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Another FCPA Derivative Suit Is Tossed

For the third time, Baker Hughes has beaten back a derivative suit based on its 2007 settlement of Foreign Corrupt Practices Act violations. It paid $44 million to resolve enforcement actions by the Justice Department and Securities and Exchange Commission related to bribery in Kazakhstan. Since then, plaintiffs have tried to sue in state court once and federal court twice. The latest federal suit in Houston was bounced on procedural grounds. Here's part of a nice report from Andrew Longstreth at AmLaw's Litigation Daily:

You would think that the recent explosion of Justice Department investigations of corporate bribery--which often end with a company admitting to some damaging facts and paying the government a fine--would be good news for plaintiffs lawyers. But in an early test of how Foreign Corrupt Practices Act charges will play in a derivative suit, they've bombed. Last week Houston federal district court judge Vanessa Gilmore adopted a magistrate's recommendation to dismiss a derivative suit against current and former officers and directors of Baker Hughes, which settled allegations of FCPA violations back in 2007 for what was then a record $44 million. Baker Hughes was represented in the derivative suit by Baker Botts.

The suit had alleged that Baker Hughes directors and officers breached their fiduciary duty by failing to address potential FCPA problems. But the plaintiffs stumbled on a procedural hurdle: They didn't make a demand on the board to file the suit, arguing that it would have been futile. But Judge Gilmore confirmed Magistrate Judge Mary Milloy's finding that plaintiffs failed to show that the Baker board could not impartially evaluate their lawsuit.

In the earlier federal derivative case involving Baker Hughes, the Fifth Circuit made it a lot harder for pension funds and other trusts to achieve the necessary "complete diversity" needed for federal court jurisdiction. U.S. Magistrate Mary Milloy's April 14, 2008 Memorandum and Recommendation on Motion to Dismiss was adopted by Judge Gilmore. The case is called Sheet Metal Workers' National Pension Fund et al v. Chad Deaton et al. A copy of the magistrate's memo and recommendation can be downloaded here.

And last year, the Ninth Circuit in Glazer Capital Management v. Magistri put another obstacle in the path of plaintiffs. The court raised the "scienter" bar for FCPA-related claims against officers and directors under the federal securities laws. See our post More Hurdles For Private Litigants.

In Texas last month, plaintiffs lawyers filed a state derivative class action against some of the officers and directors of Halliburton and its one-time subsidiary, KBR. The suit alleges various misconduct -- including the Nigerian bribery that led to the companies' $579 million settlements of Foreign Corrupt Practices Act offenses earlier this year. We speculated that part of the reason the plaintiffs went to state instead of federal court was because of the Magistri holding (which isn't binding in the Fifth Circuit but could be influential). They may also have had the same diversity issues as the plaintiffs in the earlier Baker Hughes case.

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From Frederic Bourke's trial. A packed Manhattan courtroom. The call to order. Opening statements in the biggest FCPA trial ever. It's about the tape already. The tape given to prosecutors by Bourke. He's talking to fellow investor Dick Friedman and their lawyers. Bourke is worried promoter Viktor Kozeny's plan includes bribing Azeri officials. From the trial, Bloomberg's David Glovin writes:

The ?remarkable tape recording? will show Bourke knew of the bribes and still elected to invest $8 million, Justice Department lawyer Robertson Park told jurors.

?That tape is the best piece of evidence in the case of Mr. Bourke?s innocence,? defense attorney Saskia Jordan said in her opening. It will show Bourke took his concerns about Kozeny to his attorneys so that he wouldn?t break the law, she said.

Read Glovin's report of the opening day action on Bloomberg's newswire here.

Read all our posts about U.S. v. Kozeny and the prosecution of Frederic Bourke here.
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Full post as published by The FCPA Blog on June 02, 2009 (boomark / email).