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.