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.