Facing an FCPA Probe? Prepare for Follow-On Litigation

Companies that find themselves at the center of an investigation for potential violations of the Foreign Corrupt Practices Act have more to worry about than just an enforcement action. Increasingly, they must fend off shareholder class-action lawsuits based on FCPA allegations as well.

The FCPA itself does not provide for a private right of action, but that hasn't kept shareholders from alleging violations of other laws and filing lawsuits in connection with an FCPA investigation or enforcement action. Many of the lawsuits also name the companies' directors and senior officers as defendants.

FCPA-related lawsuits typically take two forms: securities fraud class actions and derivative actions brought against the company's directors or officers for alleged breaches of fiduciary duty. Typically the class-action cases allege that the company made false or misleading statements, or failed to disclose material information regarding the nature and scope of the company's FCPA violations, leading to a drop in stock price.

The more FCPA enforcement actions the U.S. Department of Justice and the Securities and Exchange Commission bring against companies, the more attractive these lawsuits become for plaintiffs. “They are definitely on the uptick,” says Sam Cooper, a partner with the law firm Paul Hastings.

Walmart, Hewlett-Packard, Hercules Offshore, Parker Drilling, Pride International, SciClone Pharmaceuticals, Siemens, and Tidewater have all been hit with shareholder litigation following the announcement of an FCPA investigation or settlement to resolve charges, along with many others.

While the cases are becoming more common, they are no easy task for plaintiffs. “While there is an uptick in parallel FCPA litigation—both derivative actions and securities class actions—there still are enormous hurdles that a plaintiff has to overcome,” says Michael Himmel, a partner with law firm Lowenstein Sandler and chair of the firm's white-collar criminal defense practice.

Securities Class Actions

So far this year, four companies—Och-Ziff Capital Management, Hyperdynamics, NuSkin, and Archer Daniels Midland—have been targeted with securities class-action lawsuits following the disclosure of potential FCPA violations.

In a typical securities fraud class-action lawsuit shareholders often point to the existence of an FCPA investigation or enforcement action as evidence that the company knew about weaknesses in its internal controls leading up to the violation of anti-corruption laws, and that failing to disclose these weaknesses resulted in a drop in the company's stock price.

In the latest claim filed on May 5 in the Southern District of New York, shareholders sued investment management firm Och-Ziff and certain of its board members and senior executives over allegations that the company violated its duties to investors by making false and misleading statements and failed to disclose material adverse facts regarding its non-compliance with anti-corruption laws.

Hyperdynamics, an oil and gas start-up, is also facing an FCPA securities fraud class action filed in U.S. District Court for the Southern District of Texas by Dennis Gerami, a shareholder of the company, over mis-statements Hyperdynamics made concerning alleged FCPA violations. 

“At the very least, you need to be able to show and establish, whether to the government or a court, that the company did everything it possibly could to prevent an FCPA violation.”

—Michael Himmel,

Partner,

Lowenstein Sandler

Hyperdynamics' troubles began in September 2013, when it announced that the Justice Department and the SEC were investigating potential FCPA violations in connection with the company's acquisition of exclusive oil and gas exploration rights from the government of Guinea. Then in March 2014, Hyperdynamics' stock plummeted when its partner in Guinea ceased operations as a result of the FCPA investigations.

The lawsuit, filed one day after the announcement and stock decline, alleges that Hyperdynamics and three of its executives violated federal securities laws by making misleading statements that failed to reveal that Hyperdynamics obtained its rights in Guinea in violation of the FCPA and that the company lacked adequate internal controls.

Both the Och-Ziff and Hyperdynamics cases—and others like it—highlight the zeal with which shareholders are pursuing FCPA-related claims. In Och-Ziff's case, in particular, the lawsuit was filed on the coattails of media reports, not a government enforcement action. Those media reports claimed that Och-Ziff violated anti-bribery laws in their dealings with Libya's government-run investment fund and loaned $234 million to help finance two ventures in the Democratic Republic of Congo in violation of the FCPA.

Many securities fraud class actions rarely survive the motion-to-dismiss stage. “A lot of them get dismissed,” says Cooper.

The merits of a case, in part, depend on several factors, including whether the plaintiffs can prove that the company issued false and misleading statements; showed intent to defraud; and suffered a material drop in stock price as a result. All of these factors may not exist based on an FCPA investigation alone, says Michael Matthews, a partner with Foley & Lardner.

Companies should also keep in mind that public disclosures of FCPA investigations often form the basis of shareholder litigation, “It's always important to think about your disclosures,” says Cooper.

FCPA-Related Public Disclosures

Public disclosures related to FCPA investigations play a significant role in shareholder litigation. These disclosures often provide the basis for shareholder complaints and can also be utilized in preparing a response to such complaints. To that end, companies should consider what disclosures are being made—both before and during an FCPA investigation—in three respects:

Are FCPA risks being disclosed? Long before an FCPA issue arises, companies should evaluate their FCPA risks and craft appropriate disclosures as required by applicable rules. Claims that material risks went undisclosed are likely to be incorporated into shareholder claims that a company's SEC filings were misleading, even if such claims ultimately fail.

Are FCPA compliance efforts being disclosed? A company's disclosures regarding the existence of an FCPA compliance program and FCPA controls, as well as steps taken to improve or implement the program, may be useful in responding to shareholder claims, particularly when those disclosures occur in advance of any FCPA issue or shareholder dispute.

Are progressive disclosures being made during the investigation and resolution process? A company should evaluate whether disclosing more than just the fact that an investigation has commenced is warranted. Particularly where an investigation has continued for several years, disgruntled shareholders may be able to allege that a company must have learned something material that required disclosure during the intervening years. Such a claim may have even more gravity when a summary disclosure is compared to the detailed factual information provided in the resolution papers publicly available at the investigation's conclusion. Progressive disclosures help rebut shareholder claims that the company failed to timely disclose material information and thus caused damage to shareholders.

Source: Paul Hastings.

Disclosures about the existence of the company's anti-corruption compliance program and steps taken to improve the program may prove useful in responding to shareholder claims, whereas a lack of disclosure regarding compliance efforts may be used to assert the company had no such programs or controls in place, Cooper says.

Derivative Suits

Even more common than securities fraud class actions are derivative lawsuits. Such claims in the FCPA context typically allege that individual directors and officers breached their fiduciary duties by failing to oversee the implementation of policies and controls to ensure compliance with anti-corruption laws.

For companies that are negotiating the resolution of an FCPA investigation with the government, they should be careful to evaluate what information to include in their resolution papers in order to better position themselves when responding to FCPA-related litigation, advises Cooper.

Specifically, he says, companies should consider including information related to:

The existence of an anti-corruption compliance program and internal controls;  

Any actions taken by the company to evaluate, improve, or enhance its anti-corruption compliance program prior to the discovery of any wrongdoing, and prior to the resolution of an investigation;

The discovery by the company of any potential wrongdoing, if internal efforts uncovered the issue;

The thoroughness of the investigation conducted; and

Any difficulties the company faced during the investigation in uncovering the wrongdoing, or where evidence was hidden from management and the board.

The inclusion of such language may help disprove shareholder allegations that the company's directors and officers knowingly disregarded their duties to oversee the implementation and monitoring of anti-corruption controls.

Multinational companies cannot possibly oversee all the actions of all their employees. At the very least, Himmel says, “you need to be able to show and establish, whether to the government or a court, that the company did everything it possibly could to prevent an FCPA violation.”