A lawsuit against the Houston energy company Cobalt International Energy has posed a question which is not often considered under the Foreign Corrupt Practices Act—what does contradictory due diligence mean? There are also ancillary questions of what must a company disclose about possible issues of corruption and when must it do so? These questions arose in the continuing saga of Cobalt and drilling rights it secured in Angola in 2010. Cobalt had engaged a local third-party partner, who turned out to have been owned by Angolan government officials. The company later severed its relationship with the local third party.

The Houston lawsuit has revealed that two top international investigation firms that reviewed the ownership of the local third-party partner concluded it was owned by Angolan government officials. Two law firms hired by the company’s board of directors, however, contradicted these findings, and the contract with the local third party was concluded with drilling rights then awarded to Cobalt. As noted, the company ended its ties with the local third party. U.S. government regulators reviewed the matter and declined to bring any action under the FCPA.

Now there is a shareholder action that claims the board of directors failed to disclose what it knew about the potential risks of foreign government official ownership in the local third-party partner. This failure to disclose hid the potential costs to the company in terms of business development and becoming involved in a full-blown FCPA investigation. This failure caused or contributed to a propitious drop in the stock price, which the litigating shareholders now seek recompense for going forward.

In addition to the issues of what material information was known to the board and disclosed and what material information may not have been disclosed, there are fascinating questions on due diligence and what a report means in terms of an overall risk management program, particularly if there are contradictory findings in multiple reports. When does having a second set of eyes move from good process management to due diligence report shopping? Finally, should a declination to prosecute under the FCPA clear a company of charges relating to potential bribery and corruption?

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