Much has been written in recent years about the scope and costs of regulatory investigations and the powers of regulators. A company implicated in, for example, a corruption issue can expect to spend huge sums on investigations, fines, implementing corrective measures and improving its compliance structures and culture.
In high-profile cases, however, this may just be the beginning of a much longer (and more expensive) story. The inevitable fall in share price caused by even a report of improper behaviour, wherever that is in the world, let alone a finding of wrongdoing, creates a whole class of potential claimants: out of pocket shareholders and holders of other instruments.
Added to this, advances in technology have increased the potential for ever more involved/complex wrongdoing spanning internal money laundering, corrupt sales practices, cartel conduct, securities frauds, Ponzi schemes, bribery, cybercrime; and, each of these will throw up different issues to consider and different potential claims and groups of claimants. In addition the increased sophistication of the tools used by regulators to analyse financial dealings has greatly increased their investigative potential.
In this article, we identify three scenarios in which private claimants may seek to establish claims or rights based on reports of corruption, bribery or other findings of corporate wrongdoing by regulators: (1) individual claims; (2) class actions; and (3) a right to inspect documents that would otherwise be subject to without prejudice privilege. These are not consumer class actions where the claimants are the direct victim of the wrongdoing but claims where the cause of action is a step removed so that the damage to the claimants is a result of the damage to the company itself.
An obvious option for a shareholder or shareholders is to bring a derivative action – to claim in the shoes of the company against the board of directors for loss caused to the company. In the case of bribery, to rely on a breach of the directors’ fiduciary duties to the company by reason of the payment or acceptance of bribes, or the failure properly to investigate suspicions or to have in place adequate controls.
In most jurisdictions, shareholders must obtain permission from the court to bring derivative claims (including England and Australia) which has consequentially led to a more limited number of derivative actions. Under English law, shareholders must establish a prima facie case and that they have sufficient standing or interest in the affairs of the company. Under Australian law, to be allowed to bring a derivative action, shareholders must, amongst other things, satisfy the court that there is a serious question to be tried, that they are acting in good faith and that it is in the best interests of the company that the shareholders be granted leave to proceed. Bribery and corruption or a clear breach of the law would seem to be the quintessential cases where permission is given for the obvious reason that a shareholder should be able to hold accountable, on behalf of the company, the individuals responsible, whether directly or through negligence or a wilful blind eye, for such serious misconduct.
The derivative claim route has been one of the many approaches adopted by US claimants against Wal-Mart following its disclosure in late 2011 that it was investigating improper activity in its Mexican operations. Claimants alleged, in a derivative claim, that the board had concealed the issue from investors, in that they knew about the bribery and in fact took steps to prevent an earlier investigation. While the particular case in question was summarily dismissed in March by the Arkansas federal court (for lack of particularisation and failure to follow the necessary pre-action procedure), the underlying cause of action is one that is available to shareholders across many jurisdictions. Reliance on a failure to have anti-bribery controls and oversight in place echoes the requirement in the UK Bribery Act 2010 for commercial organisations to have “adequate procedures” designed to prevent persons associated with it from engaging in bribery offences. Although derivative claims that directors failed to act in shareholders’ best interests by concealing corrupt conduct are foreseeable in Australia, the courts there are yet to consider such a claim.
Much publicity is attracted by securities fraud claims (a typical class action in the United States). In these, the allegation is that a company did not disclose material information (or published misleading information). In a case relying on a factual background of corruption issues, this information would relate to the company’s anti-corruption compliance.
The sums involved can be significant. Cosmetics company Avon has been the subject of criminal charges and civil investigations in the US by the Department of Justice and Securities and Exchange Commission, following allegations that employees of Avon’s Chinese operations paid approximately US$8 million in bribes to Chinese officials. Avon then faced a securities fraud class action by shareholders seeking compensation for having purchased shares at inflated values, the allegation being that Avon knew about the improper conduct from 2005 but did not report its suspicions until 2008. In addition to a US$135 million settlement with the regulatory authorities, in August 2015 Avon settled the shareholder claim for $62 million (although insurers met the majority of this sum, with Avon paying only $2 million itself).
While the impression can often be that securities class actions are in reality a purely US risk, a number of other countries including Australia, Canada and the Netherlands have regimes that permit similar collective action. With the increased sophistication of wrongdoing and presence of litigation funders in these markets, and the heightened focus on regulation, the awareness and funding is already there and some class actions are already on foot.
Furthermore, while securities class actions in the US courts can only be brought on behalf of those who purchased the securities within the US, recent years have seen such suits being brought against non-US companies, in relation to activities outside the US and investigations by non-US regulators and prosecutors.
The most high-profile example is the class action being brought against Brazilian petrochemicals firm Petrobras by holders of NYSE-listed American Depositary Receipts (ADRs) in light of the widely publicised corruption and money laundering investigation into the company and its officers by Brazilian officials. The securities class action lawsuit filed in the Southern District of New York in late 2014 alleges that the company made materially “false and misleading statements” by “failing to disclose a multi-year, multi-billion dollar money-laundering and bribery scheme”. The claimants seek redress for the 46% decline in price of the company’s ADRs, such fall allegedly occurring as a result of the negative publicity and the consequent questions raised about its financial statements.
