Bribery Investigations Spark Shareholder Suits

cravath.comIncreased 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.

‘SALACIOUS PART OF LAW’

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.

SUITS EVOKE INFORMATION

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."



In Huron scandal, shadows of Arthur Andersen

A global consulting company that rose from the ashes of the destroyed accounting firm Arthur Andersen is now facing a scandal of its own.

The problems at Huron Consulting Group Inc (HURN.O) may reflect a corporate culture that carried over from Arthur Andersen, the firm that collapsed in connection with the Enron Corp scandal in 2002, legal and corporate governance experts say.

Chicago-based Huron was founded by two dozen Andersen partners. Gary Holdren, once a senior Andersen partner and a member of its executive committee, on Friday resigned as Huron’s chairman and CEO after Huron said it would restate more than three years of earnings because of misreported costs related to acquisitions.

The chief financial officer and chief accounting officer are also departing.

The company also said it was investigating its allocation of chargeable hours in response to an inquiry by the U.S. Securities and Exchange Commission.

Huron did not return calls requesting interviews.

Huron shares lost more than two-thirds of their value on Monday.

Attorney Hamilton Lindley of the Kendall Law Group, a Dallas-based law firm, said he expected a class-action complaint to be filed on behalf of shareholders this week.

"It’s natural to look into whether the culture of Arthur Andersen bled over into the culture of Huron Consulting," Lindley said. "That’s a question we will pursue in our investigation."

Huron’s audit committee discovered shareholders of four businesses Huron bought redistributed portions of their payments among themselves and to certain Huron employees. Huron said payments were not "kickbacks" to Huron managers.

LESSON LEARNED?

Andersen’s corporate culture emphasized maximizing fee revenue rather than a client’s best interests, and it may have gotten "transferred" to Huron, said Dr. Barbara Lay Toffler, author of the 2003 book "Final Accounting: Ambition, Greed and the Fall of Arthur Andersen."

oxfordscholarship.com"My reaction is, ‘Didn’t you learn your lesson once?’" said Toffler, who worked for Andersen for four years in the 1990s and was part of a group that reported to Holdren, the future Huron CEO.

She said Holdren started a Midwest consulting group within Andersen in response to a client’s request to create an outside monitor to ensure Drexel Burnham Lambert did not destroy documents while the investment bank was under investigation.

Andersen was then viewed as a trusted corporate watchdog. Holdren’s litigation services group evolved into a collection of consulting groups, including one focused on business fraud.

"It was a culture that simply wanted to bring in revenue, regardless of what they had to do to get it," Toffler said.

Andersen tried to convert existing audit clients to a host of consulting services with little regard to emerging conflicts of interest, she added. For example, it tried to both sell internal audit services to clients and pitch Andersen as external auditors.

"Unfortunately, there probably were practices that became the way you do things at Andersen that simply got transferred — that Holdren and others transferred," Toffler said, adding she spoke as an expert on Andersen rather than on Huron.

"For the time I was there working for these folks, no one ever asked me what did you do? They just wanted to know how much did you make on it?"

REGULATORY EXPERTS

Huron had built a reputation as an expert on litigation and regulatory issues. It advised United Airlines UAUA.O on its bankruptcy and helped uncover accounting shortfalls at mortgage giant Fannie Mae, FNM.N which eventually led the SEC to charge Fannie Mae with fraud.

In 2007, Huron was named among BusinessWeek’s hot growth companies and last year was ranked on a Fortune list of 100 fastest-growing U.S. companies.

To be sure, the scandal could turn out to be a misunderstanding or a "colossal mistake," said David Becher, an associate professor of finance at Drexel University in Philadelphia, and a fellow in the university’s corporate governance center.

But the fact that senior Huron executives resigned may lead to concerns that executives were trying to manipulate earnings by making it seem like they paid less then they really did for the companies they acquired, he said.

"They bill themselves as (experts who) help people get through these difficult regulatory environment post-Sarbanes Oxley," said Becher, in reference to the corporate governance and accounting law passed after the Enron scandal. "You’d think they would know."

The linked collapses of Enron and Andersen convinced regulators more scrutiny of corporate accounting was needed, with added outside controls. But such controls are inadequate, Becher said, if individuals decide to commit fraud.

"The controls were there, and when they caught it they did the right thing, but time will tell what was going on," Becher said. "Why didn’t the board know before then? How was it able to go on for three-and-a-half years? Why didn’t the auditors catch this?"