: Where it Stands Today?" The program brochure can be found here. If you are attending the conference, I hope you will greet me and introduce yourself.

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In prior posts (most recently here), I have written about how the increased level of Foreign Corrupt Practices Act (FCPA) enforcement activity (about which refer here) can lead to heightened D & O risk. The risks arise not so much from the enforcement activity itself, but from the threat of follow-on civil actions. A recently announced securities class action lawsuit settlement demonstrates this FCPA follow-on civil suit claim risk.

On May 21, 2007, Immucor announced (here) its entry into an agreement to settle the class action lawsuits that had been filed against the company and certain of its directors and officers. According to the company's press release, the company's insurance carrier agreed to pay $2.5 million to settle the claims.

The plaintiffs' claims against the Immucor defendants grew out of an FCPA investigation involving "payments made by the Company's Italian subsidiary to individuals associated with government medical facilities." (The Company's news release regarding the SEC's FCPA enforcement action can be found here.) The plaintiffs in the civil action alleged not that the defendants failed to disclose the existence of the problems; rather, the plaintiffs alleged that in its periodic reports to the SEC, press releases and in conference calls with stock analysts, the defendants misled potential investors into an overly optimistic assessment of the extent of Immucor's corrupt business practices and the strength of Immucor's internal controls. (A copy of the plaintiffs' Consolidated Amended Complaint can be found here.)

An unusual aspect of this case is the allegation that one of the individual defendants (Gioachinno De Chirico) was the head of the company's Italian subsidiary at the time the alleged bribes took place, prior to his becoming Immucor's CEO (a position he still holds). In denying the defendants' motion to dismiss, the Court said (refer here) that "while parts of the disclosure may have been accurate, Defendants' duty was to describe fully the nature and scope of the conduct under investigation - conduct of which De Chirico was fully aware because he participated in it." The Court denied the motion to dismiss because the omitted information was material and its omission was misleading.

The Immucor settlement joins the previously announced settlement involving the Willbros Group. As discussed in a prior post (here), Willbros agreed to pay $10.5 million to settle the class action lawsuit that alleged that the company was forced to restate several years of financials and to establish a reserve to accrue for possible fines and penalties for FCPA violations. The Willbros action (and its settlement) are described further here.

These settlements illustrate the growing risk that FCPA enforcement activity represents. The threat is not so much from the enforcement activity itself, since the resulting fines and penalties would not be covered under the typical D & O policy. The threat comes from the follow-on civil action, which seem to follow enforcement proceedings with increasing frequency. Indeed as I noted in recent in a recent post (here), both the current Siemens bribery investigation and the recent Baker Hughes enforcement action have triggered follow on shareholders' derivative lawsuits.

These types of lawsuits are likely to increase in the future, as FCPA actions themselves increase. More companies are self-identifying FCPA violations because of operational reviews required by Sarbanes Oxley, and the companies are self-reporting in an effort to avert prosecution under the Justice Department's guidelines for corporate criminality.

The First Public Law Firm: According to the May 21, 2007 Sydney Morning Herald (here), the Melbourne law firm of Slater & Gordon has become "the first law firm in the world to list on a stock exchange." The firm, which projects 2007 revenue of A$58.7 million, raised a total of A$35 million in its IPO. (According to XE.com, one Australian dollar is currently worth 0.821383 US dollars.) The firm's shares are now traded on the Australian Securities Exchange, under the symbol SGH. The shares closed their first day at A$1.40, up from their initial offering price of A$1.00. For more about the firm's ASX listing, refer here.

On its website (here), the firm describes itself as "specializing in personal injury, commercial, family and asbestos-related law." The firm's offering prospectus can be found here.

While I certainly wish the firm and its shareholders every success, there is a part of me that would be curious to witness the plaintiffs' lawyers-suing-plaintiffs' lawyers spectacle that could unfold if the firm disappoints investors and winds up in a securities class action lawsuit.

Hat tip to The Blog of the Legal Times (here) for the link to the news article. The Best in Class blog (here) also has a post on the law firm IPO.

Now, Here's Something: According to a May 21, 2007 press release from the Bank of International Settlements (here), the over-the-counter derivatives market grew last year from $298 trillion in 2005 to a notional outstanding value totaling $415 trillion worldwide as of December 2006. Yes, that's trillion.

A CFO.com article (here) commenting on this truly astounding statistic quotes European Central Bank President Jean-Claude Trichet as saying that credit derivatives may create risks to the financial markets if events prompt investors to bail out at the same time. Investors "may react in a way that can suddenly lead to dangerous herding behavior," he reportedly said at the annual meeting of the International Swaps and Derivatives Association. "Such situations are also a matter of concern from a systemic liquidity viewpoint."

With all due respect to Monsieur Trichet, I prefer to refer to the words of the Sage of Omaha himself, Warren Buffett, who wrote in his 2005 Letter to Berkshire Shareholders with respect to financial derivatives (here):

A business in which huge amounts of compensation flow from assumed numbers is obviously fraught with danger. When two traders execute a transaction that has several, sometimes esoteric, variables and a far-off settlement date, their respective firms must subsequently value these contracts whenever they calculate their earnings. A given contract may be valued at one price by Firm A and at another by Firm B. You can bet that the valuation differences - and I'm personally familiar with several that were huge - tend to be tilted in a direction favoring higher earnings at each firm. It's a strange world in which two parties can carry out a paper transaction that each can promptly report as profitable.

Or as he said, perhaps more vividly, in his 2004 Berkshire shareholders' letter (here):

Investors should understand that in all types of financial institutions, rapid growth sometimes masks major underlying problems (and occasionally fraud). The real test of the earning power of a derivatives operation is what it achieves after operating for an extended period in a no-growth mode. You only learn who has been swimming naked when the tide goes out.

