Photo Sharing and Video Hosting at Photobucket 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.

Photo Sharing and Video Hosting at Photobucket 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, 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 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.