Enough Said: Southern District of New York Decision Reiterates Limits of Disclosure Obligations Under Securities Laws

The Southern District of New York’s recent decision in Employees Retirement System of the City of Providence v. Embraer S.A. may provide useful guidance for companies struggling with disclosure obligations in the midst of ongoing investigations into potential unlawful conduct.

Defendant Embraer, S.A., a Brazilian aircraft manufacturer, made a series of disclosures regarding external and internal investigations into potential U.S. Foreign Corrupt Practices Act (FCPA) violations. Specifically, in November 2011, Embraer disclosed investigations by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) and advised that it had retained outside counsel to conduct an internal investigation. Although the company repeatedly warned that it may be required to pay substantial fines or incur other sanctions, it also stated early in the investigation that it did not believe there was a basis to estimate reserves or quantify any loss contingency. In July 2016, Embraer announced that settlement negotiations with the DOJ and SEC had progressed to a point warranting recognition of a $200 million loss contingency. Nearly three months later, the company announced a settlement that included a fine of over $107 million and disgorgement of nearly $84 million in profits.

On December 13, 2016, Employees’ Retirement System of the City of Providence filed an amended class action complaint alleging violations of Securities Exchange Act of 1934 Section 20(a), Section 10(b), and Rule 10b-5 promulgated thereunder. Essentially, plaintiff contended that Embraer’s disclosures were misleading in that they did not go far enough. According to plaintiff, Embraer had an obligation to, among other things, alert investors that FCPA violations had in fact occurred. Southern District of New York Judge Richard M. Berman disagreed. Relying on the Second Circuit decision City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, Judge Berman dismissed the complaint, explaining that it was “premised on the faulty notion that Embraer was required to disclose details of the FCPA violations and admit that it had engaged in wrongdoing—before it had even been charged and before the investigations were even complete. However, the Second Circuit has held that disclosure is not a rite of confession and companies do not have a duty to disclose uncharged, unadjudicated wrongdoing.” Judge Berman held that Embraer’s disclosure that it was under DOJ and SEC investigation for FCPA violations and its repeated public warnings that it might have to pay substantial fines or incur other sanctions satisfied the company’s disclosure obligations.

The opinion stands as an important reminder that, at least in the Second Circuit, pending investigations into potentially unlawful conduct, without more, do not create an obligation to admit to wrongdoing before those investigations are complete.