Public corporations find themselves increasingly defending shareholder lawsuits alleging that they misled investors by making general public statements about their compliance programs. Courts analyzing these claims have provided mixed results, and this month we examine two recent illustrative decisions.
In City of Brockton Retirement System v. Avon Products, Inc., No. 11 Civ. 4665 (S.D.N.Y. Sept. 29, 2014), shareholders accused Avon Products, Inc. and two of its officers of issuing materially false and misleading statements concerning Avon’s compliance with the Foreign Corrupt Practices Act. Avon announced on October 20, 2008 that it had received credible allegations of FCPA violations in connection with its Chinese operations, it was conducting an internal investigation, and it had voluntarily alerted the Department of Justice and the Securities and Exchange Commission. Subsequent announcements followed, leading to an announcement on October 27, 2011 that the SEC had opened a formal investigation. Plaintiffs alleged that beginning in 2006, Avon had made false and misleading statements and omissions about compliance with the FCPA and its international operations – including that the company was committed to high legal and ethical standards and that its success in developing markets was due to legitimate business strategies. It also allegedly made statements about its legal compliance and its internal FCPA investigation without disclosing that its actual compliance efforts were inadequate or nonexistent. The court found that a reasonable investor would not rely on the company’s general statements of its commitment to compliance, as investors do not rely on puffery or generalizations about integrity. Other statements, however, went beyond mere generalizations and addressed concrete steps the company had taken to ensure the integrity of its financial reporting, such as a statement that the company had a “comprehensive and well-documented set of internal controls that provides reasonable assurance that [its] financial transactions are recorded accurately and completely . . . .” The court found those statements to be material. The court found, however, that plaintiffs’ allegations failed to state a claim because they did not adequately plead facts sufficient to give rise to a strong inference of scienter under the Private Securities Litigation Reform Act. In particular, plaintiffs had not pled specific facts showing that specific officers were aware of the alleged bribery scheme at the time the public statements were made, and thus granted defendants’ motion to dismiss.
In City of Pontiac General Employees’ Retirement System v. Wal-Mart Stores, Inc., No. 12-CV-5162 (W.D. Ark. Sept. 26, 2014), shareholders sued Wal-Mart Stores, Inc. and its CEO in connection with alleged FCPA violations. Plaintiffs alleged that the defendants deceived the public by filing an SEC form on December 8, 2011, stating that it was conducting a voluntary review of its anti-corruption compliance program and an internal investigation into whether certain matters were in compliance with the FCPA. The filing also stated that the company had voluntarily disclosed its investigation to the DOJ and SEC. Plaintiffs alleged that the statement omitted the fact that the company had learned of the suspected corruption in 2005 and conducted an investigation in 2006. The court denied Wal-Mart’s motion to dismiss, finding that plaintiff had adequately pled that the statement was materially misleading to a reasonable investor, which could have been left with the impression that the defendants first learned of the suspected corruption in 2012, prompting their investigation and self-reporting. The court also found plaintiffs to have adequately met the PSLRA standard for pleading scienter, citing the allegation that in 2005, a top Wal-Mart attorney had given a detailed description of the suspected corruption allegations to the CEO (who at the time was Vice Chairman and head of Walmart International), who rejected calls for a legitimate independent investigation and instead assigned the investigation to the office that was implicated in the scheme. As part of its analysis, the court provided an attempt to bridge competing courts of appeals decisions on the standard for corporate scienter, and held that the states of mind of any of the following persons are probative for purposes of determining whether misrepresentations were made by the corporation with the requisite scienter: (1) the individual agent who uttered or issued the misrepresentation; (2) any individual agent who authorized, requested, commanded, furnished information for, prepared, reviewed or approved the statement in which the misrepresentation was made before its utterance or issuance; or (3) any high managerial agent or board member who ratified, recklessly disregarded, or tolerated the misrepresentation after its utterance or issuance.