Friday
Nov122010

In re Chiquita Brands: Final Judgment Entered in Derivative Shareholder Action

We have been following the Alien Tort Action and Derivative Shareholder Action brought against Chiquita Brands International (“Chiquita”) since August 2007.  In an earlier post, we reported the U.S. District Court for the Southern District of Florida had preliminarily approved a settlement order pertaining to the Derivative Action pending a Settlement Hearing.  On October 15, the court, having found that Chiquita provided adequate notice as stipulated in the proposed settlement agreement, entered a final judgment and order of dismissal for the derivative action.  

The final judgment and order of dismissal includes the following provisions: 

  • The court approves the settlement agreement’s stipulations
  • Chiquita and its shareholders are released from the derivative action’s claims
  • All claims in the derivative action are dismissed with prejudice
  • The court retains continuing jurisdiction over the parties to implement and enforce the settlement agreement. 

In a separate order, the court awarded $4,000,000 to plaintiffs’ counsel for attorneys’ fees and expenses.  The court considered the factors set forth in Johnson v. Ga. Highway Express, Inc., including time, labor, difficulty of questions raised, experience, and fees awarded in similar cases to conclude that $4,000,000 was appropriate.  There were no objections by any of the 42,000 Chiquita shareholders that received a copy of the settlement agreement to the request for $4,000,000 in attorneys’ fees. 

The primary materials for this post can be found on the DU Corporate Governance website. 

Tuesday
Sep282010

In re Chiquita Brands: Court Preliminarily Approves Settlement Agreement for Derivative Action 

We have been following the Alien Tort Statute and the Shareholder Derivative Action for In re Chiquita Brands since August 2007.  This post pertains to the Shareholder Derivative Action.

In 2008, we reported that Chiquita shareholders filed four shareholder derivative lawsuits against Chiquita in several federal district courts. Subsequently, the four shareholder derivative actions were transferred to the Southern District Court of Florida and consolidated into one action, the Shareholder Derivative Action.  A related action was filed by the Service Employees International Union in the Ohio Court of Common Pleas.  The Ohio court stayed that action until the Florida court resolved the Shareholder Derivative Action.

The plaintiffs filed an amended complaint with the Florida court asserting breach of fiduciary duty and corporate waste claims against twenty-six Chiquita executives. In response, Chiquita created an independent Special Litigation Committee (“SLC”) to conduct due diligence and decide the best course of action for Chiquita.

As a first step, the SLC conducted an independent investigation of all related documents and witnesses.  Following the investigation, the SLC filed a motion to dismiss the plaintiffs’ amended complaint, as reported here.  Then, the plaintiffs and the SLC agreed to participate in mediation to reach a settlement agreement.  While the parties were unsuccessful at reaching a settlement in the mediation, they continued to negotiate terms of a potential settlement.  Ultimately, the parties agreed to settle the Derivative Action, as reported in an earlier post.

On July 28, 2010, the court ordered the parties to file a status report concerning the settlement and derivative actions by August 9.  On August 5, 2010 the plaintiffs and the SLC filed a joint motion seeking preliminary court approval of their settlement.

The proposed settlement agreement stipulates the following:

  • Chiquita will enact corporate governance and compliance changes listed in Exhibit C of the Stipulation and Agreement of Settlement within 180 days of the court’s final judgment.  The Stipulation lays out several changes Chiquita is required to implement regarding composition of Chiquita’s Board of Directors, internal controls, compliance and ethics, shareholder meetings, and director compensation. 
  • The plaintiffs’ Co-Lead Counsel will present Chiquita’s Board of Directors with further governance and compliance changes not listed in the stipulation, including separating the Chief Executive Officer and Chairman roles and adopting majority voting for director elections.  Chiquita is not required to take any action on these proposed changes. 
  • The SLC will turn over settlement related discovery to the plaintiffs’ Co-Lead Counsel. 
    Within ten days of the court’s final judgment, the plaintiffs in the shareholder derivative suit in Ohio will petition the court to dismiss the action with prejudice on the grounds that the Florida court’s action is binding on all Chiquita shareholders. 
  • Chiquita will pay the plaintiffs $4,000,000 for attorneys’ fees and expenses within ten days of the court’s dismissal of the Shareholder Derivative Action with prejudice. 
  • Chiquita will cover costs and provide notice for all shareholders affected by the proposed settlement. 
    Upon final judgment, Chiquita, all Chiquita shareholders, and the plaintiffs relinquish all claims relating to the Shareholder Derivative Action.

The court issued an order the same day that the motion was filed, preliminarily approving the proposed settlement order and setting a Settlement Hearing for October 15, 2010.

The primary materials for this post can be found on the DU Corporate Governance website.

Tuesday
May112010

In re Chiquita Brands International: Chiquita’s Motion to Dismiss Amended Complaints

We have been following the Chiquita Brands International, Inc. (“Chiquita”) case since 2007.  In an earlier post, we reported the court set a deadline of February 26 for any amended complaints to be filed.  On April 9, Chiquita filed its Motion to Dismiss the Amended Complaints.  This motion pertains to the case filed under the Alien Tort Claims Act. 

