Alcoa’s Derivative Settlement Another Consequence of FCPA Misdeeds
That is the reminder from Alcoa Inc.’s recent agreement to pay $3.75 million in attorneys’ fees and make significant corporate governance and compliance reforms in a FCPA-based shareholder derivative settlement. The shareholder settlement was on top of a combined $384 million settlement with the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) of criminal and civil penalties and disgorgement stemming from its majority-owned subsidiary pleading guilty to bribery in January 2014. Making matters worse, Alcoa settled in 2012 for $85 million claims of fraud and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) made in a lawsuit by the Bahraini company whose officials had allegedly been receiving the bribes. Needless to say, Alcoa’s stock price has taken a hit.
According to the plea agreement, the subsidiary’s scheme spanned several years and involved tens of millions of dollars in bribes to secure contracts with Aluminium Bahrain B.S.C. (Alba), an aluminum smelter controlled by the government of Bahrain. In one case, an Alcoa subsidiary secured a long-term supply contract with Alba by agreeing to sell more than 1.5 million metric tons of aluminum through offshore shell companies owned by a third-party consultant. The consultant paid millions of dollars in bribes to Bahraini officials, using commissions from Alcoa and proceeds from its marked-up sales of aluminum to Alba.
In February 2008, Alba sued Alcoa for alleged fraud and RICO violations. The DOJ opened a FCPA investigation soon after. In March 2008, an Alcoa shareholder named Catherine Rubery then demanded that Alcoa conduct an internal investigation and initiate legal proceedings against the employees, officers, or directors who were responsible for the misconduct. But Alcoa allegedly refused to initiate legal proceedings. In June 2012, Rubery filed a shareholder derivative complaint alleging breaches of fiduciary duty and corporate waste. The complaint noted that “if Alba’s allegations are true, Alcoa’s self-proclaimed internal controls based on values and integrity utterly failed.”
Alcoa’s recent settlement of the derivative claims includes both $3.75 million in attorneys’ fees and costs and significant reforms to Alcoa’s corporate governance and compliance processes and procedures. The reforms include, among others, the creation of a Chief Ethics and Compliance Officer position, mandatory due diligence on foreign intermediaries, and updates to Alcoa’s policies on meals and entertainment. Notably, these improvements were valued by Rubery’s expert at approximately $110 million.
Guidance published by the DOJ and the SEC warns that “individuals and companies who violate the FCPA may face significant collateral consequences, including suspension or debarment from contracting with the federal government, cross-debarment by multilateral development banks, and the suspension or revocation of certain export privileges.” This settlement shows that shareholder derivative lawsuits are just another potentially harmful consequence of FCPA misconduct.
In light of the lessons of Alcoa, companies are advised to review their current compliance programs. The DOJ and SEC Guidance notes that “a good compliance program should constantly evolve... An organization should take the time to review and test its controls, and it should think critically about its potential weaknesses and risk areas.” Failing to follow this advice can be expensive.