FCPA Trend: Derivative Actions Based on Alleged FCPA Violations the Latest Example of Enforcement Through Private Lawsuits

On May 6, 2008, an ironworkers’ pension fund filed a shareholders’ derivative action in federal court on behalf of aluminum producer, Alcoa, Inc. (“Alcoa”), against certain current and former officers and directors.¹ The complaint stems from allegations that Alcoa paid millions of dollars in bribes to Bahraini government officials over a fifteen-year period, in violation of the Foreign Corrupt Practices Act (“FCPA”) and other applicable laws. The Alcoa derivative complaint is the latest example of a parallel civil suit arising out of allegations and investigations concerning FCPA violations. Although there is no private right of action under the FCPA,² private parties have found ways to incorporate bribery allegations into other theories of civil liability, including breach of fiduciary duty and fraud. For this reason, private litigation is becoming a “third front,” alongside DOJ prosecution and SEC enforcement, on which companies facing FCPA problems must defend themselves.

The Alcoa Suit

Accusations that Alcoa paid bribes first surfaced in February 2008, when Aluminum Bahrain, B.S.C., a state-controlled company (“Alba”), sued Alcoa, its long-time alumina supplier, under the RICO statute, alleging conspiracy involving overcharging, fraud, and bribery.³ The Department of Justice (“DOJ”) promptly intervened, and on March 27, 2008, the court stayed all discovery in the Alba v. Alcoa suit to allow the government time to conduct an investigation.

Although that investigation is ongoing, on May 6, 2008 the derivative plaintiffs filed a seventy-two page complaint against twenty-two current and former Alcoa officers, directors, employees, and agents. The derivative plaintiffs’ theory is that regardless of the outcome of the government probe, Alcoa will suffer “immense reputational harm” and “expend millions of dollars responding to the claims and/or investigating and disproving the charges.” Hence, they claim it is not too early to hold alleged individual wrongdoers to account for breach of fiduciary duty, abuse of control, corporate waste, unjust enrichment and gross mismanagement. The derivative complaint was filed in the Western District of Pennsylvania and has been treated as a related matter to Alba v. Alcoa, filed in the same district.

Because little information garnered from the DOJ investigation or Alcoa’s internal investigation has been made public, the complaint contains few factual particulars. It borrows heavily from the Alba v. Alcoa complaint describing the alleged bribery scheme. According to Alba and the derivative plaintiffs, between 1990 and 2005, an Alcoa agent named Victor Dahdaleh created numerous shell companies in Singapore, Switzerland, and the Island of Guernsey for the sole purpose of funneling improper kick-backs to senior Bahraini government officials. Bank records and invoices show that more than $2 billion in payments from Alba to Alcoa passed through the Dahdaleh entities, and an unknown portion of that amount allegedly went back to individual officials with power over Alba’s purchasing decisions.

The gravamen of the derivative plaintiffs’ complaint is that the named individual defendants allowed Alcoa to make these illegal payments, failed to adopt and implement adequate internal controls, and failed to monitor compliance with Alcoa’s anti-corruption policies. The plaintiffs cite representations made in Alcoa’s SEC filings and internal corporate documents as evidence of defendants’ misrepresentations about the Company’s business practices, internal controls, and compliance. They also point to the DOJ’s increased emphasis on FCPA enforcement and the associated costs to companies in order to support the claim for monetary damages.

On May 27, 2008 Chief District Judge Donetta Ambrose denied the derivative plaintiffs’ motion for a temporary restraining order and preliminary injunction and ordered defendants to file motions to dismiss by June 6, 2008. It is unclear whether discovery will be allowed to go forward, given the ongoing investigation and the stay in place in Alba v. Alcoa.

Key Issues

As noted above, the Alcoa derivative suit is not unique. In the last few years, the incidence of FCPA follow-on private securities suits—both derivative and class action—has increased markedly. When shareholders sued pharmacy company Syncor International in 2002 for allegedly engaging in a scheme to increase revenues by bribing physicians and government officials around the globe, such lawsuits were relatively uncommon.⁴ By 2007, however, many of the companies embroiled in high-profile government FCPA investigations were also facing civil securities suits. In the derivative actions, such as the suits filed against Siemens,⁵ Baker Hughes,⁶ and BAE⁷ in 2007, the claims tend to be for breach of fiduciary duty and misrepresentation. By contrast, class action claims, like those lodged against Willbros,⁸ Immucor,⁹ Nature’s Sunshine,¹⁰ and AWB Ltd.,¹¹ typically allege either securities fraud (violations of Section 10(b) and 20(a) of the Exchange Act) or violation of the Racketeer Influenced and Corrupt Organization Act (“RICO”).

