Rites of Confession

When does a company have a duty to disclose hidden wrongdoing?  As many courts have noted, disclosure is not a “rite of confession” and a company does not have a general obligation to tell investors whether some (or all) of its gains are ill-gotten.  Because of an exception that tends to swallow the rule, however, corporate defendants are often disappointed when they attempt to invoke this principle to defeat securities fraud claims.

In In re VEON Ltd. Sec. Lit., 2017 WL 4162342 (S.D.N.Y. Sept. 19, 2017), the court considered whether VEON’s public filings were rendered false or misleading by its failure to disclose that it had violated the Foreign Corrupt Practices Act (“FCPA”) by making, or attempting to make, “millions of dollars in improper payments to Gulnara Karimova, the eldest daughter of the Uzbekistan’s President, in an effort to achieve favorable treatment in Uzbekistan.”  The defendants argued that there was no dispute over the accuracy of VEON’s financial statements (bribery notwithstanding), so the plaintiffs’ claims were “in reality, an improper attempt to enforce the FCPA, which has no private right of action.”

The court agreed that VEON had no general duty to disclose the FCPA violations and that the company’s actual financial reporting was accurate.  The court noted, however, that a “duty to disclose may arise when a company puts the topic of the cause of its financial success at issue.”  Of course, most companies make disclosures about the causes of their financial success.  The court found that VEON’s attribution of its growth in Uzbekistan to things like its “sales and marketing efforts,” without mentioning the bribes, was an actionable misstatement.  Moreover, VEON had made a specific disclosure about owners of telecommunications networks in Uzbekistan enjoying “equal protection guaranteed by law,” which the court held was rendered misleading by the fact that VEON had to pay bribes to operate in the country.  Finally, the court concluded that the facts admitted in VEON’s deferred prosecution agreement with the DOJ made it clear that the company’s statements about having adequate internal controls were false.

Holding: Motion to dismiss granted in part and denied in part.

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