Chiquita continues to rely on Presbyterian Church of Sudan v. Talisman Energy, Inc., in which the Second Circuit held knowledge alone does not suffice for the required mental state for aiding and abetting liability; intent must also be present.  582 F.3d 244 (2nd Cir. 2009).  Chiquita uses this case to illustrate that it did not act with purpose.  Chiquita claims that the amended complaints “embellish” prior allegations regarding Chiquita’s support of the paramilitaries in order to meet the Presbyterian Church of Sudan mens rea standard. 

Chiquita also introduces new case law from Sinaltrainal v. Coca Cola, holding that acts of violence by Columbian paramilitaries did not qualify as state action or war crimes.  578 F.3d 1252 (11th Cir. 2009).  In Sinaltrainal, Columbian trade union representatives brought an action against Coca Cola under the Alien Tort Statute (“ATS”) and the Torture Victims Protection Act (“TVPA”), alleging Coca Cola financed and collaborated with Columbian paramilitaries in acts of murder and torture against employees.  To initiate a state action based claim under the ATS, the plaintiff must assert the tortfeaser and the state were involved in a relationship involving the violent acts. The Eleventh Circuit dismissed the lawsuit against Coca Cola, concluding the Columbian government was not involved in or aware of the violent acts alleged in the complaints.

Chiquita contends that the present actions are unlike Sinaltrainal, where the plaintiffs were employees of Coca Cola, because the plaintiffs here have no connection to Chiquita.  Chiquita argues that permitting the plaintiffs’ claims to proceed would open the floodgates to liability lawsuits by foreign plaintiffs during periods of conflict abroad. 

Additionally, Chiquita employs the holding from Ashcroft v. Iqbal, where the Supreme Court held that plaintiffs must plead facts, and not conclusory accusations, to support plaintiff’s claims of liability.  129 S. Ct. 1937 (2009).  Chiquita draws on Iqbal to argue the plaintiffs’ amended complaints do not raise any facts that would support a finding of liability on Chiquita’s part. 

Chiquita has requested the court dismiss the plaintiff’s lawsuit with prejudice.  We will continue to report on the case as it develops.

The primary materials for this post can be found on the DU Corporate Governance website.

Monday
Mar222010

In re Chiquita Brands International: Related Case Motion to Dismiss Opinion

The Race to the Bottom is following developments in In re Chiquita Brands International, Inc., specifically the claims brought by a class of plaintiffs represented by the Special Litigation Committee (“SLC”).  Recently, the SLC and Chiquita filed a notice of settlement.  In a related case, occupying the same docket as the SLC claims, Chiquita faces civil damages claims based on aiding and abetting the homicide of U.S. nationals living outside the United States, conspiracy charges under 18 U.S.C. § 2333, and that Chiquita provided material support or resources to terrorists.  Julin v. Chiquita Brands Int'l Inc., No. 08-01916-MD-MARRA/JOHNSON, 2010 U.S. Dist. LEXIS 9488 (S.D. Fla. February 4, 2010).  Judge Mara granted in part and denied in part Chiquita’s motion to dismiss.  As a related case to our coverage, we are providing the order and opinion.

The primary materials in this case can be found at the DU Corporate Governance Web Site.

Tuesday
Jan262010

Chiquita Reaches Proposed Settlement

We have been following the Chiquita Brands International, Inc. (“Chiquita”) case since August 2007.  The last post concerned plaintiffs’ opposition to Chiquita’s motion to dismiss.  The parties to the suit recently informed the court that they have settled the case.

The parties attempted mediation on October 5, 2009.  In a report filed on October 9, 2009, the Special Litigation Committee of Chiquita Brands International, Inc. (“SLC”) noted that this mediation did not result in a negotiated solution.  Despite the unsuccessful mediation, the parties continued to discuss a possible settlement and, apparently, successfully reached an agreement.  While details of their deal are not known, on January 5, 2010 the plaintiffs and SLC jointly filed a Notice of Settlement.  Plaintiffs will agree to settle the derivative action and pending shareholder derivative lawsuit in the Ohio Court of Common Pleas.

The parties also intend to file a motion pursuant to Federal Rules of Civil Procedure 23.1 seeking the Court’s approval of a future settlement.  The parties have not disclosed the terms of their settlement, though the Notice does insinuate that some negotiation may remain.  It states that the potential settlement is dependent on the resolution of a  settlement agreement.

In addition, there have been some procedural developments.  On Dec. 23, 2009, the District Court filed an order addressing the parties’ dispute over amending the complaint.  The court rejected Chiquita’s position that the court should apply Rule 15(a) to preclude plaintiffs from filing an amended complaint as a matter of course prior to the court’s ruling on the pending Rule 12(b)(6) motion.  In the December order, the court stated that any amended complaints must be filed by February 26, 2010.  In all other cases, amended complaints may only be filed with the opposing party’s consent or court’s leave.

The primary materials for this post can be found on the DU Corporate Governance website.

