We live in a time of significant geopolitical risk, from the highly volatile conditions in the Middle East, to the ongoing war in Ukraine, to continuing tensions in the South China Sea, among many other concerns. These risks of course have important ramifications, including among many other things as a source of potential D&O liability exposure. In prior posts (most recently here), I have highlighted ways that geopolitical issues, such as, for example, trade sanctions, can translate into corporate and securities litigation. In the latest example of this phenomenon, on December 19, 2024, a plaintiff securityholder filed a securities class action lawsuit against Joint Stock Company Kaspi.kz, a Kazakh company whose American Depositary Shares (ADS) trade on Nasdaq. Among other things, the plaintiff alleges that the company misrepresented the extent to which its bank subsidiary was being used for unlawful purposes, including assisting Russians with evading sanctions in the wake of the 2022 Russian invasion of Ukraine. A copy of the December 19, 2024 complaint in the case can be found here.
Background
Kaspi.kz is a Kazakh corporation with its headquarters located in Almaty, Kazakhstan. Kaspi Bank is one of its subsidiaries, which the company itself describes as “one of the largest and systemically important financial institutions in Kazakhstan.” The company also runs an online marketplace where customers can purchase products from various merchants.
The securities class action lawsuit complaint alleges that in its SEC filings during the class period, the company made a number of statements, such as, for example, “our platforms may be used for fraudulent, illegal or improper purposes” noting that the company has measures in place for purposes of “preventing our business form being used as a vehicle for money laundering, fraud or other illegal activities.” The complaint alleges that these statements were false and misleading when made because at the time the company’s platforms were “already being used for unlawful purposes, including assisting Russians with evading sanctions in the wake of the 2022 Russian invasion of Ukraine.”
The complaint also quotes statements from the company’s SEC filings that “Our business does not have any exposure to Russia or Russian businesses.” The complaint alleges these statements were false when made because the company “had exposure to Russia and Russian businesses by virtue of allowing Russians to use it financial services products, allowing Russian merchants to sell goods on its marketplace, and ordering goods … that were made by a Russian company.”
The complaint also cites statements in the company’s SEC filings regarding its relation to various third-party entities and individuals, as well as its acquisition of certain other entities. The complaint alleges that these statements contained material misrepresentations and omissions and alleged further that individuals affiliated with the acquired entities had “links to a known from for [sic] Russian organized crime figures and sanctioned oligarchs, including an oligarch wanted by the FBI.” The complaint alleges further that the company “understated the extent of money laundering happening on the Company’s platform.”
On September 19, 2024, Culper Research (a short-seller) published a report entitled “Kaspi.kz (KSPI): The NASDAQ-listed Fintech Moving Money for Criminals and Kleptocrats” (here). Among other things, the report, which the complaint quotes at exhaustive length, asserts that Kaspi “systematically misled U.S. investors and regulators in its repeated claims – especially ahead of the Company’s January 2024 NASDAQ listing – that the Company had zero exposure to Russia,” adding that the research firm believes that “Kaspi’s relationship with Russian partners permeate every segment of is business, but that in the wake of Russia’s February 2022 invasion of Ukraine and into 202 [sic], Russia has contributed materially to Kaspi’s reported growth.”
The Lawsuit
On December 19, 2024, a plaintiff securityholder filed a securities class action lawsuit in the Northern District of California against the company and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities between January 19, 2024, and September 19, 2024.
The complaint alleges that during the class period the defendants made false or misleading statements or failed to disclose that: “(1) Joint Stock Company Kaspi.kz continued doing business with Russian entities, and also providing services to Russian citizens, after Russia’s 2022 invasion of Ukraine, thereby exposing the Company to the undisclosed risk of sanctions; (2) the Company engaged in undisclosed related party transactions; (3) certain of the Company’s executives have links to reputed criminals; and (4) as a result, Defendants’ statements about Joint Stock Company Kaspi.kz business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.”
