As I have previously noted, even though the Foreign Corrupt Practices Act (FCPA) does not contain a private right of action, plaintiffs’ attorneys have fashioned an FCPA-based claim of sorts in the form of a follow-on shareholder claim alleging either mismanagement or misrepresentation with respect to the alleged bribery or corrupt activity. A July 10, 2019 memo by attorneys from the DLA Piper law firm (here) takes a look at securities class action lawsuits filed based on FCPA allegations. As the authors note, the underlying FCPA allegations “do not necessarily make for a successful securities class action,” as most FCPA-related securities fraud claims “are dismissed.” As discussed below, a July 12, 2019 dismissal ruling in the FCPA-related Cemex securities class action illustrates both the kind of securities claims that can arise in the wake of FCPA-related allegations and also the hurdles that these kinds of claims face.
FCPA-Related Securities Litigation
As the authors of the law firm memo note, allegations of FCPA violations seem to “embolden” plaintiffs’ attorneys to file securities class action lawsuits against the company involved, particularly where the company has made admissions of misconduct in connection with a deferred prosecution agreement or other corporate resolutions. The kinds of misrepresentations on which plaintiffs rely in these cases tend to fall into one of several categories of allegations.
First, plaintiffs tend to try to “fashion fraud claims” around a company’s statements about its compliance with the law or its own ethics guidelines. As a general matter, these kinds of allegations are dismissed as mere “puffery,” and “explicitly aspirational statements” are also generally found to be not actionable. However, statements about compliance of with antibribery laws can in some circumstances be actionable; the authors cite the Eletrobras securities class action lawsuit where the company’s statements about its commitment to “transparency and ethical conduct” were made in direct response to press reports about the company’s possible involvement in the Operation Car Wash bribery scandal.
Second, plaintiffs asserting FCPA follow-on claims also tend to try to rely on the company’s statements about the effectiveness of its internal controls. General statements of this type are “generally not actionable” because they are “too vague or boilerplate.” However, these allegations can be successful where the alleged statements reflected an opinion on the efficacy of the internal controls and the plaintiff was able to allege that the speaker was aware the opinion was false.
Third, plaintiffs may seek to allege misrepresentations based on the defendant company’s failure to disclose FCPA-related risks or payments. As a general matter, there is “no freestanding duty” for companies to disclose corruption risk or even uncharged wrongdoing. The risk of liability may arise where the company discusses the reasons for its success, creating an obligation to “tell the whole story,” even if it includes illegal conduct. The authors cite the Braskem case, where the court agreed that the company’s statements about the bases for the prices the company paid for certain raw materials was actionable; the company had advanced a number of innocuous reasons for the low prices, but omitted to mention that the prices were established pursuant to a side agreement under which the company paid substantial bribes.
As a general matter, the authors note that claimants in these kinds of follow-on securities suits “struggle to identify statements that rise to the level of a material misstatement.” As a result, most of these kinds of claims are dismissed. However, there are exceptions to this generalization, and as I note below, even though most of these cases are dismissed, there have been several very large settlements of FCPA-related securities suits.
The July 12, 2019 Ruling in the Cemex Case
Many of the shortcomings the law firm authors note in their memo were present in the securities class action lawsuit involving Cemex. As noted here, in 2018, plaintiff shareholders had filed a securities class action in the Southern District of New York against Cemex, a multinational building-materials company based in Mexico, and certain of its directors and officers.
The allegations in the securities suit related to the company’s efforts to build a new cement plant in Colombia. While the project was in progress, Cemex disclosed that it had commenced litigation in Columbia related to its efforts to purchase land, mining rights, and tax benefits from a Colombian counterparty. Throughout this period, Cemex made a serious of statements about its internal controls and its compliance with anti-bribery laws, as well as with its own internal Code of Ethics.
In the fall of 2016, Cemex announced that as a result of internal audit processes, it had uncovered approximately $20 million in payments to the Colombian counterparty in connection with the acquisition of land, mining rights and tax benefits. The payments, the company said, had been made in violation of the company’s policies and applicable law. In the following months, Cemex disclosed that it had been subpoenaed by the SEC and the DOJ as part of an investigation whether the payments violated the FCPA. In April 2017, the company revealed that it had uncovered a material weakness in its internal controls over financial reporting.
In their complaint, the plaintiff shareholders alleged: (1) that the company misleadingly failed to disclose the bribery scheme when disclosing information about the Colombian project; (2) attributed the company’s growth to various factors without disclosing the role that the bribery scheme played; (3 ) falsely stated that the company and its employees complied with the company’s Code of Ethics and with applicable anti-bribery laws; and (4) made false statements about the effectiveness of its internal controls over financial reporting. The court concluded as a matter of law that all of these allegations were inactionable except the first category.