Wednesday
Dec092009

Chiquita’s Motion to Dismiss Met with Opposition Concerning Statutes of Limitations and the ATA

We have been following the Chiquita Brands, International, Inc. (“Chiquita”) case since August 2007.  Chiquita filed a motion to dismiss in February 2009

In September, plaintiffs filed a Response in Opposition to Chiquita’s motion to dismiss.  Plaintiffs argue that they adequately pled a cause of action pursuant to 18 U.S.C.  § 2333(a), which states that any American citizen injured by international terrorism may sue in any appropriate district in the U.S.  They contend that Congress enacted this provision to prevent the flow of money to terrorists, and that the complaint sufficiently alleges that plaintiffs are victims of international terrorism. 

Furthermore, plaintiffs maintain that their Anti-Terrorism Act’s (“ATA”) claims were timely filed and sufficiently described their state causes of action.  While Chiquita argued in its motion to dismiss that both of these claims were barred by various statutes of limitations, plaintiffs state that their ATA claims were timely filed because the four year statute of limitations commenced when the plaintiffs became aware of the injury.

Plaintiffs also argue that they filed their Colombian law claims well within the twenty year Colombian statute of limitations, and that they timely filed their state law claims in Ohio, New Jersey, and Alabama under those states’ state tolling and accrual rules.

Moreover, plaintiffs allege that they stated their cause of action sufficiently because plaintiffs are all citizens who have been harmed by international terrorism, allegedly at the hand of Chiquita.

Plaintiffs later filed a Notice of Supplemental Authority, which included a copy of Goldberg, et al. v. UBS, AG.  2009 WL 3077118 (E.D.N.Y. 2009).  Plaintiffs suggest that since this opinion, which centered on a similar fact pattern, denied the defendant’s motion to dismiss, Chiquita’s motion to dismiss should be similarly denied.

Simultaneous with the filing of their Response in Opposition, plaintiffs filed a Motion for Hearing regarding defendant’s motion to dismiss.  Plaintiffs argue for oral argument because of the complex choice-of-law issues related to applying D.C. rules of procedure to the substantive law of a foreign jurisdiction.  They also urge that the complicated issues concerning the ATA substantive provisions and statute of limitations warrant additional oral argument.

Chiquita filed a reply brief on October 5, claiming that the statute of limitations prescribed by the ATA and the various state and foreign jurisdictions bar plaintiffs’ claims.  They reason that the statute of limitations must be measured from commencement of the criminal action, and not when the plaintiffs discover the harm.  Chiquita, in an apparent attempt to cast the plaintiff’s statute of limitations arguments as equitable tolling, claims that there is no reason to equitably toll the ATA’s statute of limitations in this case.  Chiquita also argues that the court should bar the state law claims because plaintiffs failed to file their cause of action within the statute of limitations and plaintiffs failed to sufficiently plead their negligence and direct liability claims.

Additionally, Chiquita filed a Notice of Supplemental Authority, citing Presbyterian Church of Sudan v. Talisman Energy, Inc, a case dealing with the appropriate mental state required for aiding and abetting liability in ATA claims. 582 F.3d 244 (2d Cir. 2009).  The court in Presbyterian Church of Sudan held that the appropriate mental state required for aiding and abetting liability is purpose, rather than knowledge alone.  Defendants point to this case in order to show that while the company may have had knowledge of criminal acts, its purpose was not to aid or abet any violation of international law.

The plaintiffs responded on October 10, claiming Presbyterian Church of Sudan, directly conflicted with 11th Circuit precedent concerning aiding and abetting and conspiracy set forth in Cabello v. Fernandez- Larios.  402 F.3d 1148 (11th Cir. 2005).             

On October 19, 2009, Chiquita filed a Motion for Leave to File a Reply to the plaintiffs’ arguments relating to Chiquita’s Notice of Supplemental Authority.  Chiquita addressed plaintiff’s citation of Presbyterian Church of Sudan.  The company asserted that Cabello dealt with unrelated ATA issues, allowing the present court to rely on persuasive authority like Presbyterian Church of Sudan when determining the appropriate mental state for ATA aiding and abetting liability.  Chiquita pressed that the rule set forth in Presbyterian Church of Sudan suggests a “purpose test” in order to prove aiding and abetting, which plaintiffs have failed to allege.

We will continue to follow the case as it develops and report on any subsequent filings. 

The primary materials for this post can be found on the DU Corporate Governance website. 

Tuesday
May122009

Special Litigation Committee Report Supports Chiquita Motion to Dismiss

The Special Litigation Committee (“SLC’) for the Chiquita Brands International, Inc. (“Chiquita”) submitted its Report on September 25, 2008 along with its motion for dismissal (“Motion”).  The Motion is based on the Report’s factual allegations and argues, in essence, that the SLC has investigated the facts and determined in the exercise of its independent business judgment that dismissal of the claims in the derivative action is in the best interests of Chiquita.

The Report covers the SLC investigation into the claims alleged in the Verified Consolidated Shareholder Derivative Complaint (“Amended Complaint”).  The Amended Complaint alleges generally that the defendants committed corporate waste and breached their fiduciary duties, beginning as early as 1989 to the present.  The defendants consist of several former and current directors and officers of Chiquita.  Seven specific instances of such alleged actions are listed in the Report.

