Avon Settles Bribery Related Class Action

 

Avon Products Inc. (“Avon”) recently settled a class action lawsuit brought against the beauty products company and two former executives concerning Avon’s compliance with the US Foreign Corrupt Practices Act (“FCPA”).  Avon settled the lawsuit despite the fact that the US District Court for the Southern District of New York (“Court”) had granted a motion to dismiss the lawsuit.  In the action, certain of the company's shareholders had alleged that Avon and its former executives had issued materially false and misleading statements concerning Avon’s compliance with the FCPA by concealing that the company had given bribes to Chinese government officials by various means, including providing lavish gifts and paying travel expenses improperly.

 

In 2008, Avon publicly announced that it had received allegations of potential FCPA violations in connection with its business in China and that it had disclosed such information to the US Department of Justice (“DOJ”) and the US Securities and Exchange Commission (“SEC”).  That initial press release was the first in a series of public statements by Avon relating to the potential FCPA violations and after each announcement, Avon’s stock price fell.  The class action claimed that Avon had artificially inflated its stock price by intentionally misleading shareholders about the company’s compliance with the FCPA.  The shareholders alleged that the defendants knew that Chinese officials were being bribed years before the company publicly disclosed it in 2008.  The action also alleged that Avon embraced a corporate culture that was “actively hostile” to effective oversight and hid its dependence on corrupt activities to boost their sales revenue. 

 

In December of 2014, the DOJ and SEC levied fines of $135 million to Avon for violating the FCPA - $68 million was paid to settle the DOJ’s criminal investigation and $67 million was paid to settle the SEC’s civil investigation.  As part of the settlement, Avon was also required to retain an independent monitor to review its FCPA compliance program for a period of 18 months, followed by an additional 18 months of self-reporting on its ongoing compliance efforts

 

Shareholder litigation is a common occurrence following or during FCPA investigations of public companies – both securities class actions and shareholder derivative actions.  In a derivative action shareholders file suit against members of the board of directors or corporate officers on behalf of the corporation itself for a wrong the corporation has suffered. 

The Court dismissed the action on the grounds that the plaintiffs had failed to demonstrate that Avon made any false statements regarding the use of bribes.  The Court held that in order to survive the motion to dismiss, the shareholders were subject to “heightened pleading requirements” but had failed to plead facts that were sufficient to demonstrate that Avon’s officers had met the intent to deceive Avon’s shareholders or the intent to report misleading statements regarding Avon’s business successes in China before or after 2008 when the company reported that it had become aware of the allegations. 

 

Under the heightened pleading requirements for securities fraud complaints, shareholders must plead sufficient facts with enough particularity to constitute fraud and plead with particularity facts that demonstrate a strong inference that Avon and its officers and directors intended to deceive their shareholders or were severely reckless. 

 

The Court found that Avon’s statements in its ethics policies regarding its high standards for ethics did not constitute fraud.  It found that these general statements of the company’s commitments to high standards of business ethics were not materially misleading to shareholders finding that the statements were mere “puffery” or generalizations regarding Avon’s integrity upon which reasonable investors would not rely.

  

The Court held that bare assertions about executives of Avon having information adverse to the disclosed filings were not sufficient to demonstrate that they were actually aware of alleged bribes paid to Chinese officials.  The shareholders merely alleged that executives “should have been aware” of the bribes.  The Court held that such facts were too conclusory and lacked sufficient detail to demonstrate intent to mislead. 

 

After 2008, the mere fact that Avon received a whistle-blower report regarding potential violations did not demonstrate that the company and its directors knew the allegations to be true.  They were permitted to conduct an internal investigation before announcing that the company received a report of a potential FCPA violations.

 

The Court also held that the plaintiffs failed to allege particularized facts showing that the company misled investors with regard to its internal investigation or compliance procedures.

 

When Avon first learned about potential FCPA problems in China through an internal audit report, it consulted an outside law firm but did not carry out a thorough investigation.  Instead, it simply directed that internal control measures be instituted at its subsidiary.  However, no such measures were taken and there was no follow up on the compliance initiatives.  The full-blown internal investigation only took place a few years later after a new CEO received a whistle-blower letter.  By this time, much of the damage had been done. 

