As I have noted in prior posts (most recently here), allegations of bribery and improper payments often lead to follow-on securities class action lawsuits. Although historically claimants in these kinds of securities suits have had mixed results, some of these lawsuits have resulted in significant settlements (including most notably the $3 billion settlement in the Petrobras case). In the latest of these bribery follow-on lawsuits to result in a significant settlement, on December 11, 2020, the parties to the securities lawsuit pending against the Chilean company Chemical and Mining Company of Chile Inc. (a/k/a Sociedad Química y Minera de Chile S.A., or “SQM’) filed with the court their agreement to settle the lawsuit based on SQM’s agreement to pay $62.5 million. The parties’ December 11, 2020 stipulation of settlement can be found here. The lead plaintiff’s motion for preliminary approval of the settlement can be found here.
As I detailed at the time that the lawsuit against SQM was first filed, the securities suit relates to SQM’s entanglement in the corruption and tax evasion scandal involving the Chilean financial services firm, Banco Penta. The prosecutors’ probe of Banco Penta began with an investigation into whether the firm was using fake receipts to dodge taxes, but the investigation expanded into an inquiry whether or not receipts were also used to make illegal campaign contributions to the right-wing Independent Democratic Union (UDI) party. The UDI party has links to the 1973-1990 dictatorship of Augusto Pinochet.
In February and March 2015, SQM published a series of press releases detailing the company’s increasing entanglement in the ongoing Banco Penta investigation that, as the securities class action complaint alleges, “ultimately culminated in the termination of the Chief Executive Officer and resignation of three SQM board members.”
The investigation also ultimately led to the filing of criminal charges against certain SQM board members and representatives. In January 2017, SQM agreed with the U.S. Department of Justice to pay a criminal penalty of approximately $15 million to settle charges against the company’s payments and financial accounting violated the Foreign Corrupt Practices Act.
The amended complaint in the securities lawsuit alleges that “For a period of at least six years, SQM, one of Chile’s largest companies, is alleged to have funneled millions of dollars’ worth of illegal campaign donations by paying hundreds, and likely thousands, of false invoices to politicians, political parties and politically-connected companies, in order to control the government and gain influence across Chile’s political spectrum.”
The amended complaint alleges further that “The scandal has had significant ramifications for SQM’s investors. Throughout the Class Period, SQM, through its top executives, consistently represented: it was in compliance with all applicable laws, maintained effective internal controls over the reporting of financial and nonfinancial information, had in place a code of business ethics (“code of ethics”) and promoted accountability for adherence to that code of ethics, and complied with applicable accounting standards. All the while, SQM’s top executives were illegally financing electoral campaigns, including at least three presidential campaigns, and diverting Company funds to Chilean politicians from major political parties.”
The securities lawsuit was first filed against SQM and certain of its directors and officers in the Southern District of New York in March 2015. The complaint was filed on behalf of a class of investors who purchased SQM American Depositary Shares (“ADSs”) traded on the New York Stock Exchange (“NYSE”) between June 30, 2010 and June 18, 2015. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint sought the recovery of damages on behalf of the class. The defendants filed a motion to dismiss the lawsuit.
In a March 28, 2017 order (here), Judge Edgardo Ramos denied the defendants’ and granted it in part. Judge Ramos denied the defendants’ motion to dismiss the plaintiff’s complaint on forum non conveniens grounds. Judge Ramos granted the defendants’ motion to dismiss with respect to certain of the statements on which the plaintiff sought to rely, finding that with respect to those statements the plaintiff had not adequately pleaded actionable misrepresentations. However, with respect to other statements, Judge Ramos found that the allegations were sufficient. Specifically, Judge Ramos found that plaintiff has sufficiently alleged misrepresentation with respect to the defendants’ statements concerning (1) compliance with applicable law; (2) effectiveness of internal controls; and financial reporting and accounting. Judge Ramos also found that in light of the company’s admissions in connection with its settlement with the U.S. Department of Justice that the plaintiff had adequately alleged scienter.
After the motion was denied, the case moved into active discovery. After the court granted the plaintiff’s motion for class certification, the parties entered into mediation that ultimately resulted in the settlement agreement.
The securities suit is one of several securities class action lawsuits based on bribery-related allegations to be filed in the U.S. in recent years against U.S-listed South American companies. The most high-profile of these cases is of course the Petrobras case, which ultimately resulted in a $3 billion settlement, one of the largest securities class action lawsuit settlements of all time.
Others of these cases settled for more modest amounts; the bribery-related securities lawsuit filed against Graña y Montero settled for $20 million and the securities suit filed against Braskem settled for $10 million. The bribery-related securities suit filed against Gerdau settled for $15 million. The bribery-related securities suit filed against Eletrobras settled for $14.5 million. The bribery-related securities suit against Bradesco settled for $14.5 million. The securities suit against JBS settled for $5.466 million.
The recent settlement of the SQM lawsuit, while on a completely different and lower scale compared to the Petrobras settlement, is significantly more substantial than the other bribery-related securities suit settlements involving South American companies, perhaps because of the seriousness of the company’s admissions in its settlement of the FCPA allegations.
The significant size of the SQM settlement represents yet another example underscoring the extent to which follow-on bribery related securities lawsuit can indeed be very serious. The SQM settlement is very much in the same league as other high-dollar bribery related securities suit settlements: 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.
As my recent post about the new Raytheon securities class action lawsuit highlights, plaintiffs lawyers continue to be drawn to filing bribery-related securities class action lawsuit. The lawsuit filed earlier this year against Airbus also underscores this point. In thinking about the securities class action litigation exposure that these kind of cases present, it is important to keep in mind that the kinds of activities that can lead to these kinds of corruption-related securities lawsuits is not limited to actions taken overseas or outside the U.S. As discussed here, the securities lawsuit filed earlier this year involving First Energy (and related to corrupt activities involving improper payments to members of the Ohio General Assembly) demonstrates that these kinds of lawsuit can grow out of domestic U.S. activity as well.
One final note about the SQM settlement. I know many readers would be curious to know if D&O insurance contributed toward the settlement amount. Unfortunately, there is nothing I have been able to find in the public record that says anything about whether the company’s D&O insurers contributed to the settlement. However, after reviewing the record of the various settlements involving South American companies discussed above, I suspect that D&O insurers active in the various South American markets have in recent years contributed significant amounts in the aggregate as a result of the many bribery-related securities suits filed against these companies. UPDATE: With respect to the last point about the impact on these lawsuits on D&O insurers, a D&O practitioner in Brazil advised me as follows by e-mail: ” You are completely right. Bribery related cases has been the most important contributor to SCA losses across Latin America, led by Brazil risks and Car-Wash scandal (with Petrobras) that unfold consequent investigations, such as tax scandals, politic parties donations that somehow are bribery related (ie. BRFoods recent settlement of 40M due sanitary related). But this is not Brazil related only, leading markets to include more restrictive language for commission & bribery related claims.”