  1. Causing Chiquita to make payments to Colombian terrorist organizations the FARC and the ELN from 1989 to 1997, or failing to be aware of those payments (Am. Compl. ¶ 100);
  2. Causing Chiquita to make payments to Colombian terrorist organization the AUC, from approximately 1997 through February 2004, or failing to be aware of those payments (Am. Compl. ¶ 100);
  3. Conducting an alleged “fire sale” of Chiquita’s Colombian operations (a subsidiary known as Banadex), in June 2004 in response to a pending Department of Justice (“DOJ”) investigation (Am. Compl. ¶ 127);
  4. Causing Chiquita to enter a guilty plea and pay a $25 million fine in March 2007 in order to protect individual officers and directors from prosecution (Am. Compl. ¶ 118);
  5. Acquiring Atlanta AG, a German fruit distribution business, in 2003, which allegedly turned out to be an unprofitable transaction, to offset the financial effect of a potential sale of Banadex (Am. Compl. ¶ 129);
  6. Causing or allowing Chiquita to make false or misleading statements in its public filings regarding (i) the nature of the payments to the AUC, and, (ii) Chiquita’s efforts to comply with the law in general (Am. Compl. ¶ 60-99); and
  7. Paying severance to departing executives who allegedly engaged in wrongdoing, failing to pursue claims against executives who allegedly engaged in wrongdoing, and allowing executives who allegedly engaged in wrongdoing to remain at the Company and to receive excessive compensation (Am. Compl. ¶ 119).

In summary, the factual allegations in the SLC Report are as follows. 

From the mid-1970s, Chiquita developed detailed internal reporting and monitoring practices designed to satisfy the requirements of the Foreign Corrupt Practices Act of 1977 (“FCPA”). The FCPA compliance program, beginning in the early 1990s, captured the payments to the FARC and ELN and later the payments to the AUC.  The payments made to the FARC and ELN from 1989 to 1997 were legal under Columbian law because they were the product of extortion from the guerilla groups.  The payments ended around the same time that the FARC and ELN were listed as Foreign Terrorist Organizations (“FTO”) by the U.S. Department of State. 

The payments to the AUC included four payments made by Banadex employees outside the knowledge of Chiquita management or board.  The other payments made through 2004 were paid to a “convivir,” a government-licensed and promoted security organization.  Accordingly, these payments were legal under Colombian law.  In 2000, a Chiquita employee became aware of a potential connection between the “convivir” and AUC.  The employee’s investigation revealed that at least some part of the payments went to the AUC. Chiquita sought guidance from Colombian attorneys, who again advised Chiquita that the payments were legal because they were a product of extortion. 

On September 10, 2001, the U.S. Department of State designated the AUC as an FTO.  According to the Report, Chiquita was unaware of the designation until late February 2003.  After seeking legal advice from outside counsel, Chiquita’s Audit Committee took over the matter and fully disclosed the payments to the DOJ on April 24, 2003.  The meeting between the DOJ and Chiquita concluded with Chiquita believing it had a safe harbor to make payments to the AUC, in order to protect its employees and infrastructure, until the DOJ could resolve the related policy issues.  Chiquita made its final payment to the AUC in late January 2004, and sold Banadex to a Colombian-based fruit producer in May 2004.  The Report finds the Banadex sale to have been under official negotiation for eleven months, not in the nature of a “fire sale." 

In March 2004, the DOJ notified Chiquita for the first time that it was a subject of investigations.  The nature of the investigations changed from a favorable outcome for Chiquita in early 2005 to discussion of a potential plea agreement in November 2006.  The DOJ investigation focused narrowly on whether the payments to the AUC by Chiquita were illegal under federal statutes.  In contrast, the SLC investigated and analyzed the alleged facts to determine whether the individual defendants had breached their duty to the company.  The Report alleges that the defendants continued to make payments motivated by a desire to protect Chiquita’s employees and infrastructure in Colombia, and based on assurances from DOJ officials. 

The final plea agreement resulted in Chiquita pleading guilty to one count of knowingly Engaging in Transactions with a Specially-Designated Global Terrorist on March 19, 2007, and agreeing to pay a fine of $25 million, payable over five years.  According to the Report, Chiquita’s board agreed to the plea agreement in order to prevent further reputational harm and substantial costs.  The plea included Chiquita’s promise to cooperate in any continuing investigations of individual officers and directors, extinguishing concerns of breach of duty of loyalty. 

The SLC Report concludes that the final three allegations are also unjustified based on the facts uncovered. The Report states Chiquita’s board approved the Atlanta AG acquisition six months prior to the discovery of the AUC designation as an FTO, and the acquisition was made for good faith business reasons on an informed basis after several months of consideration.  Also, the Report alleges that there was nothing improper in Chiquita’s disclosures or that any of the defendants knew, or should have known, that any disclosures were false or misleading.  Finally, the Report finds Chiquita’s compensation of executives to be informed, with the advice of an outside consultant, and not excessive under the circumstances. 

