Additional Costs Of FCPA Investigations — Collateral Litigation

by Michael Volkov

collateral2When it comes to lawyers, there is no middle ground – you either love them or you hate them.  When the government launches an FCPA investigation of a company, lawyers are drawn for two separate functions – to rescue the company from the government investigation by conducting an internal investigation and resolving the investigation through a declination or a settlement; or to sue the company on behalf of the shareholders, either through a derivative action or a shareholder suit claiming misrepresentation or omissions relating to the integrity of the company’s compliance and ethics program.

As you can see, lawyers are at the trough of corporate misfortune, profiting from the miscues of company which falls under FCPA scrutiny.   Companies have a lot to worry about when it comes to FCPA risks and collateral litigation is just another of those risks which can add to the cost – financial and reputational – which impacts a company when FCPA violations are discovered.

Plaintiffs have been successful in developing shareholder litigation as a follow on to FCPA investigation disclosures.  You can always count on plaintiffs’ attorneys to develop creative avenues of attack.  Plaintiffs have pursued two avenues of attack and had some positive results; a third area, involving RICO claims has not been as productive.

The two types of claims involve – shareholder derivative actions against the board and senior management; and shareholder class actions claiming material misrepresentations and/or omissions relating to anti-corruption compliance.

collateral4In the shareholder derivative action, the shareholders sue the board and senior management claiming that they have inadequately supervised the compliance requirements of the company and that shareholders are entitled to bring a derivative action to vindicate the company’s interests.  At bottom, the shareholders’ derivative suit is premised on the inability of senior management and the board to protect the company because their conduct – their failure to oversee the company’s compliance efforts – is the heart of the issue in controversy.  In other words, the board and senior management have a conflict of interest since they caused the very problem at issue and are out to protect their own interests to the detriment of the company’s interest.

The shareholder class action is based on a distinct set of circumstances – a classic 10b5 claim – that the board and senior management misrepresented or failed to disclose the quality of the company’s FCPA compliance program.  The focus of the litigation is the company’s disclosures or non-disclosures of information about its compliance program, or even the nature and scope of the internal investigation and the government’s enforcement action.  The company’s disclosures are measured against the actual facts which eventually are disclosed in a public filing by the Department of Justice (assuming it does not result in a declination).

Typically, plaintiffs launch these cases immediately after an FCPA investigation is disclosed.  Sometimes the plaintiffs wait until the FCPA action is resolved, but that is the rare case.  In one particular situation, 23 individual shareholder actions were filed within two weeks of the disclosure of an FCPA investigation.

collateral3Companies recognize collateral litigation as a substantial cost to an FCPA violation.  There are steps which can be taken to minimize these costs but it is hard to make them a priority when chief compliance officers are scrambling just to keep their compliance programs afloat.  As compliance program mature, CCOs will eventually add this area to their “to-do lists.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

Written by:

Michael Volkov

The Volkov Law Group on:

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