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 seeks to recover damages on behalf of the plaintiff class.
Discussion
As part of my job here at The D&O Diary, I read pretty much every securities class action complaint as it comes in. As many complaints as I have read over the years, this complaint really stands out. For starters, it is the first complaint that I can recall ever having seen that involves a company from Kazakhstan. I believe this may be the first time I have had occasion in the nearly 20 years that I have been maintaining this site that I have had occasion to refer to Almaty, the Kazakh capital.
But beyond the sheer exoticism of the geographic locale involved, there are also the interesting underlying factual allegations. My brief summary above really doesn’t do justice to the allegations. The short seller report contains extensive details allegedly explaining how Russians, in order to avoid sanctions-related constraints on their ability to move money, acquire and use debit cards, allegedly from Kaspi Bank, as a way to access and move money. The short seller report, quoted extensively in the complaint, also details the ways that Russians allegedly have been able to send rubles to Kaspi through use of Kaspi’s correspondent accounts at other banks in Moscow. There is a lot more. I recommend reading the whole complaint.
As provocative as the complaint’s allegations are, it is probably worth noting that the complaint only alleges that the supposed actions allegedly exposed Kaspi to sanctions; it is not alleged that sanctions have been imposed on Kaspi or that Kaspi has been penalized for violating sanctions.
Moreover, the allegations in the complaint consist almost exclusively of the assertions raised in the short seller’s report. For many years, I have been raising concerns about securities lawsuit complaints filed in reliance on short sellers. A recent guest post on this site (here) detailed the problems and concerns that abound when securities complaints are filed based on allegations in short seller reports; among other things, the short sellers have obvious conflicts of interest in making damaging reports concerning companies. These kinds of concerns give considerable reasons to be cautious about the allegations on which this complaint is based. Time will tell whether these allegations withstand judicial scrutiny.
All of that said, it should not be overlooked that at the heart of this complaint are the allegations that the company’s conduct violated trade sanctions (or facilitated the violation of trade sanctions) imposed in the wake of Russia’s 2022 invasion of Russia.
As I discussed in a post I published late last year, in which I also addressed my concerns about litigation risk arising from geopolitical issues, I discussed the securities class action lawsuit filed against memory storage device company Seagate Technology Company, after the company agreed to a $300 million Department of Commerce penalty for violation of export control violations pertaining to the Chinese company, Huawei. I also discussed in the prior post other examples where trade control-related allegations featured in securities class action lawsuit complaints.
The litigation risk arising from geopolitical concerns is not limited just to issues involving trade sanctions and export controls. International trade regulatory regimes have become increasingly important for companies and their executives. These regulatory regimes include U.S. sanctions, anti-money laundering (AML), and anti-bribery and corruption laws. Recent developments, such as the War in Ukraine, trade tensions with China, and issues involving digital assets have heightened these concerns. Violations of these legal regimes can result in regulatory enforcement actions as well as in related civil litigation. The cases discussed above and in my prior posts on this topic show how these concerns can translate into securities litigation.
As I have previously pointed out, the prospect for securities litigation arising out of trade sanctions and export control-related issues is not necessarily new; there have been examples of corporate and securities lawsuits arising out of trade sanction and export control issues over the last several years. However, in the current tense geopolitical environment, all of these concerns seem to loom larger. The increasing tensions with China and the ongoing “hot” wars in Ukraine and in Gaza heighten the concerns surrounding geopolitical risk.
Not only that, but the topic of geopolitical risk is one that is about to get a lot more complicated, if, for example, incoming President Trump follows through on his threats to impose tariffs on many if not most of the U.S.’s trading partners. Any move along those lines could trigger a global trade war, and an already complex geopolitical risk environment could become even more dangerous – which among many other things could contribute significantly not only to operating risks but also to corporate and securities litigation risk for many companies.
In short, while I have long thought that geopolitical risks represent an important area of corporate and securities litigation risk, that risk could become significantly greater as we head into 2025 and beyond.