ATLANTA (Reuters Legal) - Increased enforcement of the Foreign Corrupt Practices Act is leading to a sharp rise in related shareholder suits against U.S. public companies, a Reuters Legal analysis shows.
Over the past four years, the Justice Department has filed 95 enforcement actions for alleged violations of the FCPA, which bars the companies from bribing foreign officials or executives at companies owned by foreign governments — compared to 23 such actions in the prior four years. More than 240 federal criminal or civil investigations related to potential FCPA violations are under way, government reports indicate.
Investigations — which have netted the government billions of dollars in penalties — have been a boon to a growing segment of the plaintiffs’ bar that sues companies under scrutiny for alleged overseas bribery. Since the beginning of this year alone, plaintiffs’ lawyers have filed 24 shareholder suits against companies that have disclosed FCPA investigations, according to the Reuters Legal analysis of Westlaw data. In recent years, the average has been about eight such lawsuits a year. The cases are mix of class actions and derivative suits.
Westlaw, a Thomson Reuters business, is an online research service that includes thousands of databases of judicial rulings, lawsuits and other legal information.
None of the 24 shareholder suits has yet reached the motion-to-dismiss stage. But history suggests that plaintiffs collect in a majority of such suits: A review of these cases filed in the prior four years tuned up 37, of which 26 resulted in the company’s paying a settlement.
Companies contending with anti-bribery investigations are ripe for shareholder suits because such investigations are generally considered “material events” of the sort that public companies must disclose to investors — and are often bad news for the stock. If the government succeeds in extracting fines, disgorgement of bribery-related profits or guilty pleas, plaintiffs can more easily show damage to shareholders.
Lately, huge payouts to the federal government have become more common. In the last two years, companies have paid FCPA fines and disgorgements worth more than $2.6 billion, nearly triple the value of settlements in the prior four years, according to data compiled by law firm Shearman & Sterling. In shareholder cases that come on the heels of a big FCPA settlement, juries are more inclined to be sympathetic to the plaintiffs, lawyers say. Concern about large potential verdicts can trigger big settlements.
“Bribery is a salacious part of law. It’s something that people can understand — and it gets them angry,” said Hamilton Lindley, an associate at six-lawyer Goldfarb Branham in Dallas, one of about two dozen firms that have filed FCPA-related lawsuits in the last year.
Plaintiffs’ lawyers are also drawn to these cases because companies under federal bribery scrutiny typically have already endured bad press and spent millions on outside counsel and globe-trotting forensic accountants. Avon Products, for example, spent $48 million in the first six months of this year on an internal investigation sparked by an employee’s claim that company personnel made improper payments to Chinese officials. After the company disclosed the allegations to the Justice Department and Securities and Exchange Commission, which opened investigations, three shareholder suits were filed in U.S. District Court for the Southern District of New York. An Avon spokeswoman declined to comment on the investigations or the private litigation.
The recent experience of California-based SciClone Pharmaceuticals demonstrates the FCPA litigation machine in action. SciClone, which makes cancer drugs, disclosed on August 9 that the Justice Department and SEC had launched investigations related to its interactions with government officials and government-owned firms in China. The next day, SciClone stock closed down 31.9 percent, and within two days, eight law firms issued news releases announcing their own “investigations” into whether the company violated federal securities laws.
Over the next six weeks, some of these firms and a few others filed shareholder class-action suits against SciClone in the Northern District of California. The cases are pending. A SciClone spokeswoman said the company was cooperating with the federal investigation; she declined to discuss the private litigation.
Publicizing an “investigation” on firm websites and through the media has become a common tactic for plaintiffs’ lawyers filing suits over corporate FCPA-related disclosures. These lawyers say that the announcements in part are designed to smoke out potentially damaging information from insiders and to surface shareholders who may be interested in pursuing litigation.
Defendants do sometimes prevail. In 2008, Texas oilfield services firm Baker Hughes was hit with four shareholder suits after it paid $44 million in fines to settle FCPA investigations by the Justice Department. All the suits were dismissed. Sam Cooper, a partner in the Houston office of Baker Botts, who represents Baker Hughes, sees something of a plaintiffs’ lawyer feeding-frenzy at work. “They see an area where the government is going to remain aggressive,” he said. “But so far, the courts have said that doesn’t necessarily add up to a claim.”