As I have frequently noted on this site (most recently here), plaintiffs’ lawyers often attempt to fashion a securities lawsuit out of on revelations of corporate activities involving alleged violations of anti-bribery laws. A securities class action lawsuit filed this week represents the latest example of this phenomenon. In this instance, the allegedly improper conduct involved activities of an acquired company that reportedly took place prior to the merger. As discussed below, this latest example of the bribery-related securities lawsuits involves several interesting variations on the pattern of these kinds of follow-on securities suits.



International Flavors & Fragrances supplies products to be used contributing to the taste or smell of other consumer products. In October 2018, IFF acquired Frutarom Industries, Ltd. for $7.1 billion. In its August 5, 2019 quarterly earnings release (here), IFF disclosed that:


During the integration of Frutarom, IFF was made aware of allegations that two Frutarom businesses operating principally in Russia and Ukraine made improper payments to representatives of a number of customers. IFF promptly commenced investigations of such allegations with the assistance of outside legal and accounting firms. IFF’s investigations are not yet complete, but preliminary results indicate that improper payments were made and that key members of Frutarom’s senior management at the time were aware of such payments. IFF has not uncovered any evidence suggesting that such payments had any connection to the United States.

Based on the results of the investigations to date, IFF believes that such improper customer payments are no longer being made and the estimated affected sales represented less than 1% of IFF’s and Frutarom’s combined net sales for 2018. IFF does not believe the impact from these matters is or will be material to IFF’s results of operations or financial condition.


The Securities Lawsuit

On August 12, 2019, an IFF shareholder filed a securities class action lawsuit in the Southern District of New York against IFF and certain of its directors and officers. The plaintiff’s complaint can be found here. The complaint purports to be filed on behalf of IFF shareholders who purchased IFF securities between May 7, 2018 and August 5, 2019. The complaint refers extensively to IFF’s August 5, 2019 press release. The complaint alleges that after the company published the press release with the information about the improper activities at Frutarom, IFF’s share price declined 16%.


The complaint alleges that during the class period, the defendants failed to disclose to investors:


(1) that Frutarom had bribed customers in Russia and Ukraine; (2) that senior management at Frutarom were aware of such improper payments; (3) that as a result, Frutarom’s financial results were materially overstated; (4) that as a result of the improper payments, the Company was reasonably likely to face regulatory scrutiny; (5) that the Company had not completed adequate due diligence before acquiring Frutarom; (6) that as a result of the foregoing, the Company was unlikely to achieve purported synergies from the acquisition; and (7) that as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.


The complaint alleges that the defendant’s misrepresentation and omissions violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks to recover damages on behalf of the plaintiff class.



This case is the latest example of the bribery and corruption related follow on securities suit. This type of lawsuit has become increasingly common in recent years, particularly as cross-board regulatory investigation and enforcement of anti-corruption laws has resulted in increasing numbers of anti-corruption enforcement actions. While this type of lawsuit is well-established, this latest lawsuit presents some interesting variations on the pattern.


First of all, as far as I can tell, there has not yet been any regulatory or enforcement activity relating to the allegedly improper conduct at Frutarom. So far, all that has happened is that the company has self-reported its discovery of pre-merger improper conduct at Frutarom. By contrast, the typical bribery-related follow-on lawsuit involves allegations based on or derived from the allegations in regulator or enforcement proceedings.


Second, the allegedly improper conduct allegedly took place at an acquired company prior to the merger. There have of course been a number of recent securities lawsuits in which pre-merger of an acquired company is alleged; for example, there have been a number of recent lawsuits based on pre-merger data breaches or other cybersecurity incidents or failures at acquired companies. Examples include the securities class action lawsuits recently filed against FedEx (about which refer here) and against Marriott International (here). A quick review of other recently filed bribery-related follow-on securities suits did not reveal any examples where the follow-on suit involved pre-merger activities at a predecessor company, but the risk that previously undetected pre-merger activities at an acquired company violating anti-bribery laws coming to light after the acquisition represents a serious risk  and one that could lead to securities litigation.


As I discussed at length in a recent post, though plaintiffs’ lawyers often file follow-on securities suits in the wake of revelations of conduct violating anti-bribery laws, these follow on lawsuits often are unsuccessful. One common feature of these kinds of lawsuits that often result in the suits’ dismissal is that pleading shortcomings that often characterize the complaints in these suits. The complaint in this action arguably is no exception. For example, the scienter allegations in this complaint are scarce. Indeed, the complaint really reads more like a negligence or mismanagement claim, based on IFF’s supposed failure to identify the improper conduct during the pre-merger due diligence, than it does as a misrepresentation case.


In any event, the new complaint filed against IFF represents that latest example of yet another recent securities class action phenomenon, which is the proliferation in recent years of event-driven litigation. In these kinds of lawsuits, the complaints are not based on alleged financial or accounting misrepresentations, but rather on setbacks the company encountered in its business operations. The announcement of a regulatory investigation or compliance issue is one example of the kinds of events that increasingly lead to securities litigation. (As yet another example of this type of event-driven litigation, I noted in a recent post the filing of a securities suit against 3M in the wake of environmental regulatory and enforcement actions against the company.) Though these kinds of lawsuits are becoming increasingly common, they often fail to survive the initial pleading hurdles, often because of the very kind of pleading shortcomings I noted in the preceding paragraph.