According to the Motion, in exercising its business judgment, the SLC took into consideration five other factors that strongly support dismissal:

  1. No defendant, at any time, acted in bad faith or was motivated by self interest;
  2. The reputational harm associated with prolonging what has already been six continuous years of investigation and litigation, with continued emphasis on Chiquita’s action in Colombia, would inflict substantial further damage on Chiquita;
  3. The costs that will be incurred in connection with these claims outweigh any potential recovery that may be obtained in the future, especially given the weaknesses of the claims;
  4. Management and the Board appropriately focused on the adequacy of Chiquita’s compliance measures and remedial actions following this episode; and
  5. Continuing with this litigation would serve to further divert management from its core mission, which is to increase shareholder value by expanding Chiquita’s profits through the sale of bananas, tropical fruit, and other value-added produce.

The primary materials for this post are available on the DU Corporate Governance Website

Friday
Apr172009

Special Litigation Committee of Chiquita Files Motions

On February 25, 2009, the Special Litigation Committee (“SLC”) of nominal defendant Chiquita Brands International, Inc. (“Chiquita”) filed motions to dismiss, to hold oral arguments in support of dismissal, and to file under seal unredacted portions of the Special Litigation Committee Report (“Report”).  Judge Marra granted the motion to file under seal unredacted portions of the SLC Report.  The unredacted portions of the report will remain sealed until further order of the court.  The motion seeking to keep parts of the Report under seal was itself filed under seal, and Judge Marra’s order does not disclose what types of information were redacted from the Report. 

The SLC also filed a joint declaration (“Declaration”) of its three members in support of Chiquita’s motion to dismiss.  The Declaration briefly highlights portions of the Report and contains three attached exhibits.  Exhibit A is the Report detailing the investigation, findings, and determinations of the SLC as to the plaintiffs’ claims against 26 current and former Chiquita directors and officers.  Exhibit B is a copy of the resolution of Chiquita’s board, dated April 3, 2008, creating the SLC and authorizing its investigation.  Finally, Exhibit C is a copy of Chiquita’s Form Def 14-A, filed April 15, 2008, which states that each member of the SLC is an independent director. 

The three members of the SLC are Howard W. Barker Jr., William H. Camp, and Dr. Clare M. Hasler.  Mr. Barker has chaired the Audit Committee for Chiquita since September 2007, and was a partner with Peat, Marwick, Mitchell & Co., which became KPMG LLP.  Mr. Camp served honorably in the U.S. Navy until 1972, and is currently chairman and CEO of Accelegrow Technologies, Inc.  Dr. Hasler earned her dual Ph.D. in Environmental Toxicology and Human Nutrition from Michigan State University in 1990.  Dr. Hasler is the Executive Director of the Robert Mondavi Institute.

In the Declaration the SLC states that it considered factual and legal merits of the plaintiffs’ claims, including possible defenses to the claims, and additional factors relevant to determining whether the Derivative Action should be brought on behalf of Chiquita.  The Declaration requests Judge Marra to grant the motion to dismiss, stating that dismissal is in the best interests of Chiquita and its shareholders.

Chiquita based its motion to dismiss upon the SLC Report, which will be covered in more detail in a future post.

The primary materials for this post are available on the DU Corporate Governance Website.

 

Friday
Apr172009

In re Chiquita Brands: Judge Marra Establishes Schedule for Discovery on Issues Raised by Motion to Dismiss 

Plaintiffs and the Special Litigation Committee (“SLC”) of Chiquita Brands International, Inc. filed a joint motion on March 11, 2009 requesting an order setting discovery relating to the SLC’s motion to dismiss and a briefing schedule.  Judge Marra granted the joint motion the same day that it was filed.

The order establishes the following schedule:

  1. Plaintiffs and the SLC shall serve discovery requests on or before March 31, 2009.
  2. Any responses or objections to, and/or productions of such discovery, shall be served on or before April 30, 2009.
  3. Any motions to compel discovery shall be filed and served no later than May 31, 2009 and shall be briefed and heard in accordance with the Local Rules of this Court.
  4. Plaintiffs shall file and serve their opposition to the SLC’s motion to dismiss no later than 45 days after receiving discovery pursuant to paragraph b above, or, in the event there are any motions to compel discovery filed pursuant to paragraph c above, either: (a) 45 days after the Court denies the motion(s) to compel; or (b) 45 days after receiving discovery the Court compels.
  5. The SLC shall file and serve any reply to its motion to dismiss within 45 days after Plaintiffs’ opposition is filed and served.
  6. The Court shall set a hearing on the motion to dismiss at its convenience.

 

The primary materials for this post are available on the DU Corporate Governance Website.

Wednesday
Jan212009

Stay of Proceedings in Chiquita Derivative Actions

This post updates the Derivative Actions against Chiquita Brands International, Inc. (“Chiquita”).  In sum, the Derivative Actions remain stayed until February 28, 2009, when Chiquita is required to report to the Court on its investigation of the claims filed in the Verified Consolidated Shareholder Derivative Complaint (“Complaint”).

On October 21, 2008, the Special Litigation Committee (“SLC”) for Chiquita filed an Agreed Motion for a Stay of Proceedings (“Motion 1”).  Motion 1 stated that lead counsel for the parties agreed that the Derivative Actions should be stayed until December 31, 2008, in order to permit Chiquita time to investigate the claims before responding to the Complaint.  At the conclusion of the stay, the SLC proposed to: (1) issue a report detailing its investigations and conclusions regarding the claims and allegations asserted in the Complaint; and (2) present a plan outlining the SLC’s proposed next steps in the Derivative Actions.  Judge Marra granted Motion 1 on October 21, 2008, with leave to request a further stay if necessary. 

