Corruption and bribery enforcement actions and criminal prosecutions have long been a source of follow-on civil actions, including in particular securities class action lawsuits, as I have noted in numerous prior posts on this site. Two recent securities class action lawsuit filings underscore the significance of this follow-on securities suit filing phenomenon and also highlight the seriousness that many of these kinds of claims can involve.


The Airbus Lawsuit

The first of these two recent securities class action lawsuit filings involves the European aerospace firm, Airbus SE. The securities lawsuit was filed in the District of New Jersey on August 6, 2020. A copy of the complaint can be found here. The complaint names as defendants the company itself as well as certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased Airbus securities during the period February 24, 2016 and July 30, 2020.


The Airbus complaint refers to a series of anti-corruption investigations involving the company going all the way back to the first of the investigations to be reported, based on an August 2012 announcement by the U.K Serious Fraud Office that it had opened a criminal investigation into one of Airbus’s subsidiaries, GPT Special Project Management Ltd., which Airbus had acquired in 2007. The investigation was reviewing a service contract GPT entered prior to the Airbus acquisition, relating to GPT activities in Saudi Arabia.


The next event in the series of anti-corruption revelations involving Airbus to which the recently filed securities complaint refers is an August 8, 2016 Reuters report (here) that the SFO had opened a criminal investigation into allegations of fraud, bribery and corruption” in Airbus’s civil aviation business, and related to “irregularities concerning third party consultants,” and focused on alleged misstatements involving outside contractors in export financing applications to U.K. regulators and European Export Credit Agencies, which the company itself had found though an internal probe. The securities lawsuit complaint alleges that the price of Airbus’s ADR’s fell 1.49% on the news.


On January 31, 2020, French prosecutors announced that Airbus had agreed to a deal with U.S., U.K., and French prosecutors to settle bribery and export-control violations from a total of $4 billion. Airbus also agree to appoint an external compliance officer for at least two years to monitor the company’s handling of defense-related sales and disclosures. The company’s ADR price fell 1.93% on the news.


On March 15, 2020, the Wall Street Journal reported (here) that Airbus executives had previously raised red flags about fees paid to a number of middlemen working with its helicopter division, which at the time was led by Airbus’s current CEO Guillaume Faury. The securities complaint alleges that the fees “may have violated global bribery and corruption rules”, according to internal documents related to the $4 billion settlement. Airbus’s ADR’s fell 15.71% on the news.


Finally, on July 30, 2020, the Wall Street Journal reported (here) that the SFO had charged GPT and three individuals with corruption in connection with a defense contract the U.K. had arranged with Saudi Arabia. These charges related to the SFO investigations begun in August 2012. The price of Airbus’s ADR’s fell 3.56% on the news.


The securities complaint alleges based on this series of events that the defendants made false and/or misleading statements or failed to disclose: “(i) that Airbus’s policies and procedures were insufficient to ensure the Company’s compliance with relevant anti-corruption laws and regulations; (ii) that consequently Airbus engaged in bribery, corruption and fraud in order to enhance its business with respect to its commercial aircraft, helicopter, and defense deals; (iii) that, as a result, Airbus’s earnings were derived in part from unlawful conduct and therefore unsustainable; (iv) the full scope and severity of Airbus’s misconduct; (v) that the resolution of government investigations of Airbus would foreseeably cost Airbus billions of dollars in settlements and legal fees and subject the Company to significant continuing government investigation and oversight; and (vi) that, as a result, the Company’s statements were materially false and misleading at all relevant times.”


The complaint further alleges that “as a result of defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s securities, plaintiff and other class members suffered significant losses and damages.”


The FirstEnergy Complaint

The securities class action lawsuit filed in the Southern District of Ohio on July 28, 2020 relates to the facts and circumstances surrounding the July 21, 2020 arrest of Ohio Republican House Speaker Larry Householder and four others, including a FirstEnergy lobbyist and a former Republican party chair, in connection with a $60 billion racketeering and bribery scheme to bail out FirstEnergy. In the criminal complaint filed in connection with the arrests, prosecutors alleged that FirstEnergy first bankrolled Householder’s 2018 election, and then bankrolled an effort led by Householder to pass House Bill 6, a $1.3 billion bill subsidizing two troubled FirstEnergy nuclear power plants, and then also financed a campaign to defeat a 2019 referendum to repeal the bill.