Settlement of the class action came at a time when Avon had moved to dismiss an amended complaint filed by the shareholders' lawyers

Regards,

Blair   

BC Court Enforces $4.5 Million SEC Disgorgement Judgment

In dismissing an appeal from a order enforcing a United States judgment, the British Columbia Court of Appeal held that it was the character of the foreign judgment that governed whether it was enforceable, not the way in which the parties responded to it. 

On August 18, 2011, the United States District Court for the Southern District of New York (“US Court”) rendered a judgment against William Peever and Phillip Curtis.  The judgment was for injunctive relief and the disgorgement of profits derived from illegal price manipulation of stock of American corporations.  The suit was advanced by the United States Securities and Exchange Commission (“SEC”).

 

Peever and Curtis consented to the injunction, admitted liability and did not contest the quantum of the judgment.  They were ordered by the US Court to pay the sum of $4,506,535.66 into court.

 

The SEC brought an action in British Columbia to ask the court of that province to recognize and enforce the judgment.  Peever and Curtis resisted the enforcement proceedings on the basis that the judgment was penal or public in nature, a recognized exception to the enforcement of foreign judgments in Canada.  Notwithstanding such argument, a BC trial judge held that the judgment of the US Court should be recognized and enforced.  Peever and Curtis appealed from that decision to the British Columbia Court of Appeal.

 

In dismissing the appeal ( United States (Securities and Exchange Commission) v. Peever 2014 BCCA 141 ) the Court of Appeal recited the facts and noted that the US Court’s judgment was final, obtained in a civil proceeding within the court’s jurisdiction and from which no appeal was taken. 

 

In respect of the appellants' arguments that the judgment was penal or public in nature, the Court disagreed, holding that the SEC’s mandate was to enforce securities laws.  On the evidence, a vital part of its mandate was to distribute disgorged funds to defrauded investors.  Peever and Curtis argued (and it was not disputed by the SEC) that the SEC is not bound by statute to distribute disgorged funds in accordance with its policy.  Should it not do so, any fund established would be retained by the United States federal government as general revenue, although that would be subject to court approval.  Peever and Curtis argued that in that event, a judgment for disgorgement would not constitute a civil remedy because the government had suffered no loss but would rather serve a penal purpose in imposing a fine for wrongdoing or a public purpose in deterring others from offending.

 

The trial judge considered that argument and held that, given the judgment was prima facie enforceable (a final judgment within the US Court’s jurisdiction), Peever and Curtis bore the onus of establishing that it was not to be enforced because to do so would “accomplish a foreign penal or public law purpose”.  The question became whether they had demonstrated that it was more likely than not that if the judgment was enforced in BC its enforcement would serve a penal or public law purpose in the United States.  The trial court held that based on the evidence, the SEC’s policy was to distribute the proceeds of judgment to injured investors and that given the judgment described a mechanism that the SEC could employ to achieve that distribution he found that Peever and Curtis had not shown that it was more likely than not that the SEC would simply keep the proceeds of judgment to itself.  Accordingly, he found that the defendants had not discharged their burden of proof of showing that enforcement of the judgment in BC would be to serve a foreign penal or public law purpose. 

 

On appeal, Peever and Curtis argued that the trial judge had erred in burdening them with the onus of establishing that argument. 

 

However, the BC Court of Appeal agreed with the trial judge.  It held that in its view, it was the subject or character of the judgment itself that governed, quite apart from the way in which the parties responded to it. 

On its terms, the judgment was clearly not penal or public in nature.  It provided for the disgorgement of profits with such profits being paid into court to be invested and held as a fund subject to further court order.  It contemplated the SEC obtaining court approval of a plan for distribution to the victims of the fraud.  The disgorging of profits facilitated restitution which was a civil remedy.  As a result, the Court of Appeal concluded that there was simply no basis on which it could be said that the character of the judgment was penal or public in nature. 

Regards,

Blair