Two days before the expiration of the initial stay, Chiquita’s SLC filed an Agreed Motion for a Further Stay of Proceedings (“Motion 2”) on December 29, 2008.  Motion 2 requested an extension of the stay until February 28, 2009, with leave to request a further stay if necessary.  While Motion 2 did not specifically address why Chiquita was unable to complete its investigation within the initial stay period, it said that the SLC has reviewed approximately 740,000 pages of documents and conducted fifty-seven interviews of forty-seven individuals believed to possess knowledge regarding the events underlying the allegations asserted in the Complaint.  Motion 2 also reiterated that the SLC will issue a report detailing its investigations and conclusions, and present to the Court a plan outlining the SLC’s proposed next steps.  Judge Marra granted Motion 2 on December 30, 2008.

The primary materials for this post are available on the DU Corporate Governance Website.

Monday
Nov102008

Chiquita and the Alien Tort Statute

In March 2008 Chiquita Brands International admitted to illegally supporting guerrillas in Colombia. As part of the plea agreement, Chiquita agreed to pay the U.S. government $25 million in fines over five years. (Reported here).

 

In addition to the derivative suits that will be followed by this Blog, several groups of plaintiffs have filed Alien Tort Statute (“ATS”), Antiterrorism Act (“ATA”), and shareholder derivative litigation claims against Chiquita in an effort to hold Chiquita responsible for the terrorist acts of the guerrilla groups. These actions have been consolidated in the U.S. Southern District of Florida.

 

The largest suit filed so far, both in terms of numbers of plaintiffs and dollar value sought, was initially filed in the Southern District of New York under the ATS by 619 plaintiffs who are mostly Colombian survivors of individuals killed by paramilitaries. All but one of the plaintiffs are proceeding under pseudonyms for fear of reprisals in Colombia. The one identified plaintiff was granted political asylum and U.S. residency. U.S. survivors of five missionaries who were kidnapped and killed by Colombian paramilitaries filed a separate suit under the ATA with the New Tribes Mission, a Florida not-for-profit organization.

 

Each suit asserts that Chiquita provided payments, weapons, and “material support” to either Autodefensas Unidas de Colombia (“AUC”) or Fuerzas Armadas Revolucionarias de Colombia (“FARC”). AUC and FARC are competing Colombian organizations that have been identified as foreign terrorist organizations by the U.S. State Department.

 

Plaintiffs allege that Chiquita’s support for these organizations was a proximate cause of the deaths of the plaintiffs’ relatives who were killed by the terrorists. Chiquita operated in Colombia through its wholly-owned subsidiary C.I. Bananos de Exportacion, S.A. (“Banadex”), which Chiquita sold in June, 2004. As part of its plea agreement with the Justice Department, Chiquita admitted making payments to AUC, FARC, and other Colombian terrorist groups in order to protect its personnel and properties in banana producing areas. In addition to admissions made by Chiquita as part of its plea agreement, the ATS complaint alleges that Chiquita used its private ports and vessels to directly smuggle arms and munitions into Colombia, and to smuggle cocaine out. The ATA complaint alleges that support to FARC was used to limit the power of trade unions, thereby giving Chiquita a competitive advantage in labor costs.

 

The ATS complaint itemizes a total of 655 AUC-caused deaths or injuries that occurred between August 1990 and December 2007. Most of the plaintiffs are the legal heirs of individuals who were killed or “went missing,” and some are heirs to more than one victim. Fourteen plaintiffs are themselves survivors of torture. The complaint lists nine causes of action, including engaging in terrorism and/or providing material support to a terrorist organization, crimes against humanity, extrajudicial killing and torture, and wrongful death. The ATS complaint asserts that at least fourteen international laws, treaties, and norms were violated.

 

The ATA complaint relates to FARC kidnapping and murdering five U.S. citizen missionaries in 1993 and 1994. It lists twenty-four causes of action, including claims for wrongful death, aiding and abetting false imprisonment, and intentional and negligent infliction of emotional distress.

 

Both complaints are pled with gruesome particularity. For example, the ATS complaint recounts the AUC torture and execution of 36 people in the village of El Salado. Two other massacres of village civilians are also described. The FARC kidnapping of each missionary is reported in the ATA complaint in minute-by-minute detail up to the moment when the men are taken to the jungle and never seen again.

 

The ATS complaint ends with a demand for trial by jury, and for compensatory and punitive damages totaling more than twelve and a half billion dollars, along with interest, costs, and disbursements. The ATA claim does not name an amount, but prays for compensatory and punitive damages and attorney’s fees.

 

Chiquita has filed a motion to dismiss the ATS claim on the basis that material support of terrorism is not actionable under the statute. Sosa v. Alvarez-Machain, 542 U.S. 692 (2004), requires that the offending behavior be clearly and unequivocally denounced under the rule of international law to qualify as actionable under ATS. Chiquita argues that plaintiffs have not asserted that the international community has denounced material support of terrorism to the requisite degree, and that the international community has in fact not done so.

