Category: Corruption

Collateral bribery damages: NYC now 3rd fund to file suit v. Wal-Mart.

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In another of what will likely be many such lawsuits by pension funds, New York City Pension Funds filed a shareholder derivative action against Wal-Mart over the bribery and corruption scandal involving Wal-Mart’s Mexican subsidiary, Wal-Mex. This follows the California State Teachers retirement systems’s similar filing in late May.

The New York City complaint similarly alleges that Wal-Mart’s officers and directors breached their fiduciary duty to the company and its shareholders by failing to properly handle credible claims of the bribery allegations and attempting to cover up details of the scandal, reducing the value of the company by their actions.

For anyone not familiar with a derivative suit, the principal is that the shareholders of a corporation seek damages from directors to reimburse losses to the corporation for which the directors can be held personally responsible, as an exception to the “business judgment rule“.

A key aspect of evidence for plaintiffs in a derivative suit is finding a direct causal link between the directors’ actions (or inaction) and the eventual loss sustained by the corporation. In this case, it’s relatively simple to show that 1) Wal-Mart’s stock price took a big hit on the bribery news and 2) Wal-mart’s goodwill and market position has (again) been damaged. Now, the plaintiffs have to show the link.

A related suit, based on securities fraud, was filed by the City of Pontiac General Employees Retirement System in Tennessee. According to Reuters, a total of  11 derivative suits have been filed against Wal-Mart since the New York Times story ran.

It is imperative for board members and executives to realize that when they are made aware of corruption allegations that they follow advice of counsel and comply fully with internal audit procedures. In this case, it is up to Wal-Mart to show they did. If not, there will be not only the DOJ and SEC to deal with, but many angry pension fund managers and likely other shareholders brought together as a class by the many American law firms specializing in such matters. This story will continue until Wal-Mart manages to come to terms with what actually happened in Mexico (and elsewhere, depending on findings).

NGO on FCPA reform: fines should compensate victims.

The SERAP (Socio-Economic Rights and Accountability Project) has added its voice to the calls for FCPA reform.

In a press release, the Nigerian NGO proposes that the US DOJ and SEC allocate a percentage of funds from fines exacted on corporations to aide the actual victims of corrupt government officials and agencies.

SERAP argues that since the FCPA and other anti-corruption laws do not provide for civil actions (apart from under the the Alien Torts Act) and moreover since there is little possibility of recovering damages in the country where the corruption occurred, the US government should share civil penalty and disgorgement proceeds with the victims.

Last week the DOJ replied to the US Chamber of Commerce’s reasonable pleas to “restore balance” and provide clarity on the law (their letter is here) by agreeing to discussions. The DOJ owes a similar response to SERAP. While the NGO lacks the backing of the hundreds of large corporations represented by the USCC, its argument is one that needs to be taken seriously.

SERAP provides some guidance on how civil penalty and disgorgement proceeds should be distributed in a systematic and fair manner to NGOs and the US Congress should invite them to testify in hearings on FCPA reform. That’s probably unlikely though since we probably won’t see any substantial progress on the issue until after the US presidential elections this November.

Updated: The FCPA Professor blog examines this issue in further depth.

 Photo: Rory Mullholland

US DOJ brings in FBI to investigate News Corp bribes to Scotland Yard.

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When details emerged last July that employees of News International (the press arm of News Corp) had possibly bribed 5 Scotland Yard police officers, the FCPA red alert must surely have sounded in News Corp’s legal department. Since then, News has brought in a number of heavy hitters to cover them, including immediately hiring Mark Mendelsohn from Paul Weiss Rifkind (a former deputy chief of the Fraud Section in the DOJ’s Criminal Division –  who helped devise the FCPA enforcement program) and the D.C. firm of Williams & Connolly, specialists in corporate compliance matters.

That the US DOJ has been working closely with UK investigators should come as no surprise to anyone following this matter and last month’s arrest of five alleged bribery scheme participants on criminal charges likely gave the signal to make public FBI involvement in the investigation.

Legal coverage for a necessarily international internal compliance investigation and evidence gathering (as well as putting together multiple defenses) will obviously generate considerable business for all the firms involved.

Since News earned over $30 billion last year, it can probably afford the attorney fees and any fines it will incur. However, facing criminal charges is a different ballgame and News would be remiss to not leverage its populist news media outlets to portray the investigation as politically motivated. Serving time in prison is an incredible motivator.

If you are interested in delving into the details of the UK Leveson Inquiry and its rogues gallery of hackers, hacked and outright despicable characters, the Guardian (which broke the story) does it very well.

Photo: Jim Henderson

$16.8M fine for European device maker in FCPA settlement.

 

 

 

 

The US DOJ announced today that Smith & Nephew has admitted to and settled claims related to an offshore kickback scheme with a Greek distributor. Smith & Nephew also settled today with the US SEC, paying $5.4 million in disgorgement of profits, including interest.

This is one more in a line of FCPA cases where the weak link in a company’s compliance program turns out to be 3rd party distributors and pressure to bring in revenue.

A recurring motif in communications with resellers is a version of “all the other resellers are doing it, if I don’t, I can’t compete”.  It seems to be a trap that is too easy to fall into for some executives.

The DOJ noted that it will seek to have the original charges dismissed if Smith & Nephew abides by the terms of its settlement agreement.

When can an individual sue a corporation for corrupt practices?

When a company’s stock price dives or its reputation is besmirched due to a criminal investigation, what action can affected individuals or shareholders take to seek compensation? What about whistleblowers who suffer retaliation?

While the US Congress is considering legislation to allow private parties to seek compensation for damages (Foreign Business Bribery Prohibition Act of 2011), there is currently no statutory provision that specifically provides claimants the right to bring suit against a corporation convicted for violating anti-corruption laws.

However, a growing number of shareholder derivative actions are being filed against corporations and their officers for breach of fiduciary duty on the argument that the corporation did not have adequate internal controls to ensure regulatory compliance and prevent violations. While not per se a statutory remedy, a derivative suit can achieve some compensation.

In the case of whistleblowers, those retaliated against do in fact have an administrative remedy. By filing a complaint with the US OSHA within 90 days a plaintiff is entitled to “all relief necessary to make the employee whole” (while not providing for punitives). If the facts permit, there are other options, including RICO civil provisions:

  • In a disturbing case, a non-US whistleblower and his family sued a corporation under the Alien Tort Claims, Torture Victims Protection, and RICO Act for alleged torture and beatings to prevent him from exposing corruption and bribery;
  • In a widely noted ruling, the U.S. 7th Circuit found that an employee allegedly terminated for refusal to participate in violations of Sarbanes-Oxley could proceed with a RICO civil case against his former employer and the 2 employees who conspired to hide the illegal activity.

In any case, corporations (and their officiers) fighting alleged violations should be aware that once the smoke has cleared, private plaintiffs are indeed in a position to extend the pain for years after a case is concluded.

I don’t think that I need to further emphasize how important it is to put a proper compliance policy and training program in place and to document each employee and partner’s assent to and understanding of the policy. Moreover, constant auditing and internal controls must scale in proportion to the company’s business in risk areas.

Photo: Brian Turner