SciClone Settles FCPA Follow-on Derivative
Suit : In a settlement that involves a company with
significant Chinese operations -- and that also may represent something of a
template for the settlement of FCPA enforcement follow-on civil lawsuits --
SciClone Pharmaceuticals and the individual defendant directors and officers
have agreed to settle the consolidated derivative lawsuits that were filed
following the company's announcement that it was the target of SEC and DoJ
investigations for possible FCPA violations.
According to the company's October 12, 2011 press release
the parties have agreed, subject to court approval, to settle the consolidated
cases based on the company's agreement to adopt certain specified corporate
governance reforms and the company's agreement to pay $2.5 million in
plaintiffs' attorneys' fees. The press release states that the payment of the
plaintiffs' attorneys' fees is "to be paid by SciClone's insurers under its
director and officer insurance policy." A copy of the parties' stipulation of
settlement can be found here.
The FCPA does not provide for a private right of action.
However, as I
have previously noted on this site, the advent of an FCPA investigation
often triggers a follow-on civil lawsuit. In this case, multiple lawsuits were
filed against the company, as nominal defendant, and certain of the company's
directors and officers, shortly after the company announced the existence of
the investigation. The lawsuits, which were filed in San Mateo County (Calif.)
Superior Court in September 2010, and which were later consolidated, alleged
that "the Individual Defendants, by reason of their failure to implement and
maintain internal controls and systems at the Company to assure compliance with
the FCPA, breached their fiduciary duties and may be held liable for damages."
As a result of mediation, the parties reached the
settlement that the company announced in its press release. Among other
thing, the settlement requires the company to adopt certain measures for three
years, including the implementation of sanctions for employees violating the
FCPA; the establishment of a compliance coordinator; the adoption of a
compliance program and code; and the adoption of certain internal controls and
compliance functions. The governance measures are described in detail in the
parties' settlement stipulation.
There are a number of interesting things to me about this
settlement. The first is that it involves a company that, according to its own
website, is a "China-centric" pharmaceutical company. Though the company has
its headquarters in the U.S. its "strategy,"
as described on the company's website is to grow its sales in
China. The existence of the FCPA investigation underscores the
challenges facing companies attempting to do business in China. Given the
company's business model, the compliance measures adopted in the settlement
arguably are a good idea in any event, without regard to the fact that the
company willingness to adopt the measures managed to resolve this consolidated
The D&O insurer's payment of the plaintiffs' attorneys'
fees shows how these kinds of lawsuits can contribute to insurers' loss costs.
Obviously, the D&O insurers also incurred the defense expenses as well,
meaning that the total loss costs for this suit potentially represents a
substantial figure. Moreover, depending on the nature and status of the
government FCPA investigation, there could be additional covered loss costs as
well. The company and certain of its directors and officers were also named as
defendants in a related securities class action lawsuit (about which refer here), but that
action was voluntarily dismissed without prejudice.
As antibribery enforcement activity is stepped up in this
country and elsewhere, it seems likely that these types of lawsuits may become
even more common. The likelihood is that this type of litigation could make a
significant contribution toward insurers' aggregate loss costs in the coming
years. On the other hand, from an underwriting standpoint, it seems that
companies that have already voluntarily adopted the kinds of compliance
procedures that were the subject of this settlement should be view in a more
favorable light, particularly with regard to those companies that might
otherwise be viewed with caution owing to the countries in which they are doing
Dismissal Motion Denied in U.S.-Listed
Chinese Company's Securities Suit: In the second dismissal
motion denial entered as part of the current wave of securities suits filed
against U.S.-listed Chinese companies, on October 11, 2011, Central District of
California Judge Christina Snyder denied the defendants' motion to dismiss in
the securities suit filed against China Education Alliance, Inc. (CEU) and
certain of its directors and officers. A copy of Judge Snyder's opinion
can be found here.
As discussed here, the plaintiffs
first filed their action in December 2010. Among other things, the plaintiffs
allege that the company overstated its revenue and profits by "exponential
proportions." The plaintiffs, in reliance on the report of an online
securities analyst, alleged that the company maintained two sets of books, and
that the revenue reported in the company's Chinese regulatory filings was only
a fraction of the revenue the company reported in its SEC filings. The
complaint also alleges that the company's educational website was not
functional, and its education building allegedly is an empty building without
The defendants moved to dismiss, arguing in part that the
plaintiffs allegations, made in reliance on the online analyst report, merely
repeated the unsubstantiated assertions of a professed short seller that was
financially motivated to drive down the company's share price. In rejecting the
defendants' argument in this regard, Judge Snyder relied on the earlier
dismissal motion denial in the case involving another U.S.-listed Chinese
company, Orient Paper (about which refer here).
Judge Snyder found it was not appropriate to reject the allegations on that
basis at this early stage.
