As my readers know I am a huge Trekkie and The Original Series (TOS) is my Star Trek. Alison Taylor once told me that by letting my freak flag fly as a TOS-Trekkie (as opposed to a Star Wars fanatic) I was forever labeling myself as a full-on geek. I can only confess guilty as charged. Even though TOS is still my Trek, I am a fan of all the other classic Trek television shows and yes, I have seen all the episodes of all the series overs the 50+ years of Trekdom. Yet in that 50+ years the one thing I had never seen, was a reference to the rift in the space time continuum in a US District Court opinion relating to Foreign Corrupt Practices Act (FCPA) based shareholder action. That is until this week.
What is the space time continuum? Einstein’s theory of special relativity created a fundamental link between space and time. The universe can be viewed as having three space dimensions — up/down, left/right, forward/backward — and one-time dimension. This 4-dimensional space is referred to as the space-time continuum. A rift in the space time continuum is similar to a tear in fabric, thereby creating a disconnect in this timeline. This is certainly what we saw in the district court’s opinion in EMPLOYEES RETIREMENT SYSTEM OF THE CITY OF PROVIDENCE, et al., Individually and on Behalf of All Others Similarly Situated, v. Embraer, S.A., et al.
The always-great Kevin LaCroix, writing in his D&O Diary, brought such an event to my attention in his review of the district court’s dismissal of a shareholder against Embraer for its failures which allowed the company to engage in bribery and corruption. In what can only be termed as one of the great Star Trek references in district court opinion, the court cited to the defendants for the following, “On June 28, 2017, Defendants filed a motion to dismiss the Amended Complaint pursuant to Rule l 2(b)(6) of the Federal Rules of Civil Procedure arguing, among other things, that “Plaintiffs allegations suffer from a temporal disconnect: Plaintiff alleges that Embraer’s statements during the class period were false because Embraer violated the FCP A before the Class Period.”” A temporal disconnect is another way of saying a rift in the space time continuum.
From the legal perspective, the District Court found the plaintiffs claim that Embraer knew and did nothing about the bribery and corruption for which they were sanctioned by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) true. According to the DOJ Press Release on the matter, “Brazilian aircraft manufacturer Embraer S.A. (Embraer) entered into a resolution to resolve criminal charges and agreed to pay a penalty of more than $107 million in connection with schemes involving the bribery of government officials in the Dominican Republic, Saudi Arabia and Mozambique, and to pay millions more in falsely recorded payments in India via a sham agency agreement.”
Yet in the shareholder lawsuit, the plaintiffs were unable to connect the actions by the company from the time period 2004-2011 to the required time frame for the lawsuit (the ‘Class Period’), hence the rift in the space-time continuum of the actionable conduct falling within the applicable statute of limitation. Yet the rift was even deeper than the space-time continuum, as the plaintiffs tried use this rip in the fabric of the universe to claim that the fact that an Embraer executive who was aware of the bribery and corruption as far back as 2004 and was not disciplined in the remediation phase of the investigation, was somehow a violation of the company’s internal controls during the Class Period (2011-2016). The court noted, “Where plaintiffs allege that internal controls are deficient, courts have consistently required plaintiffs to “allege specific facts concerning the purportedly deficient internal controls, including how they were deficient, when and why.” (“The Complaint does not allege any facts explaining why or how [the company]’s internal controls were materially deficient at the time [the company] made any of the challenged statements.”).” [citations omitted] It was this absence of particularized allegations which doomed the plaintiffs’ claim.
Yet there even more rifts in the space time continuum from the compliance perspective, in the District Court opinion. The Court stated, “in the instant case, relies exclusively upon general assertions about Embraer’s internal controls – and tortuously (and unpersuasively) tries to relate them to the fact that some current Embraer employees knew about or participated in (publicly disclosed) pre-Class Period bribery at various points between 2004 to 2011. (“Statements by Defendants regarding the adequacy of internal controls failed to disclose that the Company’s internal controls were insufficient to insure that the Company did not violate the FCPA and other anti-bribery laws.”). These allegations fall short of satisfying the exacting (specificity) pleading requirements of Rule 9(b)” of the Federal Rules of Civil Procedure. [citations omitted]
Finally, is the following from the Court, “plaintiff does not allege facts regarding the structure of Embraer’s internal controls, or how they failed during the Class Period. The Plaintiff does not claim that Embraer “failed to evaluate its internal controls or disclose any weaknesses to its auditors,” and does not assert that Embraer’s “officers neglected to inform [the company’s auditor of any relevant fraud.” It goes without saying that it is no secret that the employees whom Plaintiff is referring to work at Embraer; and that the Company’s internal controls have nothing to do with uncovering or publicizing this fact.” [citations omitted]
Once again, a failure in the space time continuum by the plaintiffs’ counsel. All they had to do was allege facts would tie the bribery and corruption to the failure of internal controls. Yet somehow, even with Embraer agreeing to a Deferred Prosecution Agreement (DPA), the release of a Criminal Information and even SEC Complaint stating, “Embraer’s internal accounting controls were inadequate because they failed to prevent such payments or detect red flags which should have alerted its employees that these payments, in whole or in part, were bribes to foreign government officials. Moreover, the internal controls were circumvented to allow employees to authorize payments to third parties that were illegal in the host country, authorized with little or no supporting documents, or concealed through unrelated business transactions in an effort to avoid detection” the plaintiffs could simply not get past a 12(b)(6) Motion to Dismiss.
A rift in the space time continuum indeed.
The FCPA, a rift in the space time continuum and shareholder litigation: what could possibly go wrong?Click to tweet
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© Thomas R. Fox, 2018