8 November 2017

Federal District Court Opens Door For Plaintiffs To Bring Securities Claims Arising From FCPA Violations

Shearman & Sterling LLP


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While there is no private right of action under the Foreign Corrupt Practices Act ("FCPA"), the plaintiffs' bar may have a new tool to punish companies for related conduct.
United States Corporate/Commercial Law
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While there is no private right of action under the Foreign Corrupt Practices Act ("FCPA"), the plaintiffs' bar may have a new tool to punish companies for related conduct. On 19 September 2017, a federal district court in New York allowed a putative securities fraud class action to proceed against VEON Ltd. ("VEON") and several of its current and former executives for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"). In In re VEON Ltd. Securities Litigation, the plaintiffs had alleged that VEON failed to disclose in its SEC filings that it had engaged in a bribery scheme in Uzbekistan and that, as a result, its statements about the company's growth were materially misleading. VEON countered that the plaintiffs' claims were an impermissible attempt to enforce the FCPA through a private right of action. But ultimately the court held that the plaintiffs' allegations were sufficiently distinct to plead violations of Sections 10(b) and 20(a) of the Exchange Act.

By way of background, in February 2016, VEON, a telecommunications company formerly known as VimpelCom, entered into a deferred prosecution agreement ("DPA") with the United States Department of Justice and pleaded guilty to conspiracy to violate the anti-bribery and books and records provisions of the FCPA and a violation of the internal controls provision of the FCPA. In the complaint in the civil litigation, the plaintiffs had relied on VEON's admissions in the DPA.

In largely denying VEON's motion to dismiss, the court held that VEON's alleged failure to disclose its bribery scheme, when it said that its sales and marketing efforts in Uzbekistan resulted in increased subscribers and revenues, made those and similar statements an adequate basis to bring a claim. Regarding alleged misstatements concerning the Governmental authorities in Uzbekistan, the court held that general disclosures about the relevant oversight bodies were true and therefore not a sufficient basis to assert a claim. But it held that, in light of the company's bribes, its statement that "all owners of telecommunication networks have equal rights and enjoy equal protection guaranteed by the law" was materially misleading and therefore could form the basis of a claim. In addition, the court held that certain of VEON's statements about its internal controls could serve as the basis for a claim because plaintiffs alleged that those statements regarding the "existence and efficacy" of those controls were knowingly false. Notably, however, the court found that, to the extent the plaintiffs' claim was based on the failure to follow internal controls, without more, that aspect of the claim was dismissed because it constituted "mismanagement," which cannot support a claim for securities fraud. The court separately held that the plaintiffs had sufficiently alleged fraudulent intent on the part of the VEON executives. Their intent could therefore be attributed to the company.

This case highlights that, while alleged FCPA violations alone cannot give rise to a private right of action, plaintiffs may be able to sustain securities claims based on alleged criminal wrongdoing if they can sufficiently plead that the failure to disclose such conduct made the company's other disclosures materially misleading.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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