Judge Snyder also found tat the plaintiffs had adequately
alleged scienter, despite the absence of insider trading or other financially
motivated conduct. Judge Snyder found that "additional facts" the plaintiff
alleged "give rise to a strong inference of scienter." Those alleged additional
facts include the following:
That CEU has filed significantly disparate revenue
figures in China and the United States: that plaintiffs' own investigators
toured CEU's on-site "state of the art" facility in China only to find it an
empty building; that witnesses told plaintiffs' investigators that CEU was not
the owner of the building; that CEU has had rapid turnover of its CFOs during
the class period; and that many of the links on CEU's website did not work
properly despite its online segment purportedly deriving millions of dollars
Judge Snyder said that "although each fact taken along
might not give rise to an inference of fraudulent intent," the allegations
"taken together" establish that plaintiffs' theory is at least as compelling as
any opposing inference one could draw.
Judge Snyder's dismissal motion denial suggests that in
some cases at least the U.S.-listed Chinese companies draw into the wave of
recent securities lawsuits may face difficulties evading these lawsuits, at
least at the initial stages. Many of the cases, like this one, are based on the
reports of financially motivated online analysts. Judge Snyder's unwillingness
to disregard the allegations based on the analyst's report, notwithstanding the
analysts admitted financial interest in driving down the value of the company's
stock, may represent a problem for the other companies tangled up in these
cases as a result of negative reports by online analysts.
Moreover, Judge Snyder's conclusion that the plaintiffs'
scienter allegations were sufficient, inter alia, on the discrepancies between
the Chinese regulatory filings and SEC filings, may also suggest that a
number of these cases could survive the initial pleading stages, as many of
them are based on similar discrepancies between Chinese regulatory filings and
To be sure, some cases will nevertheless be dismissed, as was the case with the
China North East Petroleum case, in which the dismissal motion was
recently granted on loss causation grounds (about which refer here). But
if Judge Snyder's holding in the China Education Alliance case is any
indication, other cases also will likely survive the initial dismissal motions.
Of course, it remains to be seen how valuable these cases
ultimately prove to be for plaintiffs, even if they make it past the initial
pleading hurdle. But the name of the game is making it past the dismissal
motions, and at least in the China Education Alliance case, the plaintiffs have
made it at least that far.
Special thanks to a loyal reader for providing me with a
copy of Judge Snyder's opinion.
Fed Officials Pursue Actions Against Failed
Bank Officials: In a significant development in the current
wave of bank failures, that involves a failed bank that had significant ties to
and operations in China, on October 11, 2011, federal officials concurrently
filed a regulatory enforcement action and a criminal prosecution against
certain former officers of the failed United Commercial Bank.
San Francisco based United Commercial Bank failed on
November 9, 2009 (about which refer here). The bank
had offices throughout the United States, as well as China and Taiwan. The bank
grew rapidly. According to the SEC, it was the first U.S. bank to acquire a
bank in the People's Republic of China. However, during the economic crisis in
late 2008 and early 2009, the bank experience significant difficulties in its
loan portfolio, which regulators allege led to the bank's failure, which in
turn triggered the recently filed actions involving the bank's former officers.
First, in an October 11, 2011 complaint (here), the
SEC filed a civil enforcement action against four former officers of the bank.
According to the SEC's October 11, 2011
litigation release, the complaint alleges that the defendants "concealed
losses on loans and other assets from the bank's auditors, causing the bank's
holding company UCBH Holdings, Inc. (UCBH) to understate its 2008 operating
losses by at least $65 million." The complaint alleges that the further loan
losses ultimately caused the bank to fail. The SEC action seeks permanent
injunctive relief, an officer bar, and civil money penalties.
In addition, as reflected in the FBI's October 11, 2011
press release (here),
a grand jury has indicted two of these same former bank
officials, for conspiracy to commit securities fraud, securities fraud,
falsifying corporate books and records and lying to auditors.
Both the SEC's litigation release and the FBI's press
release specifically reference the assistance they received in preparing their
actions from the FDIC. The FDIC's role in these actions is a reminder that as
part of its failed bank post mortem, the FDIC is not only attempting to
determine whether or not it has a valuable civil suit on its own as receiver,
but is also looking to see whether or not wrongdoing has occurred that warrants
referral to other authorities.
Both the SEC action and the indictment refer to
securities fraud, which serves as a reminder that, by contrast to the
institutions caught up in the S&L crisis a few years ago, many of these
failed financial institutions in the current bank failure wave are
publicly traded, a circumstance that has many ramifications.
It remains to be seen whether or not the FDIC will also
file its own separate civil action against the former directors and officers of
this bank. The bank's former investors have in any event already filed their
own class action lawsuit. As discussed here,
the defendants' initial motion to dismiss the class action lawsuit was granted,
albeit with leave to amend.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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