More Hurdles For Private Litigants

In a case called Glazer Capital Management v. Magistri, the Ninth Circuit last week affirmed the dismissal of an FCPA-related class-action suit by shareholders of InVision Technologies, Inc. against the company and certain of its officers.

The case interprets the U.S. securities laws but not the FCPA directly. It’s interesting nonetheless because it raises the bar for private litigants wanting to sue management based on FCPA violations. As we’ve said before, there’s no private right of action under the FCPA itself and private litigants seeking relief have to resort to other causes of action — such as common law fraud, RICO or, as in this case, securities law violations.

Here’s what happened:

In early 2004, InVision said it would be acquired by GE. In July 2004, however, InVision disclosed that an internal investigation had revealed possible violations of the Foreign Corrupt Practices Act. It voluntarily reported the potentially illegal payments in Asia to the SEC and DOJ and warned shareholders that subsequent investigations could potentially delay or terminate the merger. After the announcement, the price of InVision stock dropped by more than six dollars per share. A few days later, shareholders filed a class action complaint in the Northern District of California.

In December 2004, InVision entered into a non-prosecution agreement with the DOJ and agreed to pay a fine of $800,000. It also said it would soon settle with the SEC. GE then consummated the merger. In February 2005, InVision settled with the SEC, which said the company authorized payments to foreign sales agents in China, the Philippines, and Thailand, despite knowing the “high probability” that those funds would be used to make improper payments to local government officials. The SEC also criticized InVision for failing to maintain proper internal controls and for failing to train its foreign distributors and sales agents adequately.

Right away, the class action plaintiffs filed an Amended Consolidated Complaint with citations to the FCPA settlements. In January 2006, the district court granted InVision’s motion to dismiss the complaint, but allowed the plaintiffs leave to amend. They filed a Second Amended Consolidated Complaint in February 2006. InVision again moved to dismiss, and the district court heard arguments. A few weeks later, the SEC announced that it had settled charges against InVision’s former senior vice president for sales and marketing for his role in the company’s FCPA violations. Ten days later, the plaintiffs sought leave to amend for a third time, in order to add the new allegations. The district court denied the request, dismissed the Second Amended Consolidated Complaint, and entered a judgment dismissing the action. The plaintiffs appealed to the Ninth Circuit, which last week affirmed the dismissal.

The Ninth Circuit said that under the securities laws, the plaintiffs did not plead facts “that would either directly or indirectly give rise to a strong inference of scienter on the part of those officers [of InVision] responsible for making the false statements” about FCPA compliance in its disclosures.

Kevin LaCroix at the D&O Diary has a very complete analysis of the the securities law aspects of the case. His post is here.

A copy of the Ninth Circuit’s opinion is here.

A copy of the DOJ’s December 6, 2004 release about InVision’s non-prosecution agreement is here.

A copy of the SEC’s Cease and Desist Order against InVision (Release No. 51199 / February 14 2005 and Accounting and Auditing Enforcement Release No. 2186 / February 14, 2005 Admin. Proc. File No. 3-11827) is here.

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