A further class action was also filed on 1 July 2015 on behalf of investors in the ADRs of Braskem SA, another Brazilian petrochemical company reported to be implicated in the Petrobras corruption scandal, with allegations that Braskem paid bribes to Petrobras in return for acquiring contracts for raw materials at reduced prices. On these revelations, the ADRs fell significantly.
The Chinese government crackdown on corruption has already had an impact in the US courts – see the example of Avon, mentioned above. In addition, US class action lawsuits were filed against Nu Skin Enterprises (an American developer and marketer of skin care and nutrition products) in early 2014 following a reported investigation by the Chinese authorities into the company’s sales practices in China. Very similar facts - reports of an anti-bribery investigation in China - also resulted in China Mobile Games and Entertainment Group facing a securities class action lawsuit in June 2014. What, however, about litigation in the Chinese courts themselves?
The framework already exists in China for “joint litigation”, which is akin to a type of class action, although claims tend to involve fewer claimants than the headline US cases. We are not aware of any large-scale joint litigations to date that centre on allegations or findings of bribery. Further, while we anticipate an increase in large scale joint litigations in China, these will predominantly be driven, at least in the short term, by other factors, including improved corporate transparency and reporting and the development of a “class action” bar. Claims involving allegations of bribery tend to be brought by the government under the Anti-Unfair Competition Law, rather than in private claims. That said, because grounds for joint litigation include securities law the allegations of misleading financial statements seen in the US cases could also be made in this context.
Relying on the “all clear”
The UK financial regulator, the FSA, has been investigating the manipulation of the London Interbank Offer Rate(“LIBOR”) since 2011. Outside of the regulatory sphere, RBS faces a claim by a private party, Property Alliance Group Limited (“PAG”), a property developer, alleging misrepresentations were made by RBS which induced PAG to enter into four interest rates swaps, each of which employed 3 month GBP LIBOR as a reference rate. PAG alleges that by proposing GBP LIBOR as a reference rate, RBS made the representation that it was rigging the rate.
In its defence, RBS sought to rely on the fact that there were no regulatory findings of misconduct in connection with GBP LIBOR. PAG sought disclosure of RBS’s communications with the FSA that lead to the FCA’s finding.
In a judgment of 8 June 2015, the English Court agreed that the communications were part of genuine settlement discussions and were, in essence, capable of being “without prejudice”. However, by relying on the finding, RBS had put the basis on which the Final Notice was reached in issue in the civil litigation and had thereby waived its claim to withhold the correspondence that lead to the FSA's conclusion.
So, even where a positive finding had been reached by the regulator, no reliance could be placed on it by the exonerated party to defend a suit on related facts despite it being the most obvious defence without reopening the issue and revealing all the background correspondence.
The case is subject to appeal (appeal outstanding) but the Judge’s reasoning could be applied to decisions reached by other regulators as part of settlement discussions.
While the UK's Serious Fraud Office has been at pains to emphasise that it is first and foremost a prosecutorial body, and that self-reporting carries no guarantee of avoiding criminal prosecution, there will inevitably be cases where settlement is appropriate. For example, in the recent case involving Oxford University Press (“OUP”) and the tendering processes of two of its subsidiaries operating in East Africa, OUP self-reported to the SFO. Following settlement discussions, the SFO sought a civil recovery order against OUP as an alternative to a criminal prosecution. A similar issue to that faced by RBS in the dispute with PAG could arise if the SFO’s eventual finding in a matter, after settlement discussions, exonerated a company in full or in part from the original allegations that arose again in subsequent private litigation.
The US DOJ and SEC regularly enter into settlements with those investigated. By way of example, in April 2015, Goodyear Tire & Rubber Co. and Mead Johnson Nutrition agreed to settle allegations of bribery and violations under the Foreign Corrupt Practices Act 1977 (“FCPA”) by their foreign subsidiaries by paying the SEC US$ 16 million and US$ 12 million respectively. In 2014 and 2015 alone, thirteen entities accused of violations under the FCPA have settled the charges with the SEC.
Unlike in the US and UK, Australian law does not provide for settlements or deferred prosecution agreements between prosecutors and accused parties. Criminal prosecution is the only means of addressing corruption and there is no legislative encouragement to self-report. The Australian Senate is currently conducting an inquiry into Australian’s foreign bribery laws. One area of interest is whether a scheme of deferred or non-prosecution agreements would suit the Australian context. The outcome of the Senate’s inquiry remains to be seen but initial indications from Australia’s corporate sector are that more flexible arrangements in the manner of the UK and US schemes would be effective.
Generally speaking, if wrongdoing is identified companies must tread a fine balance between cooperating with the regulator, maintaining privilege in their discussions and yet also providing sufficient disclosure to the market to avoid lawsuits on the basis of failure to disclose relevant information. They must also have an eye to what information could be used against the company in any future law suit.
Companies are today facing an unprecedented compliance burden as technological developments can not only facilitate wrongdoing on a global scale from different corners of the business, but also assist regulators in their investigations. Managing these risks and the potential for follow-on claims represents a key challenge for business in the coming years.