In yet another U.S. securities class action lawsuit involving a non-U.S. company and a corruption investigation in the company’s home country, on March 19, 2015 a shareholder of Chemical & Mining Company of Chile, Inc. (Sociedad Quimica y Minera de Chile, S.A, or SQM), the world’s largest producer of iodine and lithium and a major potash producer, filed a lawsuit in the Southern District of New York against the company and certain of its directors and officers. A copy of the plaintiff’s complaint can be found here. The plaintiff’s lawyers March 19, 2015 press release about the lawsuit can be found here.
The case relates to the ongoing corruption and tax evasion scandal involving the Chilean financial services firm, Banco Penta. The prosecutors’ probe of the firm began with an investigation into whether the firm was using fake receipts to dodge taxes, but, as discussed in a March 4, 2015 Reuters article (here), the investigation has expanded into an inquiry whether or not receipts were also used to make illegal campaign contributions to the right-wing Independent Democratic Union (UDI) party. According to Reuters, the UDI party has links to the 1973-1990 dictatorship of Augusto Pinochet.
On February 26, 2015, SQM published the first of a series of press releases detailing the company’s increasing entanglement in the ongoing Banco Penta investigation that, as the securities class action complaint alleges, “ultimately culminated in the termination of the Chief Executive Officer and resignation of three SQM board members.” In the February 26 press release (here), the company announced that at the request of its Chairman of the Board, an “extraordinary” board meeting had been held to discuss the corruption and tax evasion investigation. The press release also announced that the Board had established a special committee to perform an investigation.
It is worth noting that SQM’s Board Chair is Julio Ponce Lerou, one of the wealthiest individuals in Chile and the former son-in-law of Augusto Pinochet. In September 2014, Chile’s securities regulator fined Ponce $70 million, a record sanction in Chile, in connection with an investigation of illegal securities trading, including trading in the shares of SQM.
On March 11, 2015, SQM disclosed in a press release (here) that its board of directors would be meeting the next day to evaluate a request from the Public Prosecutor for information relating to the Prosecutor’s “investigation into improper political campaign contributions.”
On March 12, 2015, SQM issued a press release (here) stating that its board of directors had met that same day in extraordinary session and had resolved to form an independent investigation with respect to the prosecutor’s request for information; to schedule another board meeting on March 16, 2015 to analyze the independent investigation report and “to make a decision regarding the voluntary delivery of the requested information”; to ratify the board’s “willingness to cooperate” with the prosecutor and to confirm that all of the requested information “is ready to be delivered when appropriate.”
In a March 16, 2015 press release (here), the company stated that it had turned over all of the information that the prosecutor had requested to the Chilean Internal Revenue Service, which the company stated was the proper authority to receive the information.
In a separate March 16, 2015 press release (here), the company announced that board, meeting that same day in extraordinary session, had “agreed to terminate” Patricio Contesse González, the company’s CEO. The press release also stated that the board had appointed Patricio de Solminihac Tampier as the new CEO effective immediately. The securities class action complaint alleges that in the weeks leading up to Contesse’s dismissal, he had “attempted to block the Company’s decision to turn over the documents.”
Finally, in a March 18, 2015 press release (here) the company announced the resignation of the three SQM board member designees of the Potash Corporation of Saskatchewan, Wayne R. Brownlee, José Maria Eyzaguirre and Alejandro Montero.
In its own separate March 18, 2015 press release (here), Potash Corp., which owns a 32 percent stake in SQM, stated that the Chilean prosecutor had made “serious allegations of wrongdoing” against SQM and its management, and that Potash’s board designees’ requests for full and voluntary cooperation “have been rejected by a majority of the Board.” The press release goes on to state that “it has become clear that given our minority and dissident position on the board, we are unable to ensure either that an appropriate investigation is conducted or that SQM collaborate effectively with the Public Prosecutor.” Accordingly, the three Potash Corp. designees had resigned. Wayne Brownlee, one of the three that resigned from the SQM board, is the Chief Financial Officer of Potash Corp.
