As I have noted in prior posts (most recently here), in recent months a number of Brazilian companies have been hit with a wave of U.S. securities class action lawsuits. These suits have followed in the wake of corruption scandals and environmental disasters in Brazil. Now yet another Brazilian company has been hit with a U.S. securities class action lawsuit, as aircraft manufacturer Embraer and certain of its directors and officers has been sued in a securities suit following allegations that of the company’s involvement in the payment of bribes to government officials in the Dominican Republic. In addition to being the most recent securities lawsuit filed in the U.S. against a Brazilian company, the new lawsuit also represents the latest example of a securities suit arising in the wake of a bribery investigation.
The latest lawsuit was filed in the Southern District of New York on August 8, 2016, against its former CEO, its former CFO, and its present CFO. The complaint, a copy of which can be found here, alleges that the company “paid bribes to officials in the Dominican Republic to secure contracts for the sale of aircraft.” The bribery allegations first came to light in a series of articles in the Wall Street Journal, which reported that the company was under investigation by the U.S. and Brazilian governments for the payment of bribes. Among other things, the news reports included allegations that the company’s then-CEO was aware of the bribes. In June 2016, the company announced that the CEO was resigning. On July 29, 2016, the company filed a Form 6-K with the SEC stating that the company was recognizing a $200 million loss contingency reflecting “the likely outcome” of the U.S. bribery investigation. The plaintiffs allege that on the news of this loss contingency, the company’s share price declined.
This latest lawsuit filing brings the total of U.S. securities class action lawsuits pending against Brazilian-domiciled companies to seven. These lawsuits have all been filed in the last 18 months or so. These lawsuits have emerged in a country that historically has had a relatively benign D&O claims environment (at least compared to the U.S. and even to other countries such as Australia and Canada).
The lawsuit filing onslaught began with the securities class action lawsuit that was filed against Petrobras, in the wake of the ongoing Operação Lava Jato (Operation Car Wash) investigation. Several other companies that were caught up in this investigation were also sued in U.S. securities class action lawsuits. These lawsuits were followed by lawsuits against two other companies following the massive dam failure that occurred on November 5, 2015 near Mariana, in the Minas Gerais state, in Brazil. These lawsuits, in turn, were followed lawsuits arising out of an ongoing criminal investigation (Operação Zelotes) since 2013 of suspected corruption at Brazil’s Administrative Council of Tax Appeals (CARF), an agency within Brazil’s Finance Ministry, as discussed here.
As discussed in an August 5, 2016 Reuters article (here), the various corruption investigations and related claims are among several factors roiling the Brazilian D&O insurance marketplace now. The country’s deep recession, as a result of which many companies have been driven into bankruptcy, is also contributing to the market turmoil. The country’s aggregate D&O insurance premiums have doubled since 2011, and many insurers are experiencing very adverse claims results. Companies that are caught up in the investigations or that are financial weak are having difficulty placing the insurance. Other companies have seen their D&O insurance premiums increase by 50 percent or more.
The surge in U.S. securities suits against Brazilian companies is also part of a larger trend in which non-U.S. companies have been hit with U.S. securities suits. As discussed here, the increase in the number of lawsuits against non-U.S. companies is one of the important factors driving the recent heightened levels of securities lawsuit filings generally. Non-U.S. companies continue to get hit with securities suits at a greater rate than the overall universe of U.S.-listed companies.
Plaintiff Files Bribery-Related Derivative Lawsuit Against Bristol-Myers Squibb: In addition to Embraer, yet another company was hit with a lawsuit in the past week the wake of bribery allegations. On August 5, 2016, a shareholder filed a derivative lawsuit in New York (New York County) Supreme Court against Bristol-Myers Squibb, as nominal defendant, and the company’s board of directors. The complaint, a copy of which can be found here, alleges that the defendants “breached their fiduciary duties by failing to stop Company officials in China from making cash payments and providing other improper benefits to healthcare providers (or ‘HCPs’) at state-owned and state-controlled hospitals in exchange for prescription sales controls.” On October 5, 2016, the SEC announced that Bristol-Myers Squibb had agreed to pay more than $14 million to settle the SEC’s finding that it violated the Foreign Corrupt Practices Act (FCPA) and reaped more than $11 million in profits from its misconduct.
These two new lawsuits are just the latest example of a phenomenon I have frequently noted on this site, which is the filing of a shareholder lawsuit in the wake of the announcement of a regulatory or governmental investigation. There is no private right of action under the Foreign Corrupt Practices Act (FCPA), but as I have frequently noted in prior posts, news of an anti-bribery investigation frequently is followed by a shareholder lawsuit based on allegations relating to the investigation.
Indeed, the securities class action lawsuits that have been filed this year in the wake of bribery or corruption investigations is one of the factors that is driving the heightened level of securities litigation filings this year. Among the companies hit this year with corruption related securities suits are PTC, Inc. (about which refer here); Platform Specialty Products (here); Alere (here); Gerdau (here); and Banco Bradesco (here).