 

The primary materials for this post are available on the DU Corporate Governance Website.

 

 

Friday
Nov072008

Chiquita Shareholder Derivative Action: Summarizing the Complaint

The Race To The Bottom is following developments in actions against Chiquita Brands International, Inc., including a number of shareholder derivative actions that are being treated as a consolidated action in the Southern District of Florida.

This is a summary of the allegations contained in the Shareholder Derivative Complaint. Plaintiffs brought this shareholder derivative action on behalf of Chiquita Brands International, Inc. ("Chiquita") against a majority of the current directors and several of Chiquita's present or former officers and directors alleging "breaches of fiduciary duty, violations of law, misappropriation of information and corporate waste." The shareholder Plaintiffs include City of Philadelphia Public Employee Retirement System, Sheet Metal Workers Local #218(S) Pension Fund, Henry Taylor, and Hawaii Annuity Trust.

Chiquita, a publicly owned multi-national company, is the second largest banana producer in the world. This action claims "intentional and/or reckless breaches of the Board of Directors' fiduciary duties of care, control, compliance and candor, and breaches of fiduciary duty which involved illegal, improper and ultra vires conduct." This conduct allegedly caused "Chiquita to violate the laws of the United States and Colombia."

The action specifically alleges improper and illegal payments made in connection with the operation of Banadex, Chiquita's former Colombian subsidiary that allegedly functioned as Chiquita’s greatest profit center. Starting in 1989 the derivative complaint alleges that Defendants paid left-wing terrorist organizations including The Revolutionary Armed Forces of Colombia ("FARC") and the National Liberation Army ("ELN"), and "illegally provided or facilitated" the shipment of "arms and other weapons" to a right-wing fascist terrorist organization, the United Self-Defense Forces of Columbia ("Audtodefensas Unidas de Colombia" aka "AUC") as well as FARC through Chiquita's boats and port facilities in Columbia. From 1997 through post-2004 Chiquita also sent payments to AUC. The United States designated the AUC as a terrorist organization in 2001. Since that time, it has been a crime to knowingly provide material support and resources to the AUC.

Plaintiffs allege that Defendants paid off these organizations in order to avoid disruptions to Chiquita’s Latin American operations. Plaintiffs allege Defendants knowingly continued making payments to the terrorist organization even after it became a crime to do so. During the time Chiquita paid the AUC, the terrorist organization killed thousands of pro-labor social activists and labor advocates in Colombia. The Plaintiffs charge that Defendants knew that as a result of the AUC's actions local workers would feel pressured to accept lower wages and cheaper working conditions. There were over one hundred payments to the AUC over the specified seven years totaling $1.7 million.

Plaintiffs allege that Chiquita's board of directors enlisted the help of Chiquita’s auditor, Ernst & Young, to conceal these payments from shareholders in the company's accounting records in violation of the SEC Act of 1934. The directors acted with the knowledge that the company was subject to a SEC Consent Decree requiring Chiquita to cease and desist from falsification of accounting records. Ernst & Young also repeatedly certified Chiquita's "false and misleading financial statements" without a proper audit. Additionally, Chiquita's in house counsel also agreed to conceal these illegal payments.

The Department of Justice ("DOJ") first learned of Chiquita's illegal payments to terrorist organizations when Chiquita director Roderick M. Hills, Senior Vice President and General Counsel Robert W. Olson, and Chiquita's outside counsel Kirkland & Ellis reported the payments to then Assistant Attorney General Michael Chertoff in 2003 (Chertoff and Hills had been partners at the law firm Latham & Watkins LLP). This meeting occurred after outside counsel repeatedly warned Defendants that payments to the terrorist organization must stop. The DOJ also told Defendants the payments were illegal and had to stop. Chiquita continued to make payments, despite their assurances to the contrary, during the ensuing DOJ investigation.

The DOJ learned of the continuing payments, and threatened Defendants with criminal prosecution. Plaintiffs allege the Defendants then caused the company to plead guilty to a felony criminal violation of the U.S. Global Terrorism Sanctions Act. This plea was allegedly made with the understanding that the Board of Directors would not be held criminally liable for the illegal payments to the Colombian terrorist groups, even though the government specifically identified ten officers actively involved in the illegal payments. This breach of fiduciary duty thus protected Defendants while damaging the Company.

As part of the plea, the company agreed to pay a $25 million non-tax-deductible fine. This fine was so large that Chiquita had to pay it over five years with interest. The company was also sentenced to five years probation, contingent upon its meeting stringent conditions. As a result of its public admission to illegal payments, civil suits were brought against Chiquita under the "Alien Tort Claims Act" and other international laws on behalf of Colombians killed by the AUC during the period Chiquita funded them. These suits seek tens of millions of dollars in damages.