To translate Monsieur Trichet's comments quoted above into more vivid terms, it is not going to be pretty when the tide goes out.

For those readers interested in such things, $415 trillion is approaching half a quadrillion dollars. That would be ten to the fifteenth power. (I freely admit that I had to ask my 13 year-old son what comes after a trillion.) That's getting up there. A few more zeros and you will be all the way to a googol.

For some reason, I can't think about these statistics without the song "Wipe Out" by the Safaris running through my head.

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As I have previously noted (most recently here), Foreign Corrupt Practices Act (FCPA) investigations and enforcement actions represent an increasing corporate threat, and, in the form of follow-on civil actions, an area of growing D & O risk. Two recent developments underscore the growing magnitude of these concerns.

The first of these two developments is the agreement of Baker Hughes and one of its subsidiaries to settle criminal and civil FCPA charges. News stories about the Baker Hughes agreement can be found here and here. The $44 million in fines and penalties under the agreement represent the largest amounts of combined fines and penalties ever imposed in a FCPA case. Baker Hughes' subsidiary pled guilty to criminal charges and agreed to pay a $10 million criminal fine in connection with payments of $4.1 million in bribes paid to a consultant in order to secure and oil services contract with Kazakhoil, the state oil company of Kazakhstan, in the Karachaganak oil field. The contract generated more than $219 million in gross revenues from 2001 to 2006. A copy of the April 26, 2007 Department of Justice press release regarding the criminal matter can be found here.

Baker Hughes itself simultaneously agreed to pay $23 million in disgorgement and prejudgment interest and to pay a civil penalty of $11 million for violating a 2001 SEC cease-and-desist order in connection with a prior FCPA matter. The fines and penalties were assessed against the parent company in company in connection with the Kazakhstan bribe, as well as other charges that the company violated the books and records and internal control provisions of the FCPA in Nigeria, Angola, Indonesia, Russia and Uzbekistan. The SEC's April 26, 2007 press release regarding the Baker Hughes matter may be found here, and the SEC's complaint is here. An April 27, 2007 CFO.com article describing the Baker Hughes FCPA settlement may be found here.

The second of the two recent developments relates to the proliferation of publicity and action surrounding the burgeoning Siemens corruption investigation. Not only are the company's top two executives leaving (refer here), but the company has warned that it expects a "significant increase" in the number of possible bribes identified in an internal investigation. This prospective increase is on top of the previously disclosed $544 million in suspected bribes. A prior D & O Diary post about the Siemens bribery investigation can be found here. In its April 26, 2007 filing on SEC Form 6-K (here), Siemens also reported that the SEC had "advised" the company that the SEC had "converted its informal inquiry into these matters into a formal investigation." The Company previously disclosed that the U.S. Department of Justice is conducting an inquiry of possible criminal violations.

The company also noted in its 6-K filing that it will be obliged to make a number of tax asset and liabilities adjustments in future reporting periods, which could be "material." The company also said that it "cannot exclude the possibility that criminal or civil sanctions may be brought," as a result of which its "operating activities may also be negatively affected." The company said that to date "no charges or provisions for any such penalties have been accrued as management does not yet have enough information to reasonably estimate such amounts." The company did say that in its most recent fiscal quarter, it had spend 63 million euros (roughly $83 million) in connection with the investigation.

According to news reports (here), Standard and Poor's has put Siemens on a watch for a possible downgrade.

Several things about these two cases reinforce my view that FCPA investigations will become an even greater concern in the months ahead. First, the sheer scope and magnitude of the concerns, both at Siemens and at Baker Hughes, suggest a larger problem that inevitably will attract increased prosecutorial interest and involve more companies. The enormous unlikelihood that these two companies alone were the only ones involved in this type and scale of activity will encourage investigators and regulators to search for similar activities elsewhere.

Second, a significant factor in the Baker Hughes subsidiary's plea agreement, which included a deferred prosecution agreement and a three-year probationary period, was the Company's self-reporting of the violation. The Department of Justice's press release states that the agreement "reflects, in large part, the actions of Baker Hughes in voluntarily disclosing this matter." The unmistakable message is that companies have a substantial incentive to self-report FCPA violations, as I have previously noted (here). The increased internal review compelled by the Sarbanes Oxley Act, together with the incentive to self-report, increases the likelihood of further FCPA investigations and enforcement actions. As a recent memo from the Gibson, Dunn & Crutcher law firm notes (here), more than three quarters of the FCPA enforcement actions in the last two years arose as a result of voluntary disclosures.

Third, Siemens' 6-K discloses that in February 2007 it was sued as a nominal defendant in a New York state court shareholders derivative complaint "seeking various forms of relief relating to the allegations of corruption and related violations." The complaint also names "certain current and former members of the Company's Managing and Supervisory Boards." As I have previously noted (here), the D & O risk arising from FCPA enforcement actions comes from this type of follow-on civil action; the FCPA fines and penalties themselves would not be covered under the typical D & O policy, but the threat of follow-on civil action creates substantial D & O risk. UPDATE: On May 4, 2007, a shareholders derivative suit was filed against Baker Hughes (as nominal defendant) and certain of its present and former directors and officers, alleging breach of fiduciary duties in connection with the FCPA violations described above.

Finally, the unprecedented level of international cooperation involved in the Siemens investigation further increases the likelihood that the various national authorities will provide information across borders that could support antibribery enforcement actions here and overseas.

