Increasingly over the past decade, securing a settlement agreement with government authorities does not signal the end of what may have been a drawn-out (and expensive) anti-bribery investigation. Instead, the threat of subsequent civil litigation by private third parties will often extend the uncertainty and financial risk related to anti-bribery violations.

Where FCPA investigations have uncovered corrupt activity, stakeholders have sought to obtain relief for perceived (and, in some cases, real) harms suffered as a result of a company's misconduct using various legal avenues: (1) securities fraud actions, (2) derivative lawsuits, (3) ERISA claims, (4) restitution claims and (5) state law commercial contract and tort claims. Significantly, such follow-on claims are not unique to the U.S. legal system. Claims can arise after U.K. anti-bribery investigations as well, although they are relatively rare.

This piece offers an introduction of the most common claims a corporation can face in the aftermath of an anti-bribery investigation in the U.S. and the U.K. and describes the significant losses that may be associated with those claims.

See "In Latest Chapter of the Och-Ziff FCPA Saga, Court Rules That It Pay Restitution to Victims of Bribery" (Jan. 8, 2020)

Securities Fraud Claims

In the United States, shareholders may first seek to recover alleged losses from negative price reactions to FCPA news by filing securities class actions. These plaintiffs typically bring claims under Rule 10b-5 – promulgated under the Securities Exchange Act of 1934 – which provides shareholders a private right of action to recover damages resulting from "fraud, misrepresentation, and deceit in the sale of securities." A 10b-5 action requires the following elements: (1) a material misstatement or omission, (2) scienter, (3) a connection to the purchase or sale of securities, (4) reliance, (5) economic loss and (6) a causal link between the material misrepresentation and the loss.

Heightened Standard

The Private Securities Litigation Reform Act, enacted in 1995, expressly heightened the standard for pleading scienter in an effort to discourage baseless lawsuits. Under this law, the complaint must state with particularity facts that give rise to a strong inference that the defendants acted intentionally when making or failing to make a specific public disclosure. As securities fraud typically requires conduct by individuals whose actions can be attributed to the issuer, plaintiffs must allege involvement by senior corporate actors in the making of the false or misleading statements.

In many cases, this presents significant obstacles. For example, as reflected in the company's pending motion to dismiss, the plaintiffs in the Cognizant Technology Solutions case are likely to have difficulty successfully alleging securities fraud against the company after finding that the bribery scheme was hidden from the board of directors and other senior management.1

Plaintiffs also encounter difficulties in linking loss to specific misrepresentations. To meet that challenge, they often allege that the relevant misrepresentation occurred much earlier than the disclosure of the government investigation or the resulting settlement, with plaintiffs claiming that issuers knowingly or intentionally failed to disclose that the company's profits were generated through corruptly obtained contracts or that the company was exposed to financial and reputational risk as a result of insufficient internal controls.

Embraer

For example, plaintiffs turned to the courts to remedy a significant drop in value of Embraer S.A.'s American Depositary Receipts immediately following news that the company was under investigation for allegedly corrupt conduct in the Dominican Republic, claiming that the company's financial statements were false and misleading because they did not disclose the illicit source of some of the company's earnings.2 The court, however, rejected this claim, finding that the company's financial statements accurately reflected revenues received – albeit from illicit conduct.

It also found that Embraer S.A. did not have a duty to disclose (or publicly admit) uncharged wrongdoing as long as the company sufficiently addressed the risks that could result from the government investigation.

See "The Strategy That Helped a Former Embraer Sales Manager Avoid Jail Time" (Mar. 20, 2019).

General Cable

In the General Cable securities fraud case, filed exactly a week after the DOJ and SEC announced settlement agreements with the company, plaintiffs relied on a different theory of misrepresentation, claiming that the company's claims that it had implemented programs and internal controls designed to ensure FCPA compliance was misleading in light of the corrupt conduct set forth in the settlement agreements. The court, however, rejected this argument as well, finding that the company had not made any assertions as to the effectiveness of such programs and internal controls.

Despite the difficulty of meeting the high threshold for pleading securities fraud, class action settlements in such cases are not uncommon.3 The Petrobras Securities Litigation4 highlights the financial risk potentially associated with securities fraud litigation based on admissions in a FCPA settlement.

After successive failures to dismiss its shareholders' class action complaint and decertify the class in the district court and court of appeals, Petrobras and its codefendants agreed to pay nearly $3 billion in a class action settlement to remedy allegations that they failed to disclose systemic and widespread bribery practices and subsequent investigations in the United States and Brazil. As such, corporations can ill afford to ignore potential securities fraud claims in response to an FCPA settlement.

See "General Cable Pays $75 Million to Settle Wide-Ranging Bribery Scheme Based on Agents and Distributors" (Jan. 18, 2017).

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Footnotes

1. Park v. Cognizant Tech. Solutions Corp., et al., No. 2:16-cv-06509 (D.N.J. 2016).

2. Employees Retirement System of the City of Providence, et al. v. Embraer S.A., et al., No. 16-CV-06277 (S.D.N.Y. 2018).

3. For example, in the aftermath of an FCPA investigation, plaintiffs recently have settled securities fraud actions with the following companies: Avon Products, Inc., Wal-Mart Stores, Inc., Juniper Networks, Inc, Cobalt International Energy, Inc., Petrobras, Braskem S.A., and Alere Inc.

4. In re Petrobras Sec. Litig., No. 1:14-cv-09662 (S.D.N.Y. 2014).

Originally published by Anti-Corruption Report on the 14th of May, 2020

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