On May 14, 2009, the Policeman and Firemen Retirement System of the City of Detroit filed a shareholder derivative suit in the District Court for Harris County, Texas against the Halliburton Company and KBR, Inc. in which it alleged, among other things, that the companies’ failure to institute internal controls resulted in the bribery of Nigerian government officials.35 The law suit arose from the recent highly-publicized FCPA investigation and related settlement Halliburton and KBR entered with the Department and the SEC.36
On February 11, 2009, the Department announced its record-breaking settlement with KBR, Inc., its subsidiary, Kellogg Brown & Root LLC (“KBR LLC”), and Halliburton, including a guilty plea by KBR LLC to one count of conspiracy to violate the FCPA, and four substantive counts of violating the FCPA by authorizing, promising, and making over $180 million in illegal payments to Nigerian government officials to obtain over $6 billion in contracts for the construction and development of a major liquefied natural gas project on Bonny Island, Nigeria.37 Consistent with the terms of the plea agreement with the Department, KBR LLC was fined $402 million. The related SEC Complaint charged KBR, Inc. with violating the anti-bribery provisions, and both KBR, Inc. and Halliburton with breaching the books and records and internal controls provisions of the FCPA. KBR, Inc. and Halliburton agreed to the entry of a consent decree and disgorged an additional $177 million in profits and pre-judgment interest.38 In the aggregate, KBR and Halliburton paid over $579 million to settle these charges, a record FCPA criminal fine and disgorgement for a U.S. company.39 Pursuant to the terms of an indemnification agreement with KBR, Inc., Halliburton was ultimately responsible for the disgorgement of profits, for which it was jointly and severally liable, and for all but $20 million of the criminal penalty imposed on the KBR entities.40
The Shareholder Derivative Suit
The Complaint filed in the instant case by the representative shareholder specifically alleges that certain members of the boards of directors of Halliburton and KBR, Inc. breached their fiduciary duty to shareholders by failing to reign in years of careless business practices and criminal activity that resulted in massive fines, penalties and settlements paid to the federal government. The Complaint alleges that the name Halliburton “has become virtually synonymous with ‘corruption,’ just as Enron became the poster child for fraud.”41 While the bribery by KBR LLC of government officials in Nigeria in violation of the FCPA is only one of the improper business practices set forth by the shareholder, it is important because of the high-profile nature of the U.S. government investigation and the significant fines and penalties that resulted. In fact, the Complaint relies heavily on the fact that the SEC has challenged the sufficiency of the internal controls of Halliburton and KBR, Inc.
Shareholders of companies who are involved in FCPA investigations and settlements are typically unaware of such wrong-doing and corruption. As a result, companies are wise to expect and prepare for such civil actions after FCPA enforcement actions are announced publicly.