As the SEC Actions blog noted (here) in its commentary on the Baker Hughes FCPA enforcement case, "it is clear that the number of FCPA cases being brought by the SEC and the DOJ are on the rise. This suggests prudent companies that do business abroad and their directors and officers carefully review their compliance systems in this area to avoid difficulties rather than later at the insistence of the SEC or the DOJ." In any event, FCPA compliance undoubtedly will become an area of heightened scrutiny for D & O underwriters.

Internal Affairs Doctrine: The shareholders derivative complaint filed against Siemens could face substantial hurdles in the form of the "internal affairs doctrine." Under New York legal principles that only one state should have the authority to regulate a corporation's internal affairs, New York courts will refuse to allow actions to proceed against corporations from other jurisdictions if the shareholders have sufficient avenues to address management malfeasance under the laws of the corporation's domicile.

A March 12, 2007 New York ruling where the court applied these principles to dismiss a shareholders derivative complaint that had been filed against directors and officers of ABN Amro Holdings NV may be found here. An interesting discussion and analysis of the ABN Amro case may be found on the With Vigour and Zeal blog, here.

An interesting article about the possible applicability of the internal affairs doctrine to the BP Alaska shareholders' derivative action, written by Francis Kean of the Barlow Lyde & Gilbert law firm, may be found here. Special thanks to Francis for providing a copy of this article.

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The D & O Diary has long contended (most recently here) that civil claims following on enforcement actions under the Foreign Corrupt Practices Act (FCPA) represent a growing area of D & O claim risk. The entry last week (refer here) of a $26 million criminal fine - the largest criminal penalty ever under the FCPA - underscores the growing importance of FCPA enforcement cases. A February 7, 2007 memorandum from the Gibson, Dunn & Crutcher law firm entitled "2006 Year-End FCPA Update" (here) provides a useful overview of 2006 FCPA enforcement activity, and underscores the growing importance of civil claims based on FCPA proceedings.

The memo notes that "2006 marked one of the busiest years of FCPA enforcement and further evidenced the recent proliferation of FCPA enforcement activity." The memo identifies a number of important FCPA trends, including:

Voluntary Disclosure: "The number of voluntary disclosures continued to rise in 2006. Seventeen of the twenty newly disclosed FCPA investigations during the past two years were voluntarily disclosed to the DOJ or the SEC following internal investigations by the companies."

Increased Penalties: "Enforcement activity in 2006 continued the trend of increasing the severity of penalties."

Increasingly Broad Jurisdiction: "U.S. enforcement authorities have shown a willingness to reach far and wide outside traditional jurisdictional boundaries....The Statoil matter marked the first time that the DOJ has taken criminal enforcement action against a foreign issuer for violating the FCPA."

Ongoing Civil Liability: Even though there is no private right of action under the FCPA, plaintiffs lawyers may be able to pursue securities fraud lawsuits based on FCPA-related misrepresentations. In the Immucor decision (discussed previously on The D & O Diary, here), "for the first time a federal court held that plaintiffs had met the heightened pleading standard requirement for fraud under the PSLRA in an FCPA case."

According to the memo, "more than 24 other major corporations are under investigation for FCPA violations." The memo suggests that in this environment, securities claims based on FCPA violations "may start to gain traction" and therefore "the legal road towards resolving an FCPA violation in the U.S. now stretches far beyond achieving peace with the SEC."

The Gibson Dunn memo confirms a couple of themes that The D & O Diary has been sounding for some time. First, FCPA enforcement activity is increasing, both in frequency and severity, and, second, the threat of follow-on civil litigation from FCPA enforcement activity is also growing. As FCPA enforcement actions grow in number and magnitude, this exposure could pose an increasingly greater D & O risk.

Special thanks to a loyal D & O Diary reader for the link to the recent record-setting FCPA criminal fine.

Record Number of Restatements in 2006: According to a February 12, 2007 Wall Street Journal article entitled "Restatements Still Bedevil Firms" (here, subscription required) publicly traded companies filed a record 1,876 restatements of financial results in 2006, an increase of 17% over the number of restatements in 2005. However, the number of 2006 restatements by large companies (defined as those with over $700 million in shares available to the public) filed 196 restatements in 2006, a drop of about 20% from 2005. By contrast, companies with a public float of less than $75 million filed 1,108 restatements in 2006, more than two-thirds of all 2006 restatements, representing a 42% jump in restatements for companies of that size compared to the prior year.

The most frequent cause of restatement was related to the "measurement and recognition of debt and stock or equity instruments," and the second most frequent cause related to compensation issues (including, in particular, options backdating).

The drop in restatements for larger companies, which have had to adapt to the reporting requirements of Section 404 of the Sarbanes Oxley Act, suggests that those companies' internal controls are working better. The smallest companies, which do not yet have to follow Section 404, are clearly continuing to struggle.

Buy-Backs and EPS: When I commented (here) on the controversy surrounding Robert Nardelli's compensation as the departing head of Home Depot, one of the concerns I specifically noted was the way stock buy-backs had been used to improve Home Depot's reported earnings per share (EPS), at the same time that the executives' compensation was adjusted to reward executives based on EPS. Fortune Magazine has a more detailed elaboration of this concern in a February 9, 2007 article entitled "Nardelli's Fake Bogey: Earnings Per Share" (here).

The D & O Diary's prior post about the pitfalls of stock buybacks and the way they interact with executive compensation can be found here.

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The growing bribery scandal at Siemens has made the front pages of the world's financial papers in recent days. For example, on January 31, 2007, the Wall Street Journal (here, subscription required) ran an article entitled "At Siemens, Witnesses Cite Pattern of Bribery." In its February 1, 2007 SEC filing on Form 6-K (here), Siemens, whose ADRs have traded on the NYSE since 2001, reported that the U.S. Department of Justice is "conducting an investigation of possible criminal violations of U.S. law" and also announced that it "understands that the U.S. Securities and Exchange Commission's enforcement division is conducting and informal inquiry into matters at this time."

