As I have often noted (for example, here), a company’s announcement that it is the subject of an FCPA-related investigation frequently leads to the filing of a follow-on civil lawsuit in which investor claimants allege either that the company’s senior officials have violated their oversight duties or that the company’s public disclosure statements were insufficient in some way relating to the alleged misconduct. As I have also noted, these kinds of follow-on lawsuits, while frequently filed, often are unsuccessful.
Both of these aspects of the follow-on civil lawsuit track record are relevant in connection with the wave of litigation that has followed in the wake of the massive anti-bribery investigation in Brazil. Many of the companies caught up in the continuing anti-corruption investigation in Brazil have been hit with follow-on securities suits in the U.S. While there have been noteworthy exceptions, many of these cases have been unsuccessful. Most recently, the defendants’ motion to dismiss was granted in the anti-bribery investigation-related securities class action lawsuit that had been filed against the Brazilian airplane manufacturer Embraer. Southern District of New York Richard M. Berman’s March 30, 2018 opinion granting the motion to dismiss can be found here. The decision is interesting and it highlights many of the challenges claimants face in pursuing these kinds of claims.
As discussed here, in August 2016, Embraer was hit with a U.S. securities class action complaint. The amended complaint, a copy of which can be found here, was filed on behalf of investors who purchased the company’s American Depository Receipts (ADR) between January 11, 2012 and November 28, 2016. The amended complaint alleges that between 2007 and 2011, company employees or representatives paid bribes to officials in the Dominican Republic, Mozambique, Saudi Arabia and India to secure contracts for the sale of aircraft.” Significantly for purposes of the subsequent motion to dismiss, all of the alleged bribery allegedly took place prior to the class period specified in the amended complaint.
The amended complaint alleges that the company engaged in and covered up a “sprawling bribery scheme” that involved payments of about $11.5 million in bribes to secure government contracts that in total allegedly were worth $463 million in revenue and $83 million in profit. On October 24, 2016, the company entered into a deferred prosecution agreement in which the company agree to pay a fine of over $107 million and to disgorge profits of $83 million plus prejudgment.
In their amended complaint, the plaintiff contended that the defendants had made numerous false or misleading statements or omissions, including that as a result of the improper payments, the company’s consolidated and business-segment reporting was misleading; about the nature of the company’s subsidiaries, which allegedly had the function to execute the improperly procured contracts; about the company’s provisions for the companies foreseeable liabilities resulting from the misconduct; about the nature and effectiveness of the company’s internal controls; and about the knowledge of the bribery scheme.
The defendants filed a motion to dismiss the amended complaint.
The March 30, 3018 Order
In his March 30, 2018 Decision and Order, Judge Berman granted the defendants’ motion to dismiss with prejudice.
In reaching this decision, Judge Berman went through each of the specific types of allegations on which the plaintiffs’ sought to rely in asserting their claims.
First, Judge Berman addressed the plaintiff’s allegations pertaining to the defendants’ alleged failure to disclose the existence of the investigations. Judge Berman agreed with the defendants that the “controlling principle” is that “disclosure is not a rite of confession, and companies do not have a duty to disclose uncharged, unadjudicated wrongdoing.” Judge Berman further found, upon review of the statements the company did make about the pendency of the investigation, that the company had complied with its disclosure obligations, noting among other things that the defendants had made numerous statements during the class period that it might have to pay substantial fines or incur other sanctions.
Second, with respect to the alleged omissions about the company’s subsidiaries, Judge Berman found that the statements concerning the subsidiaries that the plaintiff alleges were misleading “describe the business activities that the subsidiaries engaged in.” With respect to the plaintiff’s allegation that the company failed to disclose that the subsidiaries were to execute wrongfully procured contracts and to dole out bribes, Judge Berman simply repeated that “companies do not have to disclose uncharged, unadjudicated wrongdoing.”
Third, with respect to the plaintiffs’ allegations that the company’s financial statements were misleading because they failed to disclose that revenues and income were the result of improper activities, Judge Berman agreed with the defendants that the plaintiff did not allege that the company’s financial statements were inaccurate. He noted that “a violation of the federal securities laws cannot be premised upon a company’s disclosure of accurate historical data,” so the alleged omissions are not actionable.
Fourth, with respect to the plaintiff’s allegations that the company’s statements about its code of ethics and anti-corruption policy, Judge Berman agreed with the defendants that the statements were not actionable because the code and policy are “inherently aspirational,” noting that “it cannot be that every time a violation of the code occurs, Embraer will be liable under the federal laws.” He added that an undisclosed breach of the company’s anti-bribery prohibitions is, without more, similarly not actionable under the securities laws.