Perhaps in response to the Potash Corp. press release, SQM issued a second March 18, 2015 press release (here), in which the company stated that it had “promptly initiated internal investigations” and created a special committee to complete an independent report; that it had contracted independent consultants in Chile and the U.S.; and that it “continue to provide information to the regulatory authorities as necessary.” The press release also stated that the company had terminated Contesse and voluntarily provided the Chilean Internal Revenue Service with the information the prosecutor had requested.
A March 18, 2015 Bloomberg article entitled “Potash Board Exodus Sinks SQM as Chile Company Fights Probe” (here) stated that on the news of the three individual’s resignation from the SQM board, the company’s share price on the Santiago stock exchange, which had already fallen on the prior new of the investigation, fell as much as 29%, the most in two decades. The price of the company’s American Depositary Receipts, which trade on the NYSE, fell 17%.
In their March 19, 2015 press release, plaintiff lawyers announced that they had filed a securities class action lawsuit against SQM, Contesse (the former CEO), Solminihac (the new CEO) and Ricardo Ramos, the company’s Chief Financial Officer. The complaint alleges that the defendants made false and misleading statements or omissions by failing to disclose that “money from SQM was channeled illicitly to electoral campaigns for [UDI], Chile’s largest conservative party” and that the company “lacked internal controls over financial reporting” and that as a result the company’s financial statement were false and misleading.
The Complaint asserts claims based on Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The Complaint is filed on behalf of investors who purchased SQM’s American Depositary Shares on the New York Stock Exchange between March 4, 2015 and March 17, 2015.
The SQM lawsuit follows closely after the securities class action lawsuit filed in December 2014 against Petrobras and certain of its directors and officers in the wake of the massive scandal in Brazil surrounding the company (The Petrobras lawsuit is discussed here.) Both of these U.S. securities lawsuits involve Latin American companies whose shares trade on their home countries’ stock exchange and that also have American Depositary Shares trading on a U.S. exchange. In both cases, the lawsuits arising out of bribery or corruption investigation in their home countries and being pursued by prosecutors or regulatory authorities in their home countries.
Both of these lawsuits, in turn, follow after the securities class action lawsuit filed in April 2013 against Wal-Mart de Mexico SAB De CV (“Walmex”) and certain of its directors and officers, in the face of corruption allegations involving its operations in Mexico. The securities complaint quoted extensively from news reports that the company had falsified its financial records in order to conceal its widespread bribery activities. Walmex’s American Depositary Receipts trade on the New York Stock Exchange. (A separate action previously had been filed against Walmart Stores, Walmex’s U.S. parent, as discussed here).
The phenomenon of civil litigation following in the wake of a corruption investigation is nothing new, at least in the U.S. What is different about these various lawsuits, including the new lawsuit against SQM, is that they involve non-U.S. companies sued in a U.S. securities class action lawsuit in connection with bribery or corruption activities and investigations in their home countries, by their home countries’ regulators or prosecutors.
As I noted in a prior post, in recent months there has been a series of securities lawsuits filed in the U.S. against non-U.S. companies in connection with regulatory investigations in the companies’ home countries. For example, as discussed here, in January 2014, NuSkin Enterprises was hit with a securities class action lawsuit following news of an investigation in China of the company’s allegedly fraudulent sales practices there. In June 2014, China Mobile Games and Entertainment was hit was a U.S. securities class action lawsuit following news of a bribery investigation in China involving company officials.
As regulators in Latin America and around the world become increasingly more active, it not only become increasingly more likely that companies elsewhere could become involved in regulatory or even criminal investigations, but also, at least where the companies have securities trading on U.S. exchanges, increasingly more likely to become involved in a U.S. securities class action lawsuit.
Which of course immediately begs the question – what about investors in companies whose shares do not trade on U.S. exchanges? By the same token, what about the investors who purchased their SQM shares on the Santiago exchange? As a result of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, the investors who purchased their shares on exchanges outside the U.S. cannot assert claims under the U.S. securities laws. Will those investors seek to try to assert claims in their home country’s courts, under their home country’s laws? Will they seek to expand or reform their home country’s laws so that they can assert their claims there?