Siemens apparently is already under investigation in German, Lichtenstein, Italy, Switzerland and Greece. The investigation gained momentum in November 2006, when, according to the Journal, more than 200 German police raided about 30 offices and homes of current and former Siemens employees." The German police searched office of Siemens management board members, including that of Siemens' CEO, Klaus Kleinfeld. In December, the company announced that it had uncovered $544 milllion in "suspicious transactions." covering over seven years. The investigation involves the possibility that Siemens officials diverted funds through sham consulting contract to slush funds used to bribe potential customers. Investigators are looking into possible bribes in a number of countries, including Saudi Arabia, Russia, Slovakia, Argentina, Nigeria, Egypt, Cameroon, and Kazakhstan. A number of high-ranking Siemens officials have been arrested, including a member of the management board. The Company's former CFO reportedly is a suspect.

It obviously remains to be seen whether the DoJ investigation or the informal SEC investigation will lead to further proceedings. But according to the February 3, 2007 Wall Street Journal article discussing the U.S.-based investigations (here, subscription required), these U.S investigations "heighten the legal risk for Siemens, which could face lawsuits and be banned from bidding on infrastructure contracts in the U.S. and other countries if there is evidence of wrongdoing."

The company also faces significant (but uncertain) financial risk as well. In its 6-K announcing the U.S. investigations, while acknowledging that the company "cannot exclude the possibility that criminal or civil sanctions may be brought against the Company itself or against certain of its employees," the company also reported that so far "no charges or provisions for any ...penalties or damages have been accrued as management does not yet have enough information to reasonably estimate such amounts." As a company with 2006 sales of over $113 billion, Siemens would have to sustain a very significant fine, penalty or damages for it to have a material impact on its financial condition, although certain enforcement outcomes could definitely impact the company's future prospects. The absence of any accrual at this time does raise at least the possibility of a negative financial effect from an adverse investigative development.

The involvement of the SEC in the Siemens investigation underscores a point that The D & O Diary has made in several prior posts relating to investigations involving the Foreign Corrupt Practices Act (most recent posts here and here). That is, these investigations can give rise to follow on securities claims. This is the reason that I have often cited the FCPA as a threatening potential new source of D & O exposure. The threat is not so much from the corrupt practices investigation itself, but from the follow on claims that could arise in which it is claimed that the corrupt practices caused a misrepresentation of the company's financial condition - which presumably is the question the SEC is examining in connection with the Siemens probe.

The Siemens investigation is also important in connection with the current calls inside the U.S. for regulatory reform to improve the competitive position of U.S. securities markets in the global financial marketplace. The Siemens investigation originated outside the U.S. and only came to this country after the provision by foreign authorities of investigative information to U.S. authorities. It is evident that regulators throughout the world increasingly understand the importance of vigilance and scrutiny. The magnitude and scope of the Siemens investigation suggest cross-border commitment to regulatory rigor and the extent of the alleged misconduct is likely to spur further efforts for oversight and reform As international regulatory standards respond to these circumstances, differences between the standards in the U.S. and those elsewhere are likely to continue to diminish.

The Here After: It turns out that in the cycle of death and rebirth, what we are really here after is beer:

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In recent weeks, the Hewlett-Packard (H-P) board has struggled to manage the turmoil and adverse publicity from its flawed investigation of media leaks. While the H-P debacle may be the most notorious recent example of board tumult, it is merely one of many instances of problems arising from increased tension inside numerous corporate boardrooms. By way of illustration, since early 2005, the boards of some of the country's largest companies have ousted their CEOs - including Bristol-Myers Squibb, Fannie Mae, Pfizer, Merck and American International Group (AIG). In the October 2006 issue of InSights (here), I discuss how board turmoil not only generates distraction and adverse publicity, but also increases the possibility of D & O claims activity.

A prior D & O Diary post on board turmoil and D & O risk can be found here.


Significant FCPA Enforcement Developments: In the past few days, there have been two significant Foreign Corrupt Practices Act (FCPA) enforcement developments. First, on October 13, 2006, the SEC announced (here) the institution of a settled enforcement action against Statoil ASA, a Norway-based company whose shares are traded on the NYSE. The SEC found that Statoil had paid bribes to an Iranian official in return for his influence to help Statoil obtain contractual development rights to Iranian oil and gas fields. Without admitting or denying the allegations, Statoil agreed to pay disgorgement of $10.5 million In a related criminal proceeding, Statoil agreed to pay an additional $10.5 million penalty as part of a deferred prosecution agreement. ($3 million of the $10.5 million penalty was deemed satisfied by Statoil's prior penalty payment to Norwegian officials).

On October 16, 2006, Schnitzer Steel Industries agreed to pay $15.2 million resolving an investigation that commenced with the company's self-reporting of improper payments made between 1999 and 2004 in connection with the company's operations in China and South Korea. The company's press release is here. The company's deferred prosecution agreement requires the company to hire an independent compliance consultant to audit and monitor the company's operations.

I have frequently posted about the growing risk of FCPA enforcement actions (most recently here). The dollar size of these two recent settlements show the seriousness and magnitude of these actions. The Statoil case shows that both foreign and domestic public companies are subject to the FCAP if their stock trades on American exchanges. And the Schnitzer Steel case shows the growing role of self-reporting as a growing source of increased enforcement activity.

"The Funniest Joke in The World": Watch the Monty Python video here. Read the Wikipedia article here.

