A prior post (here) discussed the rise in claims and so-called investigations by plaintiff firms representating investors as soon as FCPA scrutiny is disclosed or soon after FCPA enforcement actions are resolved.
When a company’s FCPA violations are found to be condoned or encouraged by the board or officers, such plaintiff causes of action would seem to be warranted. However, these types of FCPA violations are rare – the more typical situation is where, because of respondeat superior, a company faces FCPA exposure because of the actions of a single or small group of employees whose conduct was in violation of the company’s FCPA policies and procedures. In these typical situations, I question what value these so-called “investigations” by plaintiff firms have or what purpose these derivative or securities fraud claims serve.
I do not find myself in complete agreement with the U.S. Chamber as to all of its FCPA reform proposals (see here for those proposals), but I agree with the Chamber sponsored Congressional testimony last month on the issue of FCPA-related litigation.
Last month John Beisner (a partner at Skadden - see here) testified on behalf of the U.S. Chamber Institute for Legal Reform before the Subcommittee on the Constitution of the Committee on the Judiciary United States House of Representatives. The hearing, held on May 24th was titled "Can We Sue Our Way to Prosperity?: Litigation's Effect on America's Global Competitiveness."
In his prepared statement (here) Beisner "highlighted four specific areas in which we are still seeing substantial litigation abuse" including "private lawsuits that piggyback on government investigations."
As to this issue, the bulk of Beisner's remarks focused on the FCPA and he stated as follows.
"More recently, the piggyback-litigation phenomenon has been most noticeable with respect to Foreign Corrupt Practices Act (“FCPA”) enforcement proceedings brought by the Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). These piggyback cases tend to fall into two categories: (1) shareholder class actions alleging that a company did not adequately disclose its FCPA exposure; and (2) derivative actions against officers and directors alleging that they failed to prevent a company from bribing foreign officials."
"Follow-on FCPA cases target companies at a difficult time. Companies going through DOJ or SEC FCPA enforcement proceedings often spend tens of millions of dollars, if not more, on attorneys and forensic accountants – on top of potentially multimillion-dollar criminal and civil fines and disgorgement – in order to determine whether their employees (often at a relatively low level) acted improperly. Enforcement proceedings also interrupt normal business operations, as companies make employees and documents available to lawyers, and take action against truly culpable employees. The investigations themselves are disclosable events and are almost always “bad news,” resulting in negative publicity. Shareholder suits against companies involved in enforcement proceedings threaten to further delay the companies’ ability to return to normal operations and to further damage shareholder value. These suits serve no purpose but to take money from current shareholders and transfer it to former (or other) shareholders – with a hefty slice cut out for the plaintiffs’ lawyers."
"Derivative shareholder suits are equally problematic in this arena. These suits tend to target senior officers and directors, not the employees who actually paid any bribes or condoned others paying them. The reason is simple enough: directors and officers are backed by the deep pockets of the company’s D&O insurer; culpable employees have little money to pay in private civil damages, especially if they themselves have been the target of an individual enforcement proceeding."
"Often, lawyers filing shareholder class actions against companies under investigation or derivative actions against directors and officers of a company under investigation do not even wait until the government investigation is complete. Such tactics are particularly egregious, because they necessarily involve the company and senior management in defending against a private civil suit – and in making strategic judgments regarding such defense – when their focus should be on resolving the government’s investigation. Both the DOJ and the SEC have developed leniency policies for companies that actively assist in government investigations. These policies acknowledge that U.S. government resources are limited, and that cooperating companies can materially assist the government in enforcing the law and protecting shareholders. As part of cooperating with the government, companies in FCPA investigations frequently investigate their own potential wrongdoing and self-report misconduct to the government. When companies and their senior officers and directors face personal civil liability in addition to any exposure to the DOJ and SEC, their judgments regarding what issues to investigate and what results to report to the DOJ and SEC necessarily will be affected, possibly to the detriment of the integrity of the government’s investigation."
For additional reading on the rise in FCPA related civil litigation (see here from Jeffrey Johnston and Erika Tristan of Vinson & Elkins and here from Sean Griffin of Steptoe & Johnson).