In her July 12, 2019 opinion in the case (here), Judge Valerie Caproni ruled with respect to the allegation that the supposed failure to disclose that the bribery was an important component of the company’s success that these statement were “far too generic to be actionable,” adding that “it is not at all clear whether the bribery scheme played a role in the company’s growth or success.” Judge Caproni also held that the company’s statements about compliance with its own Code of Ethics and anti-bribery laws were “inactionable puffery,” because they were “too general to cause a reasonable investor to rely on them.” Many of the statements were preceded with “explicitly aspirational language,” signaling that the statements were “about goals, not statements of fact.” Finally, with respect to the plaintiffs allegations about internal controls, Judge Caproni noted that the statements on which the plaintiffs sought to rely did not state that the internal controls were effective, only that management had concluded the controls were effective. The plaintiffs, Judge Caproni said, had not alleged that management had not so concluded.
Judge Caproni did conclude that the plaintiffs had adequately alleged misrepresentation with respect to the company’s failure to disclose the bribery scheme in connection with the Colombia project. Judge Caproni said that the alleged bribery scheme had a “direct nexus” to Cemex’s efforts to acquire the requisite land, mining rights, and tax benefits. Armed with information about the scheme, an investor could reasonably have questioned with the rights to these various assets were legally enforceable.
However, while Judge Caproni concluded that the plaintiffs had sufficiently alleged a misrepresentation with respect to the failure to disclose the bribery scheme, she further concluded that the plaintiffs had failed to sufficiently allege that the statements or omissions were made with scienter. She rejected the plaintiffs’ arguments that the resignation of several company officials at the time the improper payments were revealed established scienter, and she also rejected the contention that various supposed “red flags” established the existence of a culture of corruption sufficiently to establish scienter.
Judge Caproni granted the defendants’ dismissal motion but granted the plaintiffs leave to amend, noting that she is “skeptical that the flaws in the Amended Complaint can be remedied.”
Judge Caproni’s opinion in the Cemex case corroborates the generalization in the law firm memo that plaintiffs in FCPA-related securities suit face difficulties in establishing that the defendant companies made actionable misstatements, even where the companies have made admissions that improper payments took place. Indeed, many of the allegations in the Cemex case raised track closely with the law firm memo’s authors observations about the kinds of allegations that plaintiffs in these kinds of cases tend to raise. Judge Caproni’s opinion shows even armed with company admissions it is difficult for plaintiffs to establish that the company made actionable misrepresentations to investors.
Despite these kinds of difficulties, plaintiffs’ attorneys continue to file these kinds of cases. For example, during 2019, plaintiffs’ lawyers have filed bribery-related securities class action lawsuits against Mobile Telesystems PJSC (about which refer here) and against China Cache International Holdings Ltd (here). The Mobile Telesystems lawsuit is discussed at length in a prior post here.
There is one very good reason why plaintiffs’ lawyers continue to file these kinds of lawsuits despite the long odds, and that is that if they can figure out a way to get past the motion to dismiss hurdle, these cases can be highly remunerative. The most extreme example of this principle is the high-profile case involving Petrobras, which settled in early 2018 for $3 billion, one of the largest U.S. securities class action lawsuits ever.
The Petrobras settlement is obviously something of an outlier, but it is not the only recent high dollar-figure settlement in FCPA-related securities class action lawsuits. For example, the series of settlements in the FCPA-related Cobalt International Energy securities suit total approximately $389.6 million. The bribery related securities suit against Wal-Mart Stores settled for $160 million. The FCPA-related securities suit against Avon Products settled for $62 million. There has been a host of other settlement in FCPA-related suits.
There are a couple of other points worth making concerning these FCPA-related lawsuits. As the suits against Cemex and Petrobras demonstrate, many of these lawsuits involve companies based outside the U.S. Indeed the possibility of these kinds of lawsuits is one of the factors that helps to explain the elevated U.S. securities litigation frequency exposure of U.S.-listed non-U.S. companies.
The other thing worth point out about these FCPA-related lawsuits is that these cases are yet another example of the kind of event-driven litigation that has come to be such a significant factor in securities litigation filings in recent years. The exposure to these kinds of claims is not the kind of risk that can be identified by the kind of financial statement review and analysis that is the traditional basis of public company D&O insurance underwriting – although, to be sure, companies that are doing business in certain obvious high-risk jurisdictions obviously are at greater risk of becoming involved in bribery or corruption investigations.
In any event, notwithstanding the hurdles that plaintiffs’ lawyers face in trying to pursue FCPA-related securities claims, the likelihood is that they will continue to file these kinds of claims. Even though, as I have previously noted, that while these kinds of cases frequently are filed, they also are frequently dismissed. The ones that survive the dismissal motion can, however, be quite dangerous.