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In prior posts (here and here), The D & O Diary has written about the increasing level of Foreign Corrupt Practices Act enforcement activity and the growing D & O risk that it represents. An October 4, 2006 opinion in the United States District Court in Atlanta by Judge William Duffey Jr. in the consolidated Immucor securities litigation (view complaints here) illustrates how the increased level of FCPA enforcement activity can lead to heightened D & O risk.

Plaintiffs sued Immucor and two of its officers (a third individual defendant died after the Complaint was filed and was dismissed from the action). The Complaint alleges that between August 16, 2004 and August 29, 2005, the defendants made numerous statements about corruption problems at Immucor's Italian subsidiary. The plaintiffs did not allege that the defendants failed to disclose the existence of problems; rather, the plaintiffs allege that in SEC filings, press releases and conference calls with stock analysis, the defendants misled potential investors into an over optimistic assessment of Immucor's corrupt foreign business practices and the strength of Immucor's internal control mechanisms. An unusual aspect of this case is the allegation that one of the individual defendants was head of the Italian subsidiary at the time the alleged bribes took place, prior to his becoming Immucor's CEO, and therefore this individual (and by extension Immucor) had actual knowledge of the falsity of the misrepresentations at the time they were made.

The defendants moved to dismiss the Complaint on the grounds that the plaintiffs had not alledged any false or misleading statements, and on the grounds of scienter and failure to adequately plead loss causation.

Judge Duffey denied the motion to dismiss as to several of the allegedly misleading statements. Even though the company disclosed the existence of an Italian criminal investigation and an internal investigation of allegedly improper payments, the Judge found that

these disclosures created the impression that the investigation was limited to a single incident of poor bookkeeping by Immucor ...but Plaintiffs allege that multiple legally dubious payments made by De Chirico [the former head of the Italian subsidiary and CEO at the time the alleged misstatements were made] or under his direction were being investigated. The omission creates a distorted picture of Immucor's alleged liabilities. That is, while parts of the disclosure may have been accurate, Defendants' duty was to describe fully the nature and scope of the conduct under investigation - conduct of which De Chirico was fully aware because he participated in it. The omitted information would have been viewed by a reasonable investor as affecting the total mix of information available, and a reasonable investor's investment decision would have been swayed had the alleged omitted information been included in the press release.

Judge Duffey also found that the allegations of actual knowledge represented sufficient allegations of scienter to survive a motion to dismiss, and that the plaintiffs had adequately pled loss causation.

As The D & O Diary noted in its prior posts, the D & O risk arising from FCPA actions is not so much due to the enforcement proceedings themselves, since any fines or penalties likely would not be covered under the typical D & O policy; rather, the risk arises from the follow-on civil actions. The Immucor case, while it has some unusual features, illustrates how these follow on civil actions can arise. Plaintiffs' allegations in the Immucor case that the defendants did not fully disclose the extent of the company's FCPA exposure is not in and of itself unusual in securities litigation, as securities cases often allege that defendants soft-pedaled or minimized adverse information. However, the increasing level of FCPA enforcement activities provides increasing opportunities for these kinds of issues to arise. That is one reason why The D & O Diary has identified the increase in FCPA activity as one of four D & O trends to watch (here).

One particular feature of Immucor's circumstances explains why FCPA activity is increasing. That is, Immucor itself identified the existence of potentially improper payments and self-reported the payments to the SEC. This type of self-reporting is one of the causes behind the increase in FCPA activity. Due to the requirements of Sarbanes Oxley, companies are undertaking a more thorough operational review, including review of their overseas operations, and are finding a greater number of concerns. As a result of guidelines requiring self-reporting in order to avoid corporate criminality, more corporations are turning themselves in. (There is more than a little irony in the fact that having self-reported to the SEC, Immucor is now accused of withholding information.) FCPA enforcement activity because more companies are turning themselves in for violations they have found themselves.

An October 12, 2006 memorandum from the Wilkie, Farr & Gallagher law firm discussing the Immucor case and the ruling on the dismissal motion can be found here.

Bad News Disclosure: The Immucor case is also a good illustration of the pitfalls that attend bad news disclosure. (The allegations in the Immucor complaint of course remain unproven; for purposes of the motion to dismiss, and for purposes of this discussion, the allegations are taken as true.) As I have written elsewhere about the pitfalls of bad news disclosure (here), "partial, incomplete or overly optimistic disclosure can exacerbate the damage from bad news disclosure and risk the creation of securities litigation exposure." As bad as the consequences of bad news are, they can always be made worse by attempts to bury the news. As the Immucor case demonstrates, the risk from trying to put positive "spin" on bad news is that it may later be alleged that the "calming statement" itself is misleading - in other words, the securities litigation arises from the "damage control," not the underlying event.

Today's Stat: According to The Economist magazine (here, subscription required), "The State of California alone has more venture capital than any country outside the United States."

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The D & O Diary has previously written (here and here) about the recent revival of the Foreign Corrupt Practices Act (FCPA) and the potential implications for D & O risk. PricewaterhousCoopers' Summer 2006 Solutions newsletter (here) has an interesting article entitled "ABB Ltd and the Foreign Corrupt Practices Act" taking a closer look at the FCPA problems at one particular company - ABB Ltd., the Switzerland-based energy engineering and construction company whose ADRs trade on the NYSE.

The article first reviews the 2004 enforcement proceeding against ABB, involving allegedly improper payments ABB subsidiaries made between 1998 and 2003 in Nigeria, Angola, and Kazakhstan. ABB ultimately consented to a judgment (without admitting or denying the allegations) enjoining the firm from future violations and requiring it to pay $5.9 million in disgorgement and a $10.5 million penalty. The article then reviews three subsequent incidents where ABB itself identified and self-reported possible additional FCPA violations involving suspected improper payments in Africa, Europe and the Middle East. The article comments that "[t]he continuing series of discoveries of suspected payments, disclosures to the SEC and DOJ (and the market) and ensuing internal control investigative results... raise questions about the control environment; imply that ABB's compliance controls are inadequate; tarnish the Company's reputation; and expose ABB to possible substantial fines and penalties."