As I noted in a recent post, there have been moves toward the adoption of a form of collective litigation in a number of Latin American countries, including Chile. Will investors who bought their SQM shares on the Santiago exchange but who are closed out of the U.S. class action seek to pursue a claim or claims in Chile’s courts, under Chilean law? I hope that my readers in Chile and elsewhere in Latin America will let me know what they think about the possibility of a civil action in Chile on behalf of shareholders who purchase their SQM shares on the Santiago exchange.
(In another recent post, here, I discuss how the existence of the U.S. securities class action lawsuit involving non-U.S. companies can create something of a “double whammy” for investors who purchased their shares in the company on the company’s home country exchange, as the settlement of the U.S. lawsuits effects a form of “wealth transfer” to the investors who purchased their securities on the U.S. exchange.)
In any event, it is worth noting that non-U.S. companies with securities trading on U.S. exchanges continue to attract the attention of plaintiffs’ lawyers. As I discussed in my most recent annual review of U.S. securities class action lawsuit filings (here), non-U.S. companies continued to get his with securities litigation in numbers disproportionate to their representation on the U.S. exchanges. For example, in2014, about 19 percent of securities lawsuit filings involving non-U.S. companies, while non-U.S. companies represent only about 16 percent of a U.S.-listed companies. These same trends have continued in 2015, where eight of the 39 securities lawsuits filed so far this year (about 20 percent) have involved non-U.S. companies, while the non-U.S. companies continue to represent only about 16% of all U.S.-listed companies.
More About Fee-Shifting Bylaws: Over the last few days, I have linked on this blog to several recent articles on the topic of fee-shifting bylaws, most of them written by authors with an academic or a defense perspective. Readers interesting in a plaintiffs’ lawyers’ perspective on the topic will want to review the March 16, 2015 article from Mark Lebovitch and Jeroen Van Kwawegen of the Bernstein Litowitz law firm entitled “Of Babies and Bathwater: Deterring Frivolous Stockholder Suits Without Closing the Courthouse Doors to Legitimate Claims” (here). In their interesting paper, the authors suggest that “the ‘nuclear option’ of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles.”
The authors also propose their own alternative as a way to try to reduce abusive shareholder litigation. They propose the adoption of “a two part test that would eliminate the weakest two-thirds of all stockholder litigation.” Under this two-part test, before approving a “disclosure only settlement,” the court would “affirmatively determine that: (1) the disclosures providing the purported consideration to stockholders are, in fact, material, and (2) subject to judicial discretion to approve a broader release for good cause shown, the release is limited to the benefit of the disclosures obtained, so as to ensure that meritorious claims that were not properly vetted by counsel are not inadvertently or thoughtlessly released.”
Finally, readers interested in the ongoing debate regarding the legislation proposed in Delaware to address fee-shifting bylaws will want to review Alison Frankel’s March 20, 2015 post on her On the Case blog entitled “Why Proposed Legislation in Delaware Won’t End Loser-Pays Fight” (here), in which she discusses Columbia Law Professor’s John Coffee’s recent CLS Blue Sky blog post about the proposed legislation, to which I linked earlier this week. She also mentions the Bernstein Litowitz’s authors’ paper as well.
Break in the Action: I will be traveling during the week of March 23, 2015, and there will be an interruption in this blog’s usual publication schedule while I am on the road. Normal publication will resume upon my return to the office the following week.
Among other things while I am traveling, I will be attending the C5 D&O Liability Insurance Forum in London. On Thursday morning, March 26, 2015, I will be participating in a panel entitled “The Latest U.S. Judicial Decisions, Litigation, and Exposures and Emerging D&O Liability Risks” with my good friends Chris Warrior of Hiscox and Phil Norton of A.J. Gallagher. I will also be moderating a panel at the C5 conference on Wednesday, March 25, 2015, on the topic “Lifting the Lid on Regulatory Investigations and Lessons Learned” with Robert Sikellis, the Chief Compliance Counsel at Siemens, and Richard Sims of Simmons & Simmons.
On Wednesday evening, March 25, 2015, I will be participating once again in the annual London event and reception that my firm co-sponsors with Beazley and (this year) the Mayer Brown law firm. This event usually draws most of the London D&O insurance marketplace and we hope it will be successful again this year.
If you see me this week at the C5 conference or at the Beazley event, I hope that you will be sure to say hello, particularly if we have not previously met. I look forward to seeing everyone in London.