The securities lawsuit complaint, a copy of which can be found here, alleges that the criminal complaint filed in connection with the arrests details “a stunning pay-to-play scheme in which FirstEnergy brazenly corrupted every facet of the legislative process in order to ensure the passage of HB6.” The securities complaint quotes prosecutors as saying that criminal case involved the “largest bribery, money-laundering scheme” in Ohio history. The securities complaint alleges that FirstEnergy’s share price fell 45% on the news of the arrests.


The securities complaint alleges that in its public statements the company “touted” its “legislative ‘solutions’ to problems with its nuclear facilities, but failed to disclose that those ‘solutions’ centered on an illicit campaign to corrupt high-profile state legislators in order to secure legislation favoring the Company.”


The defendants, the complaint alleges, “falsely represented that they were complying with state and federal laws and regulation regarding regulatory matters throughout the Class Period, exposing the Company and its investors to the extreme undisclosed risks of reputational, legal and financial harm.”



As these cases demonstrate, civil action filed in the wake of bribery and corruption allegations can be serious matters involving serious allegations. Prior cases show that these kinds of follow-on cases can involve significant settlements as well, the most noteworthy example of which is the massive $3 billion settlement in the Petrobras securities suit based on the Brazilian bribery investigation allegations. The Petrobras settlement is the fifth largest U.S. securities class action settlement of all time.


One of the obvious reasons why these cases can be so serious and involve such serious allegations is that the civil action plaintiffs’ attorneys can rely on and borrow from the serious allegations that prosecutors and enforcement authorities have previously raised and developed, as well as from extensive press coverage of the prior prosecutorial and enforcement actions. As a result, the complaints filed in these kinds of follow-on civil actions are much more detailed than is often the case with initial securities class action complaints. (Just the same, as I have noted, while follow-on civil actions often follow in the wake of corruption allegations, they are not always successful.)


The FirstEnergy complaint is particularly noteworthy not only for the egregious allegations involved but also for the fact that it involves a domestic U.S. company and the underlying allegations involve company activities in the U.S.  The FirstEnergy action underscores the fact that corruption risk is not only a concern for foreign companies and is not a risk limited just to activities outside the U.S.


The Airbus case is unusual in a number of respects that could make the plaintiffs’ burden of sustaining the action challenging. It is not just that the complaint proposes an unusually long class period (from February 24, 2016 to July 30, 2020) but it also relies upon a long series of supposed revelations, most of which had only a nominal impact on the price of Airbus’s ADRs. The most significant share price decline, following the March 15, 2020 news about payments by middlemen for the company’s helicopter division, took place in the midst of the massive market meltdown in March as news of coronavirus outbreak spread. For example, the Dow Jones Industrial Average dropped over 5.3% that day. The usual deception-price inflation-revelation narrative that plaintiffs’ lawyer try to paint in these kinds of cases is not quite as tidy in the Airbus case as plaintiffs’ lawyers often try to suggest in other cases.


As an Ohio resident, the facts involved in the FirstEnergy case are both shocking and highly repugnant. The allegations in the underlying criminal case suggest that a public utility acting with the top individuals in the state legislature collaborated to undermine the basic mechanisms of democracy. The part of the story that I find particularly outrageous is the way that the utility corruptly used massive amounts of money (obviously the product of payments by utility rate-payers) to undermine the citizen referendum action that was intended to counteract the horrible and offensive bail-out legislation that the legislature had passed but that many Ohioans opposed. There is more – a lot more – I might say about these truly deplorable allegations, but principles of self-restraint compel me to forbear for now on this topic, at least in this forum.


The problem with these kind of cases from a D&O underwriting perspective is that they are very hard to underwrite against. Corrupt activities are by definition conducted in a way that the wrongdoers hope will escape detection, so there is little chance that D&O underwriters could, using traditional underwriting tools, hope to select away from companies engaged in corrupt activities. To be sure, an international aerospace company involved in the defense arms supply business might be treated as higher risk in this area that perhaps other countries. But the fact that a regulated public utility might also engage in corrupt activities suggests how challenging trying to underwrite against this type of risk might be.


In the end, the possibility that a company might get involved in an anti-corruption action falls into the same category as the more general risk of event-driven litigation. The problem likely can’t be underwritten against, so the best approach for underwriters is to try to price against the uncertainty, rather than to try to select away from the risk.