The article concludes with the observation that FCPA compliance is "on the SEC's radar screen, and more cases like ABB are very likely to come. The hard lessons learned by ABB ought not to go unnoticed or unheeded by other global companies." The article merits reading in its entirety.

A Further Commentary on the "Milberg Effect": In a prior post (here), The D & O Diary added its observations on the Wall Street Journal's editorial (here, subscription required) about the "Milberg Effect," that is, the impact that the indictment of the Milberg Weiss firm is having on the declining number of securities fraud lawsuit filings. A recent post (here) by plaintiffs' attorney Adam Savett on his Lies, Damn Lies blog provides an interesting additional perspective on the apparently declining number of securities fraud lawsuits. Savett suggests that "the number of federal securities class actions has potentially slowed because a substantial portion of the plaintiffs' bar is busy filing other types of securities cases, including state and federal derivative actions." This is an observation that The D & O Diary has also made (here), but the fact that this observation is coming from a member of the plaintiffs' bar makes it more interesting.

Options Backdating Litigation Update: Perhaps the most obvious proof that the plaintiffs' bar is concentrating on filing shareholders' derivative lawsuits rather than securities fraud lawsuits is the pattern of lawsuit filings arising out of the options backdating scandal. As shown in The D & O Diary's running tally of the options backdating litigations (which may be found here, and which was recently updated to add several new derivative lawsuits) only 17 companies have been sued in securities fraud lawsuits, but 78 companies have been named as nominal defendants in shareholders' derivative lawsuits. Clearly, the plaintiffs' bar is showing a preference for the derivative lawsuit, at least with respect to options backdating litigation.

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In this prior post, the D & O Diary noted the recent resurgence of the 70's vintage statute, the Foreign Corrupt Practices Act. Recent developments in the Comverse Technology options timing investigation underscore the increasing importance of the FCPA, particularly as the options backdating scandal continues to unfold.

On August 9, 2006, the SEC filed a civil enforcement complaint against three former officers of Comverse Technology. (The Affidavit filed in conjunction with the criminal complaint filed against the three individuals can be found here, even though the document says on its face that it is to be filed under seal.) The SEC Complaint alleges "a fraudulent scheme" by the three defendants "to grant undisclosed, in-the-money options to themselves and others by backdating stock option grants from 1991 through 2001 to coincide with historically low closing prices for the Company's stock." The SEC Complaint alleges a variety of securities laws violations, including specifically violations of the books and records provisions of the FCPA, which are codified as amendments to the Securities Exchange Act of 1934. The FCPA allegations are that the defendants "knowingly violated ...internal controls" and "falsified books, records or accounts."

These same kinds of allegations are likely to be a recurring part of future enforcement actions arising out of the options backdating investigations. Indeed, according to press reports, the criminal indictment entered on August 10, 2006 against former officials of Brocade Communications also contained "books and records" allegations.

The D & O Diary's prior post about the FCPA noted that one of the dangers from an FCPA enforcement proceeding is the possibility of follow-on litigation. A recent securities fraud lawsuit settlement provides a glimpse of the way FCPA violations can spawn follow-on litigation, including specifically follow-on securities fraud lawsuits.

On August 9, 2006, Willbros Group, Inc. announced that it had settled the 2005 class action lawsuit that had been filed against the Company and several of its directors and officers. The Complaint alleged that the company had been the subject of numerous of numerous investigations "because the Company engaged in a campaign of illegal and illicit bribery of foreign government officials in Bolivia, Nigeria and Ecuador to successfully obtain construction projects." The Complaint alleged that the company was forced to restate several years of financial statements and to establish a reserve to accrue for possible fines and penalties for FCPA violations. The Complaint alleged that as a result of these violations, the Company had misrepresented its true financial condition. The Complaint alleged that the company's share price declined 31% when these matters were disclosed.

In its August 9 press release, the Company did not disclose the amount of the securities class action settlement, but the press release did state that the amount of the settlement would be funded by the company's insurance carrier.

The Willbros settlement illustrates the growing D & O risk that increased FCPA enforcement activity could represent. The threat is not so much from the underlying FCPA enforcement action itself; any FCPA fines and penalties likely would not be covered under most D & O policies. Rather, the threat is from the potential liability that could arise in any follow-on civil action, including any follow-on securities fraud lawsuit like the one filed against Willbros Group. Any settlement or judgments incurred in a follow-on action, as well as defense expenses, would usually be covered under the typical D & O policy.

As FCPA enforcement actions grow in number and magnitude, this exposure could pose an increasingly greater D & O risk.

An August 10, 2006 CFO.com article discussing the Willbros settlement, as well as the simultaneous resignation of the company's CFO (who had been a defendant in the securities fraud action), may be found here.

Two particularly interesting articles discussing the Comverse Technology criminal complaint may be found at the White Collar Crime Prof blog, and at the Securities Litigation Watch blog.

A particularly provocative contrarian view of the Comverse Technology criminal complaint and of the whole options backdating morass may be found on this post on Professor Ribstein's Ideoblog.

Big Numbers: An August 10, 2006 post on Bloomberg.com reports that

The number of companies with stock options grants under scrutiny passed 100...At least 105 companies have disclosed internal or federal probes, according to data compiled by Bloomberg News. Nineteen people have lost their jobs, five face criminal charges and one of them -- Comverse Inc. founder Jacob Alexander -- didn't show up for his arraignment yesterday.

