Uzbekistan (highlighted)

There is no private right of action under the Foreign Corrupt Practices Act (FCPA), but plaintiff shareholders nevertheless frequently file follow-on civil actions in the wake of FCPA allegations against a company. Are these follow-on civil actions just an end run around the FCPA’s lack of a private right of action? That is the question a district court addressed in ruling on a motion to dismiss in a securities class action lawsuit filed against VEON (formerly known as Vimpelcom). In a September 19, 2017 order (here), Southern District of New York Judge Andrew L. Carter, Jr. held that the alleged misrepresentations on which the plaintiff sought to rely were “sufficiently distinct to avoid any potential concern that Plaintiffs are seeking to enforce the FCPA by [their] securities fraud action.” A November 8, 2017 memo from the Shearman & Sterling law firm about the ruling can be found here.


VEON is a multinational telecommunications company. In February 2016, VEON entered a deferred prosecution agreement with the U.S. Department of Justice in which the company pled guilty to violations of the FCPA and agreed to pay more than $460 million in penalties. In the criminal information accompanying the DPA, the company admitted that between 2005 and 2012, the company paid bribes totaling tens of millions of dollars to Gulnara Karimova, the daughter of Uzbekistan’s President, in order to achieve favorable treatment in the country. Executives at the company disguised the payments in the company’s books and records as legitimate transactions.


In their subsequent securities class action lawsuit, the plaintiff shareholders’ amended complaint relied heavily on the factual admissions the company made in connection with the DPA. The plaintiff alleged three categories of alleged misrepresentations: (1) that the company’s financial disclosures of its business success in Uzbekistan were misleading without corresponding disclosure of the bribery that enabled the company’s financial success; (2) that the description of the regulatory authorities overseeing the company’s activities in Uzbekistan without disclosure of Karimova’s role were misleading: (3) the company’s statements about the efficacy of its internal controls and audit and compliance function were misleading. VEON filed a motion to dismiss


The September 19 Order

In his September 19, 2017 order, Judge Carter largely denied VEON’s motion to dismiss.


In its motion, VEON argued that the Plaintiffs’ claims regarding the company’s financial disclosures are, in reality, “an improper attempt to enforce the FCPA, which has no private right of action.” The company further argued that the company is not required to disclose uncharged wrongdoing.


In ruling on these arguments, Judge Carter reviewed the relevant prior case law, noting that in general, disclosure is not a rite of confession and that companies do not have a duty to disclose uncharged, unadjudicated wrongdoing. However, the failure to disclose uncharged criminal conduct may be actionable where the failure to do so would make other disclosures material misleading. The duty to disclose could arise when a company puts the topic of the cause of its financial success at issue. In this case, Judge Carter found that certain of VEON’s statements “sufficiently place the reasons for growth in Uzbekistan at issue to make further disclosure necessary.” These misrepresentations, Judge Carter concluded, are “sufficiently distinct to avoid any potential concern that Plaintiffs are seeking to enforce the FCPA by this securities fraud action.”


With respect to the plaintiffs’ allegations concerning the company’s disclosures about governmental oversight in Uzbekistan, Judge Carter held that in light of the bribes that the company paid to Karimova, the company’s statement that “all owners of telecommunications networks have equal rights and enjoy equal protection guaranteed by the law” was materially misleading. Judge Carter also concluded that certain of the company’s statements about its existence and efficacy of its internal controls were also materially misleading.


Finally, Judge Carter concluded that the plaintiffs had adequately alleged that in making these allegedly misleading statements the company had acted with scienter. In reaching this conclusion, Judge Carter referenced the plaintiffs’ allegations, made in reference to the company’s admissions in the DPA, that various senior executives at the company had “orchestrated a bribery scheme,” and that these executives understood how the bribery payments impacted the company’s financial statements. These individuals’ scienter, Judge Carter said, could be attributed to VEON.



As the Shearman & Sterling law firm’s memo about this case (to which I linked above), this case “highlights that while alleged FCPA violations alone cannot give rise to a private right of action, plaintiffs may be able to sustain securities claims based on alleged criminal wrongdoing if they can sufficiently plead that the failure to disclose such conduct made the company’s other disclosures materially misleading.”


What makes this decision interesting to me is not just that it affirms a plaintiffs’ right to try to allege a separate follow-on civil action even in the absence of a private right of action in the FCPA , but also that the decision expressly addressed this issue head on; VEON’s dismissal motion expressly raised the issue of the absence of a private right of action in its dismissal motion, and Judge Carter’s ruling expressly addressed this issue.


The bottom line is that a plaintiff can pursue an FCPA follow-on civil action even in the absence of a private right of action if the allegations in the follow-on action are “sufficiently distinct” to avoid any “potential concern” that the plaintiffs are merely seeking to enforce the FCPA.


That is, a plaintiff cannot merely allege that the defendants violated the FCPA and therefore are liable; in order to state an actionable claim, the plaintiffs have to allege (for example, as was the case here) that the defendants’ disclosures were materially misleading in light of the FCPA violations. It is the misrepresentation not the bribery that makes the claim actionable.


This case is somewhat unusual in another respect, in that it survived the threshold pleading hurdles. As I have noted elsewhere, although FCPA follow-on civil actions are not uncommon, they are infrequently successful.


To be sure, the follow-on actions that frequently fail to survive motions to dismiss are filed in the form of shareholder derivative actions, rather than (as was the case here) in the form of a securities class action lawsuit. The plaintiffs in this action also had the distinct advantage of being able to rely on the company’s admissions in connection with the DPA. The company’s admissions were critical to Judge Carter’s assessment of the case and of VEON’s dismissal motions and by themselves may explain the outcome of the dismissal motion.


A Matter of Consideration: The bribes VEON admitted paying to Karimova apparently were not the only payments Karimova was able to extract from companies seeking to do business in Uzbekistan. Indeed, Karimova is alleged to have received over $1 billion in improper payments.  According to a January 2017 Wall Street Journal article (here), Karimova, whose father died in 2016, is now under house arrest in Tashkent (Uzbekistan’s capital) and was interrogated by Swiss officials in December 2016 in connection with a multinational bribery probe.