Fifth, with respect to the plaintiff’s allegations that Embraer misleadingly failed to estimate the company’s exposures and record a contingent liability as a result of its bribery activities, Judge Berman said that the securities laws “do not allow investors to second-guess inherently subjective and uncertain assessments.” After observing that the plaintiff does not allege that the companies statements about its liabilities were insincerely not truthful or that management did not believe what they were stating publicly, and adding that “it is of little moment that Plaintiff disagrees with that opinion,” he concluded that the alleged omission or misstatement was not actionable because the securities laws “do not allw investors to second-guess inherently subjective and uncertain assessments.”
Finally, with respect to the plaintiff’s allegations about the defendants’ alleged misrepresentations about the company’s internal controls, the defendants noted that there was a “temporal disconnect” between the alleged bribery activities (all of which occurred before the class period) and the alleged misrepresentations during the class period. Judge Berman found that the plaintiffs failed to allege specific facts concerning the purportedly deficient controls, including how they were deficient, when and why. Judge Berman contrasted the situation here with the allegations in the Petrobras case; in the Petrobras case, both the statements and the alleged corruption occurred during the class period, whereas in the this case the bribery scheme occurred as much as five years before the class period. The plaintiffs allegations are both “temporally and logically insufficient.”
It is worth emphasizing at the outset that FCPA follow-on civil actions are not uniformly unsuccessful. To cite one rather dramatic example where an anti-corruption follow on civil action resulted in a successful outcome for the claimants, earlier this year, the plaintiffs in the Petrobras securities class action lawsuit settled that case, subject to Court approval, for just under $3 billion, as discussed here. In a much earlier case, Avon settled an FCPA follow-on civil action for $62 million.
However, those kinds of exceptions notwithstanding, by and large the plaintiffs in these kinds of follow-on actions generally are not successful. Judge Berman cites in his opinion several of the recent cases involving follow-on actions against Brazilian companies in support of his dismissal ruling. For example, among the cases involving Brazilian companies he cited in his opinion was the 2017 dismissal in the Braskem case (about which refer here) and the 2017 dismissal in the Banco Bradesco case. (To be sure, the Braskem case later settled for $10 million and the dismissal in the Banco Bradesco case was without prejudice.)
The fundamental problem the claimants face in these kinds of FCPA or anti-corruption follow on actions is that same that claimants face in any type of event-based securities litigation. That is, merely because something bad has happened at a company or because the company has encountered a significant problem in its business operations does not mean that the company committed securities fraud. (For more about event-based litigation beyond just the context of the FCPA follow-on litigation, refer here.)
Indeed, because Judge Berman concluded that none of the alleged misrepresentations or omissions on which the plaintiff sought to rely in the Embraer lawsuit are actionable, he did not have to get into other issues. However, even if Judge Berman had concluded that one or more of the statements were otherwise actionable, the plaintiff would have faced the further hurdle in establishing that the statement or omission was made with scienter. That is the problem with trying to turn events into securities suits; just because the company has experienced a significant business reverse that caused the company’s share price to decline does not mean that the circumstances will support a securities class action lawsuit.
As discussed in a recent post on the CLS Blue Sky Blog by Columbia Law School professor John Coffee, among the causal factors behind the rise in event-driven securities litigation are changes in the plaintiffs’ bar, as what he calls “new entrants” compete for these kinds of event-driven cases in which these firms will not have to compete with the larger, better established plaintiffs’ firms. In that regards, I think it is interesting to note that the lead plaintiff’s counsel in the Embraer lawsuit is one of these “new entrant” law firms.
One final note. At the outset of the legal analysis section, Judge Berman pointedly noted that counsel chooses the dimensions of the class period. He added the observation that pre-class period allegations of misconduct are insufficient when there is “scant else from which to infer that this was the company’s practice at any pertinent time.” Judge Berman does not explicitly connect the point, but to me at least it seems that his prominent emphasis at the outset of the opinion that plaintiff’s counsel chooses the class period is a pointed reference to his later statements about the temporal mismatch between the time within which the bribery took place and the class period of the class that the plaintiff seeks to represent. He doesn’t say it expressly but it sure seems like he is trying to say that maybe the plaintiff’s counsel should have chosen a different class period if trying the assert the kinds of allegations on which the plaintiff sought to rely.
Special thanks to a loyal reader for sending me a copy of Judge Berman’s opinion.