A separate article on Bloomberg.com, also dated August 10, reports that:

UnitedHealth Group Inc. Chairman William McGuire sparked outrage among some stockholders over his $1.8 billion in potential stock-option gains. Turns out, the board of directors that granted those options got a share of the wealth, too. UnitedHealth's 10 non-executive directors held $230 million in stock as of March 21, according to the health insurer's most recent proxy...``You have to ask yourself, are these people paying attention to the mission of the corporation, or are they being distracted by the amount they're getting themselves?'' says Minnesota Attorney General Mike Hatch, who is investigating Minnetonka-based UnitedHealth along with federal authorities...A board committee is reviewing 45,000 separate option grants made to 15,000 people over 13 years, the company said in a statement.

And a Japanese man was arrested this week after making 37,760 silent calls to directory inquiries because he wanted to listen to the "kind" voices of female telephone operators, according to news reports.

Sudden Complications: United Airlines' aviation war risk insurance is up for renewal on August 31, 2006. Read the story here.

Yet Another Globalization Downside: The U.S. economy is trading factory workers for real estate agents. Take a look at this uncanny chart here.

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Sarbanes-Oxley Act Whistleblower Updates: In a May 31, 2006 ruling, an Administrative Review Board (ARB) of the U.S. Department of Labor has answered two important questions arising Section 806 of the Sarbanes-Oxley Act, the so-called Whistleblower provisions. (Prior D & O Diary posts regarding the Sarbanes-Oxley Whistleblower provisions can be found here and here.). First, the ARB held that the nonpublicly traded subsidiary of a publicly traded company can be a proper defendant in a Sarbanes-Oxley Whistleblower case if the subsidiary acted as an agent for the public company. The determination is one of fact, based upon the subsidiary's attributes of agency, rather than one of law based on the organizational relationship between the parent and the sub. This holding is significant because it was not previously clear whether the Whistleblower protection would extend to the employee of a private sub of a public company; while the issue is one of fact, the possibility of extension broadens the scope of potential defendants. Second, the ARB also held that it does not matter whether or not the employee who is claiming retaliation did not believe that anything fraudulent had occurred so long as the employee reasonably believed that an SEC rule or other subject "in the realm covered by" the Act had been violated. Both of these holdings tend to broaden the potential scope of Sarbanes Oxley Whistleblower protection and confirm the D & O Diary's view that the Whistleblower provisions have the potential to become a very serious concern for employers. A discussion of this case can be found in a July 6, 2006 post on Broc Romanek's CorporateCounsel.net blog.

In an update on the original Sarbanes-Oxley Whistleblower action, cfo.com reports in a July 7, 2006 post that the Department of Labor has intervened on behalf of David Welch, the former CFO of Cardinal Bankshares whom an administrative law judge has ordered to be reinstated. The post also reports that Welch has filed a U.S. District Court complaint to force the company to comply with the ALJ's order. The D & O Diary's prior post on the Cardinal Bankshares case can be found here.

Another interesting issue under the Sarbanes Oxley Whistleblower provision is its extraterritorial applicability. A July 7, 2006 post on law.com entitled "SOX Whistleblower Rule Triggers a Continental Divide" discusses the struggle between regulatory authorities in the US and in the EU over the applicability and requirements of the Sarbanes Oxley Whistleblower provisions, and in particular the potential conflict between the whistleblower data gathering requirements and EU data protection and privacy laws.

Foreign Corrupt Practices Act Update: On July 5, 2006, the SEC announced simultaneous filing of FCPA charges against and the agreement to settle by four former employees of ABB. The SEC alleges that the four individuals participated in a scheme to pay bribes to Bonga Oil Field. The complaint alleges that as a result of the four defendants' actions, ABB paid officials at the Nigerian state-owned oil production and exploration agency approximately $1 million in bribes. The four consented to entry of judgment against them without admitting or denying the allegations, and agreed to pay fines ranging between $40,000 and $50,000. One of the four also paid approximately $60,000 in disgorgement and interest. ABB itself previously agreed to final judgment in connection with these and other illicit payments, and consented to pay $5.9 million in disgorgement and interest and an ABB subsidiary agreed to pay a civil penalty of $10.5 million.

Who (if anyone) will succeed Milberg Weiss?: The July 7, 2006 New York Times (registration required) has an article reviewing the efforts of the various securities class action plaintiffs' firms to jockey for position while Milberg Weiss struggles to defend itself against its own criminal indictment. At least for purposes of the Times article, the other plaintiffs' firms are doing a surprisingly good job at maintaining the appearance of decorum. But even if the other firms can restrain themselves from the outward appearance of seeking to profit from Milberg Weiss' misfortune, the real pressure on the Milberg Weiss firm will come from the decisions of the various lead plaintiffs the firm represents, as to whether the indicted firm appropriately should be representing the class on whose behalf the lead plaintiff is acting. Here is a link to a May 20, 2006 Wall Street Journal (subscription required) article reviewing various cases where the lead plaintiffs have decided to remove the Milberg Weiss firm from the cases as a result of the firm's indictment.

Options Backdating and the SOX Clawback Provisions: UCLA Law School Professor Stephen Bainbridge has a July 6, 2006 post on his ProfessorBainbridge.com blog discussing whether or not the options backdating scandal will provide the first occasion for the implementation of the clawback provisions under Section 304 of the Sarbanes Oxley Act. The clawback provisions require executives at companies that restate their financials to return to their companies bonus compensation the executives received in the 12 months following the original issuance of the later-restated financials. Professor Bainbridge, who is critical of the clawback provision, is unaware of any attempts to date to use the clawback provisions in connection the options backdating investigations. The comments that accompany his post raise the interesting question whether the clawback provisions can be applied to require disgorgement of compensation awarded following restatement of financials that were originally created prior to the enactment of the Sarbanes-Oxley Act. A prior D & O Diary post commenting on the possible applicability of the clawback provisions to companies involved in the options backdating investigation may be found here.

