Securities Snapshot January 03, 2017

$3.5 Billion Fine In Record FCPA Case

Summary

Attorneys in Goodwin’s Securities + Shareholder Litigation and White Collar Defense groups have extensive experience before federal and state courts, legislative bodies, and regulatory and enforcement agencies. We continually monitor notable developments in these venues to prepare the Securities Snapshot – a bi-weekly compilation of securities litigation news delivered to subscribers via email. This publication summarizes news from the civil and criminal securities law arenas in a succinct, easy-to-read format. Topics covered include litigation and enforcement matters, legislation, rulemaking, and interpretive guidance from regulatory agencies.

$3.5 Billion Fine In Record FCPA Case

In a record Foreign Corrupt Practices Act (“FCPA”) settlement, Odebrecht SA, Latin America’s biggest construction company, and its petrochemical unit affiliate, Braskem SA, pleaded guilty and agreed to pay more than $3.5 billion to resolve bribery allegations involving Brazil’s state-run oil company. Authorities in the United States, Brazil, and Switzerland were parties to the global settlement. Odebrecht agreed to pay a criminal penalty to the U.S. DOJ that is equivalent to 10% of its total criminal fine, while it will pay 80% to Brazil and 10% to Switzerland. Odebrecht agreed in its plea that the appropriate criminal fine is $4.5 billion, but it said it can only afford to pay $2.6 billion (the fine is subject to an inability-to-pay analysis to be completed by the DOJ and Brazilian authorities on or before March 31, 2017). For its part, Braskem agreed to pay the DOJ and SEC $159.8 million for conspiring to violate the FCPA and will pay a criminal penalty of $94.8 million to the DOJ and disgorge $65 million to the SEC. The DOJ stated that the conduct at issue “spanned many years, involved the highest levels of the companies, occurred in multiple countries, and involved sophisticated schemes to bribe high-level government officials.” According to the resolution documents, Odebrecht paid approximately $788 million in bribes to government officials and political parties in at least twelve countries to win business for Odebrecht and Braskem. The U.S. DOJ had jurisdiction over the case due to the use of U.S. bank accounts by Odebrecht and Braskem and due to the involvement of conspirators who acted in Miami. The SEC had jurisdiction over Braskem, it said, because the company has shares registered with the Commission. The SEC did not bring a case against Odebrecht.

District Court Grants Motion To Set Aside Dismissal Due To Subsequently Filed SEC Action

In March 2015, a Massachusetts District Court dismissed with prejudice for failure to adequately plead scienter under the PSLRA an amended complaint against AVEO Pharmaceuticals, Inc. and three of its officers. The amended complaint alleged that defendants had violated the 1934 Exchange Act by failing to disclose an FDA recommendation that AVEO undertake an additional study to evaluate the adverse health effects of AVEO’s cancer drug, tivozanib. Notwithstanding the dismissal, in March 2016, the SEC filed a complaint against AVEO and the same three officers alleging violations of the 1933 and 1934 Acts based upon allegations substantially similar to those alleged by the class action plaintiffs. On January 3, 2017, the Court in the class action granted plaintiffs’ motion to set aside the dismissal in light of new evidence presented in the SEC’s complaint. While recognizing that such relief should “not be freely given” due to the “strong interest in the finality of judgments,” it held that plaintiffs had adequately established that the SEC complaint was discovered after judgment was entered, and that such evidence could not have been discovered earlier given that plaintiffs were unaware of the SEC’s investigation. After reviewing the new evidence, the Court concluded that it was not merely cumulative of other evidence alleged in prior deficient complaints. Rather, the newly discovered evidence “strikes at the heart of what the Court previously found lacking in the complaint—a strong inference of scienter—as it concerns the divergence of internal reports and external statements, one of the indicia of scienter that the Court found lacking in Plaintiffs’ previous pleadings.”

Delaware Supreme Court Refuses To Second-Guess Conflicted Transaction Under Implied Covenant Of Good Faith And Fair Dealing

The Delaware Supreme Court, in Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., upheld the Chancery Court’s dismissal of a complaint filed by a limited partner of TC Pipelines LP that challenged a $466 million conflicted transaction between the limited partnership and the owner of its general partner, TC Pipelines GP, Inc. The transaction had been approved according to the procedure set forth in the limited partnership agreement, which waived fiduciary duties and which further provided that conflicted transactions will be “conclusively deemed fair and reasonable” to the limited partnership if the general partner obtains approval from a Conflicts Committee made up of directors who were neither security holders nor employees of the general partner or its affiliates. Plaintiff had pleaded facts which it argued showed that the transaction “was economically unfair to the partnership” and that the Conflicts Committee had thus violated the implied covenant of good faith and fair dealing. Affirming the Chancery Court's refusal to inquire into the fairness of the transaction, the Supreme Court held that “the appellant cannot escape the conclusive effect given to Conflicts Committee approval solely by attacking the fairness of the underlying transaction. . . . The implied covenant is narrowly applied, and if a plaintiff is to invoke it, the plaintiff must plead some specific facts suggesting that the Conflicts Committee process was tainted in some specific way by unanticipated behavior, such as the example of bribery the Vice Chancellor pointed to, or other factors bearing on whether the Conflicts Committee process fulfilled its evident contractual purpose.” Because the plaintiff had failed to plead any such specific facts, the Supreme Court affirmed the Chancery Court’s dismissal of the complaint with prejudice.

