In prior posts (refer here
), I have discussed the jurisdictional issues and other questions arising when foreign domiciled companies are sued in securities lawsuits in U.S. courts. But the November 26, 2007 opinion (here
) in the Yukos
shareholders’ lawsuit raises some unique and uniquely interesting issues. And as discussed further below, other companies are wrestling with other issues arising from the extraterritorial application of U.S. law.
The Yukos Case:
The Yukos lawsuit was brought in the federal court for the District of Columbia by 43 holders of Yukos ADRs
against some rather unusual defendants. The defendants include, among others, the Russian Federation
, several Russian oil companies (including Gazprom
), and several prominent Russian governmental officials, including Viktor Khristenko
, the current Minister of Industry and Energy of the Russian Federation; Alexi Kudrin
, who is the Minister of Finance of the Russian Federation; and Dmitri Medvedev
, the First Deputy Minister of the Russian Federation. Russia’s President, Vladimir Putin
, is not a defendant, although he is alleged to have "made several misstatements and omissions of material fact directed at U.S. and global securities markets."
The plaintiffs allege that the defendants expropriated Yukos beginning in 2003. The plaintiffs allege that Yukos was competing more successfully that its Russian competitors, and (perhaps more to the point) had an active business strategy of selling oil directly to the U.S. The plaintiffs allege that in a matter of days in October and November 2003, the defendants, among other things, "allegedly levied illegal and confiscatory taxes on Yukos, forced a sham sale of Yukos’s most important assets, seized a majority of Yukos shares, intimidated and harassed Yukos executive team, and used bankruptcy proceedings to paralyze Yukos’s non-Russian management team." The court noted that the plaintiffs’ allegations "tell a troubling story if proven true."
The defendants for their part moved to dismiss the case on the grounds that "the case involves the conduct of the Russian government, senior Russian government officials, Russian companies, and Russian citizens."
Judge Colleen Kollar-Kotelly
, in ruling on the defendants’ motion to dismiss, opened her opinion by noting that "this Court is one of limited jurisdiction." Ultimately, she concluded that she "cannot reach the merits of Plaintiffs’ claims based on the doctrines of sovereign immunity and personal jurisdiction." The Foreign Sovereign Immunities Act
generally embodies the principle that "foreign states are immune from the jurisdiction of both federal and state courts." Judge Kollar-Kotelly found that the doctrine applied to the Yukos case and that none of the exceptions to the doctrine were applicable. She concluded that the doctrine required the dismissal of the Russian Federation, the Russian government instrumentalities, and the individual Russian government defendants. Even thought the remaining defendants were not protected by the FSIA, they were also dismissed because they lacked the "continuous and systematic" contacts with the forum that are necessary to support the exercise of the court’s personal jurisdiction
The separate shareholders' securities lawsuit brought by Yukos shareholders alleging the company's failure to disclose its tax liabilties was previously dismissed (refer here
). The shareholders that filed the prior securities lawsuit had a decidedly different take on the events that led to Yukos's demise; the securities lawsuit alleged:
Defendants' scheme began to unravel in October 2003 when the market learned that Russian authorities had arrested the Company's largest shareholder and CEO, defendant Mikhail Khodorkovsky, and had charged him with fraud, embezzlement and evading taxes on hundreds of millions of dollars that was owed to the government. At this time, the Russian authorities also announced that they would pursue criminal prosecutions against other senior Yukos officials. Ultimately, Yukos, which has been audited by the Tax Ministry of Russia for its fiscal year 2000 tax returns, will be required to pay approximately $3.3 billion for 2000 alone due to its understatement of its tax liability, including interest and penalties. The Tax Ministry intends to audit Yukos' books for 2001-2003 based upon the same charges. Yukos could ultimately be expected to pay upwards of $10 billion to the Tax Ministry for defendants' involvement in the illegal tax evasion scheme. As a result of the revelation of defendants' wrongdoing, investors have suffered massive damages as the price of Yukos' securities plummeted.
A scholarly study of the "Yukos affair" (written in both Polish and English) can be found here
Hat Tip to the Blog of the Legal Times
) for the link to the Judge Kollar-Kotelly's opinion. Special thanks to Adam Savett at the Securities Litigation Watch blog
for the dismissal opinion in the prior shareholder lawsuit against Yukos.
BAE and the FCPA:
While the defendants in the Yukos case were found not to be susceptible to the U.S. court’s jurisdiction, some other foreign companies are finding themselves facing uncomfortable pressure from U.S prosecutors over potential violations of U.S. law. Regular readers will recall that I have previously written (most recently here
) about enforcement developments under the Foreign Corrupt Practices Act
, and in a recent post (here
) I specifically discussed the circumstances involved in the anticorruption investigation of BAE Systems
. The BAE investigation is the subject of a lengthy and detailed November 25, 2007 New York Times
article entitled "Payload: Taking Aim at Corporate Bribery" (here
), that also discusses the implications of the current prosecutorial activity regarding FCPA enforcement.
Among other things, the article notes that the anticorruption investigations are a priority and that the BAE investigation is particularly high profile because "it offers a test of how aggressively anti-corruption initiatives will be pursued." The article quotes one source as saying that "the FCPA has now surpassed Sarbanes-Oxley for being at the nerve endings of corporate general counsel and executives." The article also reports that the U.S. Department of Justice's FCPA case load is "running at twice last year’s pace" and one DoJ official predicted that "the upward trend will continue in 2008."
The article also notes that "for companies that have not adapted to the new legal landscape, the consequences have become serious." The article specifically notes that several companies have paid very large fines.
But as I have noted elsewhere (here
) one of the consequences of the FCPA crackdown is the threat of follow-on civil litigation. For example, BAE Systems faces a shareholders’ derivative lawsuit raising allegations pertaining to the FCPA investigation (refer here
), as does Siemens
, which also faces its own FCPA investigation (refer here
). Other companies have faced civil lawsuits following on FCPA enforcement actions and investigations (refer here
As prosecutors step up their enforcement efforts, the threat of follow-on civil litigation will continue to grow.
A Final Note:
While Chiquita Brands
is a domestic company, its recent involvement with certain improper payments to a Colombian right-wing group designated by the U.S. government
as a terrorist organization has put the company in a very uncomfortable spotlight. (See my prior post about Chiquita here
has an interesting November 26, 2007 article entitled "Blood Money Paid By Chiquita Shows Company’s Hard Choices" (here
) discusses Chiquita’s struggles, dilemmas and its discussions with government officials.
Chiquita also faces lawsuits brought by alleged victims of the Colombian organization (refer here
), the United Self-Defense Forces of Colombia
. Portfolio magazine has an October 2007 article (here
) about the organization (which it refers to as a "death squad") and about Chiquita's involvement with the group. Hat tip to The Daily Caveat blog
) for the link to the Portfolio magazine article.