The high-profile November 18, 2018 arrest in Japan of Carlos Ghosn, the Chairman and former CEO of Nissan (and of several other car companies) on charges of misleading the Japanese government and investors about his compensation made the front pages of the world’s papers. Continuing revelations, including the recent indictment of Ghosn and other company executive, continue to roil the company. On December 11, 2018, an institutional investor and holder of U.S.-traded Nissan ADR’s initiated a securities class action lawsuit against the company. The lawsuit is interesting in and of itself but also with respect to how it reflects several recent securities litigation filing trends.
Nissan is an automobile manufacturing company with its U.S. headquarters in Tennessee. Its company-sponsored American Depositary Receipts (ADRs) trade in the U.S. Ghosn served as Nissan’s CEO from 2001 to 2017. He continued to serve as Nissan’s chairman until the recent events. He also served as Chairman of the Nissan-Renault-Mitsubishi alliance, a consortium of interlocking auto manufacturing concerns that collectively represents one of the largest auto groups worldwide.
As discussed here, Ghosn was detained in Japan on November 18, 2018 after an internal investigation – initiated based on the report of an internal whistleblower — found that company had underreported his compensation to the Japanese government for several years. The Japanese government also arrested Greg Kelly, a director, whom a company spokesperson speaking after the arrests described as one of the “masterminds” of a long-running scheme to mislead financial authorities and to misuse company assets. On November 22, 2018, the company’s board voted to remove Ghosn and Kelly from their positions.
On December 10, 2018, Japanese prosecutors indicted Ghosn, Kelly, and Nissan on charges that they had violated Japan’s financial reporting laws by underreporting Ghosn’s compensation.
The Securities Lawsuit
On December 10, 2018, an institutional investor holding Nissan ADRs filed a securities class action lawsuit in the Middle District of Tennessee against Nissan, Ghosn, Kelly, and certain other Nissan directors and officers. The lawsuit purports to be filed on behalf of purchasers of Nissan ADRs between December 10, 2013 and November 16, 2018. A copy of the complaint can be found here.
The complaint alleges that throughout the class period Nissan was materially understating its expenses by concealing half of the annual executive compensation it was obligated to pay Ghosn. The company did report that it had paid him annual compensation of over 1 billion Japanese Yen, but did not disclose in its publicly filed financial reports that it had paid Ghosn an additional 1 billion yen per in the form of deferred compensation I.O.U.s. In addition, the complaint alleges that the company concealed from investors that it had “significant defects in its corporate governance and internal controls” that allowed the false financial reporting, while at the same time the company was affirmatively emphasizing its “strong ethics” and high transparency.
The complaint alleges further that the company failed to heed the express direction of its outside auditors going back at least to 2013 about its executive compensation disclosures. The underreporting, the complaint says, not only deceived Nissan investors, but it also violated the pay cap Nissan shareholders approved.
The complaint alleges that the underreporting of Ghosn’s compensation was undertaken in order to avoid shareholder scrutiny of Ghosn’s “inordinately high executive compensation.” The company was further motivated to conceal the full extent of Ghosn’s pay in order to “avoid the scrutiny of the investors in the France-based Renault SA – which includes the French government.” Ghosn was simultaneously serving as the CEO and Chairman of Renault, which owns 43% of Nissan’s equity.
The complaint alleges that on the news of Ghosn’s arrest, the price of Nissan ADRs “declined precipitously” closing down more than 5% on November 19, 2018. The complaint seeks to recover damages under Sections 10(b) and 20 of the Securities and Exchange Act of 1934.
In numerous recent posts, I have highlighted to recent phenomenon of event-driven securities litigation (for example, here). Because of the prominent media attention that Ghosn’s arrest had been getting, it would be tempting to try to identify this new lawsuit as yet another event-driven lawsuit filling. However, despite the high-profile nature of the underlying allegations, this lawsuit arguably is more of the old-fashioned financial misrepresentation lawsuit than it is an event-driven lawsuit.
In alleging that Nissan investors were misled, the complaint highlights the fact that the underreporting of Ghosn’s compensation understated the company’s expenses and overstated its earnings. In order to try to magnify the supposed distortions of this allegedly misleading reporting, the complaint presents all of the relevant currency figures in the form of Japanese yen. For example, Ghosn’s compensation is alleged to have been underreported by as much as 1 billion Japanese yen, and the company is further alleged to have underreported by as much as 10 billion Japanese yen over the last decade.
There are several things to keep in mind when considering the magnitude of these allegations. First of all, a billion of anything sounds like a lot. However, one Japanese yen is worth only .0088 cents – that is, less than one one-thousandth of a penny. A billion yen is worth about $8.8 million – a not insubstantial amount of money. But Nissan had 2017 revenues of 11.95 trillion yen (about $105.5 billion). In other words, Ghosn’s alleged overcompensation amounted to less than one tenth of one percent of Nissan’s revenue.
The complaint’s reference to the fact that Ghosn’s compensation was overstated by more than 10 billion yen over the last decade is also a bit of bootstrapping, as the class period is not a decade long, it is only about five years long.
To be sure, the true value of Ghosn’s compensation arguably is material for all of the reasons the complaint alludes to – political, investor relations, and corporate governance considerations all require Nissan to try to convince the world that Ghosn’s pay was lower than it actually was, and that is why the executives involved all went along with the plan to understate the executive’s compensation.
But how important was this information to investors? On the news of Ghosn’s arrest, the company’s share price dropped five percent. A material drop, but not a massive drop – and part of the magnitude of the decline had to be due to the news of the arrest, and not just the news about the amount of Ghosn’s compensation.
One other noteworthy thing about this case is that the entire set of circumstances leading up to the arrest appears to have been set in motion based on a whistleblower report. The possibility of increasingly active whistleblowers leading to more securities litigation is a theme I have been sounding for some time, although truthfully, there have not been that many securities cases filed as a result of whistleblower reports. Notably, this case seems to involve an internal whistleblower, too, rather than someone making a whistleblower report to the SEC. So this case may not exactly represent what I have been trying to predict might happen, but it at least is a case arising because of a whistleblower report.