SOX and Non-Profit Organizations: One of the more interesting consequences of the enactment of the Sarbanes-Oxley Act has been the statute's application far beyond the public company arena to which it was primarily addressed. A July 7, 2006 post on the accountingweb.com details the impact that the Act is having in the non-profit sector. A May 2006 article by The D & O Diary's author describing the Act's impact on privately held companies can be found here.

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A venerable statute from the 1970's is going through a 21st Century revival, and that is not good news for companies who are active in the global econonmy or for their directors, officers and employees.

The Foreign Corrupt Practices Act of 1977 (FCPA) is a federal law containing antibribery and accounting requirements. The antibribery provisions make it unlawful for any US person (and certain foreign issuers) to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA (as amended) also added accounting requirements to the Securities and Exchange Act of 1934. These accounting provisions require publicly traded companies to maintain records that accurately and fairly represent the company's transactions and to have an adequate system of internal accounting controls. Under the antibribery provision, corporations are subject to fines of up to $2 mm, and officers, directors, employees and agents are subject to fines of up to $100,000 and up to five years' imprionment. However, as a result of the Sarbanes Oxley Act's enlargement of criminal penalties for willful violations of the '34 Act, violation of the FCPA's accounting requirements subject corporations to fines of up to $25 mm and individuals to fines of up to $5mm and up to 20 years' imprisonment.

The FCPA emerged from SEC investigations in the mid-1970's that led to over 400 US companies admitting having made questionable or illegal payments to foreign governments and officials. The Act was enacted to bring a halt to the bribery of foreign officials and to restore public confidence. The Act was amended in 1998 by the International Anti-Bribery Act of 1998 which as designed to implement the anti-bribery conventions of the Organization for Economic Co-operation and Development (OECD).

In recent years, there have been a rash of FCPA investigations involving US companies. Among the companies involved are Titan Corporation, Universal Corporation, and Immucor. In its most recent 10-Q, United Parcel Service disclosed a FCPA problem with one of its larges subsidiaries. On April 27, 2006, the SEC entered a cease-and-desist order against Oil States International in connection with improper payments by a consultant to the Venezuelan government oil company. Among other things, the SEC found that Oil States' "internal controls failed to ensure that [its subsidiary's] books and records accurately reflected the purpose and nature" of the improper payments.

An increasingly important factor in the escalating number of FCPA actions is the challenge of doing business in China. It is a business cliche these days that every company needs to have its China strategy. But a recent front page article in the Washington Post provides a lengthy examination of the problems US businesses face in China and concludes that "the lure of China profits combined with local corruption is tempting foreign companies and managers and bringing them into conflict with US anti-bribery laws." U.S. Companies find themselves "adopting Chinese-style tactics to secure sales, as they compete in a market in which Communist Party officials routinely control businesses, and purchasing agents consider kickbacks as part of their salary." These conditions have brought an increasing number of US companies into conflict with the requirements of the FCPA. Among US companies recently facing FCPA problems from their Chinese operations are Lucent Technologies, InVision Technologies, Schnitzer Steel Industries, and Diagnostic Products Corp.

The primary reason for the dramatic increase in the number of FCPA investigations and enforcement actions is the enactment of The Sarbanes-Oxley Act of 2002. Sarbanes-Oxley 's requirements that senior management assess their internal controls and verify their financial statements, including the requirement that companies identify any material weaknesses, are increasing management scrutiny and leading to the identification of more FCPA concerns. Companies are obligated to report potential FCPA violations to the company's chief legal officer, or the company's audit committee or full board. The increase in FCPA activity is a result of Sarbanes-Oxley's emphasis on top level management responsibility.

Another important factor for the surge in FCPA actions is The Thompson Memo , which identifies considerations that the Department of Justice will take into acccount in deciding whether or not to prosecute a corporation. A corporation may avoid prosecution altogether if, among other things, the corporation has self-reported and cooperated fully with the authorities. Companies are now choosing to voluntarily disclose FCPA violations in an attempt to receive favorable treatment and to mitigate what might otherwise be harsher penalties. The increased internal scrutiny triggered by Sarbanes Oxley combined with the rise in self reporting has resulted in a substantial increase in FCPA investigations and enforecement proceedings.

In addition to the possibility of criminal punishment, fines and penalties for violation of the FCPA itself, FCPA violations can give rise to follow-on civil litigation. For example, conduct that violates the FCPA may also give rise to to a private cause of action for treble damages under the Racketeering Influenced and Corrupt Organizations Act. For example an action might be brought under RICO by a competitor who alleges that the bribery caused the defendant to win a foreign contract.

Another possibility for follow-on civil lititation arises from Sarbanes-Oxley. While the FCPA imposes certain books-and-record and internal control requirements, Section 404 of Sarbanes Oxley creates disclsoure requirements about internal controls (including a requirement for management's annual "assessment" of internal controls), and Section 302 imposes requirements for CEOs and CFOs to certify their company's financial statements. Shareholders of companies facing FCPA difficulties may allege that prior internal control assessments or certifications were deceptive or misleading due to failure to dislose internal control or other weaknesses that failed to prevent or detect improper payments.

In the wake of Sarbanes Oxley, companies are devoting an increasing amount of effort to maintaining compliance programs, and as the business economy become progressively more global, FCPA compliance will be more important than ever.

A good resource from which to follow FCPA developments is the While Collar Crime Prof Blog.

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