On March 30, 2018, the United States District Court for the Southern District of New York dismissed with prejudice a class action complaint against Embraer S.A. (“Embraer” or the “Company”) and several of its officers, alleging securities fraud under Sections 10(b) and 20(a) of Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5. Employees Retirement System of the City of Providence, et al. v. Embraer S.A., et al., No. 16-cv-06277 (S.D.N.Y. Mar. 30, 2018). Plaintiff alleged that the Company made false or misleading statements about and/or failed to disclose violations of the Foreign Corrupt Practices Act (“FCPA”). The Court dismissed the claims, finding that the Company did not have a duty to disclose uncharged, unadjudicated wrongdoing and that the Company’s disclosures about the government investigation adequately addressed the risks that could result from a finding of unlawful conduct.
Embraer is a Brazilian company that manufactures commercial, executive, and defense aircrafts and sells them to governmental and private customers worldwide. In November 2011, the Company disclosed that it was under investigation by the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) for potential FCPA violations, and that it may be required to pay substantial fines or incur other sanctions. On July 29, 2016, the Company announced that its negotiations with the DOJ and SEC had progressed to the point that the Company was recognizing a $200 million loss contingency. On October 24, 2016, the Company announced it had entered into a deferred prosecution agreement with the DOJ under which it agreed to pay approximately $190 million in fines and disgorged profits. The Company also entered a Consent to Entry of Final Judgment with the SEC.
Plaintiff alleged, among other things, that having disclosed the existence of the government investigations, the Company had a duty to disclose that it had engaged in fraud. The Court disagreed, ruling that the Company had no duty to disclose uncharged, unadjudicated wrongdoing. The Court noted that the Company repeatedly disclosed that it was under investigation for alleged FCPA violations and that it may be required to pay substantial fines or incur other sanctions.
The Court ruled that, under Second Circuit law, these statements satisfied the Company’s disclosure obligations. The Court also rejected Plaintiff’s argument that the Company’s financial statements were false and misleading because it failed to disclose that some of its revenue was derived from an illicit bribery scheme. The Court ruled that, when a company accurately reports historical financial data, a plaintiff cannot state a violation of the federal securities laws by claiming that the defendant should have disclosed that some portion of its sales or income was related to an FCPA violation.
This decision is consistent with the line of cases which have held that a disclosure of the existence of an investigation and the risks that could result from a finding of unlawful conduct is generally sufficient to satisfy a company’s disclosure obligations.