Circuit Court Holds That Company's Failure To Disclose "Pay-To-Say" Promotions Does Not Violate Securities Laws

The Eleventh Circuit, in In re Galectin Therapeutics, Inc. Securities Litigation, affirmed dismissal of a securities class action alleging that Galectin Therapeutics, Inc. violated the federal securities laws by failing to disclose that it had paid for promotional articles recommending investment in the company. The Galectin decision confirms that, at least in the Eleventh Circuit, there is no duty to disclose payments to outside firms who publish promotional material about a company (there is, however, an obligation for promotors to disclose that they are being paid). Although a few lower courts had previously concluded that disclosure was required, the Eleventh Circuit’s decision is the first published circuit court opinion to address whether a public company has a duty to disclose the use of third-party promotional firms to recommend investment in a publicly traded company. The Eleventh Circuit additionally ruled that Galectin was not liable for any statements contained within the promotional articles themselves and held that “[p]ayment for the promotional articles does not mean that Galectin is the maker of the statements in the articles. . . . Galectin is not liable for any statements or omissions in the stock promoters’ articles.”

Bylaw Shifting Fees To Shareholder Who Sues Company In Improper Forum Violates Delaware General Corporation Law

The Delaware Chancery Court, in Solak v. Sarowitz, et al., denied a motion to dismiss a complaint challenging a Paylocity Holding Corporation’s fee-shifting bylaw that shifts attorneys’ fees and other expenses to a stockholder who files an internal corporate claim outside of Delaware without the company’s consent. Section 109(b) of the Delaware General Corporation Law was amended in 2015 to provide that the bylaws of a Delaware corporation “may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim.” Unlike other challenged fee-shifting bylaws, Paylocity’s bylaw at issue only applies when a shareholder brings a claim in violation of another Paylocity bylaw—authorized by Section 115 of the DGCL—that required all claims to be brought in Delaware. The Court found that “the plain text of [Paylocity’s] Fee-Shifting Bylaw violates Section 109(b) because the statute unambiguously prohibits the inclusion of ‘any provision’ in a corporation’s bylaws that would shift to a stockholder the attorneys’ fees or expenses incurred by the corporation ‘in connection with an internal corporate claim,’ irrespective of where such a claim is filed.” According to the Court, “nothing in the plain text of [the DGCL] indicates that the legislature intended to create an exception to the prohibition on fee-shifting bylaws . . . in Section 109(b) for actions filed in violation of a forum selection provision compliant with Section 115.” As such, the Chancery Court held that Paylocity’s fee-shifting bylaw cannot operate lawfully under any circumstances, and that the fee-shifting bylaw was facially invalid.

Circuit Courts Split Over Legitimacy Of SEC's Use Of Administrative Law Judges In Enforcement Proceedings

In a recent ruling squarely at odds with the D.C. Circuit's holding earlier this year in Raymond J. Lucia Cos. v. SEC, the Tenth Circuit, in Bandimere v. SEC, vacated the SEC's imposition of civil penalties against a Colorado businessman on the ground that SEC administrative law judges, or ALJs, have not been properly appointed under the Appointments Clause of Article II of the Constitution. The SEC is authorized to pursue alleged violators of securities laws either in federal district court or in civil administrative proceedings before ALJs, who receive career appointments and may only be removed for cause, and every year the SEC brings hundreds of cases before ALJs. Relying on the Supreme Court's 1991 decision in Freytag v. Commissioner of Internal Revenue, which involved “special trial judges” appointed by the IRS, the Tenth Circuit held that the SEC ALJs are “inferior Officers” under the Constitution (and thus require special appointment) because their positions were “established by Law,” their duties, salaries and means of appointment are specified by statute and they “exercise significant discretion” in “carrying out . . . important functions.” In its ruling, the Tenth Circuit disagreed with the D.C. Circuit, which had held in Raymond J. Lucia that ALJs were employees that did not require special appointment under the Constitution because their decisions did not become final without some act by the Commission—a factor the Tenth Circuit did not consider dispositive. The Tenth Circuit's opinion, which came with a dissent that warned that the ruling could “effectively render . . . invalid thousands of administrative actions,” provides ammunition for future challenges to penalties issued by ALJs and, given the D.C. Circuit's ruling, signals that the Supreme Court may need to weigh in either in Bandimere itself or in a future case.