Some of the shareholder suits have proceeded to motion practice while others have been settled early. A company’s litigation strategy will often turn, in part, on the status and/or disposition of any government investigation. Once agreement with either the DOJ or SEC is reached, complex estoppel and indemnification issues can arise in related civil proceedings. As Alba v. Alcoa illustrates, however, it is not always the case that the government probe prompts the civil suit; regulators also take note of civil suits in which one party raises allegations of bribery. In Bazzetta v. Daimler-Chrysler Corp.,¹² for instance, a former employee filed a wrongful termination suit against the auto manufacturer which included allegations that the company maintained secret bank accounts in South America and used the funds therein to pay bribes to foreign officials. Bazzetta’s suit precipitated internal, SEC, and DOJ investigations. Similarly, Grace & Digital Information Technology Co., Ltd. v. Fidelity National Financial, Inc., et al.¹³ was a breach of contract case between two private parties that spurred government investigation of Fidelity’s business practices in 2005.

This second set of cases, alongside the first, underscores the importance of remaining ever-vigilant against FCPA violations. Companies must continuously raise awareness about their anti-corruption programs and policies and subject their internal controls to rigorous testing. Employees must be trained and periodically refreshed on their ethical obligations, and agents must be thoroughly vetted and screened. As the FCPA enforcement trend continues, follow-on securities litigation will become even more common place. Thus, any compliance failure potentially creates exposure with three sets of enforcers: the DOJ, the SEC, and private shareholders.

¹ See Complaint, Hawaii Structural Ironworkers’ Pension Trust Fund, derivatively on behalf of Alcoa, Inc. v. Belda, et al., 08-cv-00614 (W.D. Pa. May 6, 2008).
² See Lamb v. Phillip Morris, 915 F.2d 1024 (6th Cir. 1990).
³ Alba’s suit sounds in RICO and common law fraud. See Complaint, Aluminum Bahrain B.S.C. v. Alcoa, Inc., No. 08-cv-299 (W.D. Pa. Feb. 27, 2008).
⁴ See In re Syncor International Corp. Securities Litigation, 327 F. Supp. 2d 1149, 1153 (C.D. Cal. 2004) rev’d in part by In re Syncor International Corp. Securities Litigation, No. 05-55748, 2007 WL 1729968 (9th Cir. 2007).
⁵ See Complaint, Ronald Johnson, derivatively on behalf of Siemens AG v. Klaus Kleinfeld, et al., No. 07-101618 (N.Y.S. Feb. 2, 2007).
⁶ See Complaint, Sheet Metal Workers’ National Pension Fund, et al., derivatively on behalf of nominal defendant Baker Hughes, Inc. v. Chad C. Deaton, et al., No. 4:07-cv-01517 (S.D. Tex. Oct. 15, 2007).
⁷ See Complaint, City of Harper Woods Employees’ Retirement Sys. v. Olver, et al., 1:07-cv-1646 (D.D.C. Sept. 19, 2007).
⁸ See Complaint, Legion Partners, LLP v. Willbros Group, Inc., et al., 4:05-cv-1778 (S.D. Tex. May 18, 2005).
⁹ See In re Immucor Incorporated Sec. Litig., 1:05-cv-2276, 2006 WL 30000133 (N.D. Ga. 2006).
¹⁰ See Complaint, Hyman v. Nature’s Sunshine Products, et al., 2:06-cv-267 (C.D. Utah Apr. 3, 2006).
¹¹ See Complaint, Boyd, et al. v. AWB Ltd., et al., 1:07-cv-3007 (S.D.N.Y. Apr. 16, 2007).
¹² See Complaint, Bazzetta v. DaimlerChrysler Corp., 2:04-cv-73806 (E.D. Mich. Sept. 28, 2004).
¹³ See Complaint, Grace & Digital Info. Tech. Co., Ltd. v. Fidelity Nat’l Financial, Inc., 3:06-cv-239 (C.D. Fla. Mar. 6, 2006). 

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jeremy Maltby, an O'Melveny partner licensed to practice law in California, New York and the District of Columbia, Richard Grime, an O'Melveny partner licensed to practice law in the District of Columbia, and Katherine Buchanan, an O'Melveny associate licensed to practice law in California contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.