On September 28, 2023, the SEC announced that it had filed charges against and entered into a settlement agreement with the Illinois electric utility Commonwealth Edison (ComEd) and its corporate parent Exelon Corporation in connection with an alleged scheme to influence the then-speaker of the Illinois House of Representatives, Michael Madigan. The SEC separately filed a complaint against ComEd’s former CEO in connection with the same allegations. In an October 12, 2023 post on the Cooley law firm’s PubCo blog (here) Cydney Posner wrote about the SEC enforcement actions and raised the interesting question of whether Political Corruption is Securities Fraud? It is a question well worth asking. However, as I discuss below, there is a long-standing connection between corruption and bribery allegations and securities class action lawsuits and other types of claims.
ComEd is the largest electrical utility in Illinois. The formula applicable to ComEd’s rates was set to expire in 2019. ComEd, through a piece of legislation called the “Future Energy Jobs Act” (FEJA), sought to have the rates formula extended beyond 2019, in a way that potentially could provide ComeEd with benefits exceeding $150 million. To secure passage of the FEJA, the SEC alleged, ComEd sought the help of the House Speaker as part of what the SEC alleged was a “multi-year scheme to corruptly influence and reward the then-Speaker of the House.”
The complaint alleges that from 2011 to 2019, ComEd arranged for various associates of the Speaker to obtain jobs, vendor subcontracts and related monetary payments with the intent of corruptly influencing the Speaker. The SEC alleged that these various efforts were veiled or hidden though third-party vendors. The SEC alleged that the CEO was aware of the corrupt purpose of the payments and that the payments took place with the CEO’s active participation.
The SEC alleged that the CEO “concealed this scheme and those bribes from Exelon investors” and made “materially misleading statements to Exelon regarding ComEd’s lobbying and legislative efforts in support of the FEJA legislation.” While the company published various statements disclosing the company’s legitimate legislative efforts, the statements, the SEC alleged, were “misleading,” because they “omitted that ComEd was engaging in an effort to corruptly influence and reward a governmental official.”
The SEC alleged that Exelon and ComEd violated Sections 10(b), and Rule 10b-5 thereunder, as well as Sections 17(a) and 13(b), of the Securities Exchange Act of 1934. Exelon agreed to pay a civil penalty of $46.2 million. Separately, ComEd entered into a deferred prosecution agreement with the U.S. Attorney for the N.D. Ill., agreeing to pay a $200 million criminal fine. The SEC’s separate complaint against the CEO charges the executive with similar securities law violations.
In her post about the recent settled Exelon and ComEd enforcement action, Cydney Posner, after first quoting extensively from Bloomberg’s Matt Levine’s famous essay in which Levine raised the provocative assertion that “everything everywhere is securities fraud,” and after reviewing the SEC’s allegations in the enforcement actions, asked the question “How is this securities fraud?”
Well she might ask that question, as in effect the companies and the CEO are alleged to have failed to have disclose that they were seeking to use corrupt means to influence an influential public official. It would indeed be a startling thing if a company were to disclose that, say, during the last quarter our company made corrupt payments in order to procure the passage of legislation favorable to us. But does the omission of that disclosure amount to securities fraud?
It is an interesting question, but it is far from the first time a legal proceeding has in effect raised that question. There have in fact for years been private securities class action lawsuits against companies and their corporate executives relating to bribery and corruption allegations. (I note parenthetically that Matt Levine’s famous quip that “everything is securities fraud” was in fact referring to private securities litigation rather than SEC enforcement proceedings.)
The mother of all bribery and corruption-related securities litigation is the Petrobras securities lawsuit, which, as noted here, ultimately settled for $3 billion dollars. The Petrobras settlement was one of the largest U.S. securities class action lawsuit settlements of all time. (Related proceedings continue in the Netherlands and in Brazil.) The Petrobras litigation involved particularly egregious factual allegations, but the circumstances show that there is substantial precedent for securities fraud allegations based on corruption charges.
To be sure as I have noted elsewhere, there have been many bribery and corruption-related securities class action lawsuits over the years, although but many of these cases have proven to be unsuccessful.
But just the same, there have been other bribery and corruption-related cases, in addition to the Petrobras cases, that have resulted in 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. In addition, as discussed here, in November 2022, Grupo Televisa S.A.B. recently agreed to a $95 million settlement with shareholders, resolving bribery allegations of FIFA officials.
The fact is that securities suits filed as a follow-on to bribery or corruption allegations is a well-established phenomenon. Indeed, bribery-related follow-on securities suits continue to be filed.
Nor has the corruption-related claims activity been restricted to securities class action lawsuits. In a case that has a number of parallels to the Exelon/ComEd circumstances, plaintiff shareholders filed a shareholder derivative lawsuit against executives of the Ohio-based utility FirstEnergy in connection with the utility’s alleged efforts to corruptly influence Ohio legislators. In what is one of the largest shareholder derivative lawsuit settlements ever, the FirstEnergy derivative suit settled for $180 million (although the settlement itself became bogged down in a series of inexplicable settlement-related squabbles).
Just to bring this discussion full circle, it should be noted that the bribery and corruption-related allegations against Exelon and ComEd were themselves the subject of a private securities class action lawsuit. Indeed, and as discussed here, in April 2021, the court in the securities suit largely denied the defendants’ motion to dismiss. And as reflected in the parties’ stipulation of settlement (here), in May 2023, the defendants settled the securities class action lawsuit for $173 million.
In summary, while one may well ask whether the kinds of corruption and bribery allegations raised against Exelon and ComEd really amount to securities fraud, the fact is that it is by now a well-established phenomenon for shareholders and others to bring securities fraud allegations and other types of claims against companies and corporate executives who are alleged to have engaged in bribery or corrupt activities. Indeed, in my mind, among the many risks and exposures that companies face when they engage in corrupt activities is the possibility of separate corporate and securities litigation based on the alleged activities. And, by the way, this is nothing new.