Plaintiffs further allege that Chiquita's officers and directors encouraged or permitted Chiquita's executives to resort to improper and/or illegal ultra vires activities, including false accounting and payments to the AUC, ELN and FARC, to boost the Company's reported Colombian profits. This occurred for several reasons: large debt and operation disruptions in Latin American operations led to lower actual profits, and executives' salaries and bonuses were tied to the Colombia operation's profits. Through these actions, Plaintiffs allege executives breached their fiduciary duty by directly profiting via bonuses and salaries from the illegal ultra vires activities.

Plaintiffs next allege that Defendants sold Chiquita's Colombia operations in a "fire sale" in 2004. Defendants were trying to remove themselves from their illegal activities in Colombia while also reducing their chance of extradition to Colombia to stand trial for their criminal conduct. The sale of the Colombia operation deprived the company of a major source of bananas, resulting in a purchase of bananas at unprofitable prices from another source at a loss of $9 million.

Plaintiffs continue, alleging that Defendants overpaid in their acquisition of German fruit distribution business Atlanta A.G. (“Atlanta”) in their haste to make up for lost revenue and profits from the sale of the Colombian operation. Defendants then failed to profitably run Atlanta before selling it in 2008, harming Chiquita further.

Finally, plaintiffs allege that the current board of directors will not objectively consider claims against themselves or the officers of Chiquita who were actively involved in the criminal misconduct that harmed the company. Although the board of directors appointed independent counsel to investigate these allegations, Plaintiffs claim counsels' ties to the current board of directors make them far from independent. Plaintiffs bring their claims in order to protect the company from the board of directors and restore shareholder value.

By way of relief, Plaintiffs ask the court to:

  • Impose a constructive trust consisting of all damages caused by Defendants and all profits and special benefits and unjust enrichment obtained through Defendants' unlawful conduct;
  • Direct Chiquita to take all necessary actions to reform and improve its corporate governance and internal control procedures to comply with the Sarbanes-Oxley Act of 2002;
  • Direct the passage of amendments to the company's articles in order to reform director oversight and internal company controls;
  • Void all indemnity agreements with and recapture all severance or departure payments to any officer or director found to have been actively involved in the illegal acts;
  • Terminate the employment of Jeffery Zalla, Senior Vice President and Chief Financial Officer, and Robert F. Kistinger, President and Chief Operating Officer of Chiquita Fresh Group, and any other current member of Chiquita management actively involved in the illegal acts;
  • Recapture all directors' fees, other compensation or reimbursement paid to any of the Defendant directors;
  • Terminate Ernst & Young's corporate accounting services;
  • Award monetary damages against all Defendants, jointly & severally, for all losses and damages suffered as a result of the acts and transactions complained of in the complaint, including prejudgment interest, in a way that ensures Defendants do not participate or benefit from the damage awards.

Plaintiffs also seek punitive damages, an award of costs, disbursements, attorneys’ fees, accountants’ fees, and expert fees.

The primary materials for this post are available on the DU Corporate Governance website.

Friday
Nov072008

Covering the Chiquita Derivative Litigation

The Race to the Bottom is a collaboration between faculty and students.  One of the roles played by students is to follow ongoing cases that address important issues in the realm of corporate governance. Students form a team and monitor any activity in the case.  When a filing surfaces or a hearing held, students digest the information and write a post.  A faculty member then reviews the post and holds a tutorial on the importance of the issues raised by the filing.  Students both develop writing skills and learn first hand about the process of handling a case. The posting process is slow but results in an important learning experience for students and useful information for those following the case.

One of the cases followed by students is the criminal trial of David Stockman.  Another is the derivative action against Chiquita.  The suits against Chiquita arose out of payments made by the company to guerrillas in Columbia.  The facts have already given rise to criminal allegations.   Robert Anderson, a member of the writing faculty at the Sturm College of Law, is supervising the posts.  Sean Harrell is the student responsible for the case.

The first two students posts, both of which will go up today.  One was written by Rebecca Rian who serves as a Student Contributor to the Blog.  The first is below and written by Sean Harrell, a Case Editor for the Blog.

Friday
Nov072008

Derivative Actions Against Chiquita

We will be following the multidistrict litigation In re: Chiquita Brands International, Inc., pending in the Southern District of Florida.  The multidistrict litigation consists of four shareholder derivative lawsuits (“Derivative Actions”), five tort lawsuits brought under the federal Alien Tort Statute and various state laws, and one tort lawsuit brought under the federal Antiterrorism Act and state tort laws.  Our focus will be on the Derivative Actions.  This post highlights the pleadings to date.

The Derivative Actions consist of three institutional shareholders lawsuits - two originally filed in the District of D.C. and one in the Southern District of Ohio - and one individual shareholder lawsuit originally brought in the District of New Jersey. 

On February 20, 2008 the Judicial Panel on Multidistrict Litigation (“Panel”) ordered one of the D.C. District cases and the Ohio case transferred to the Southern District of Florida for pretrial proceedings.  The Panel found that both of the actions concerned allegations that Chiquita provided financial and other support to a Colombian right-wing paramilitary group called Autodefenses Unidas de Colombia (“AUC”).  Chiquita once had banana-producing operations in Colombia.  According to a Washington Post article, the company stated that it made payments to the AUC for protection of its workers and operations against the Revolutionary Armed Forces of Colombia (“FARC”), a leftist paramilitary group.  The FARC were blowing up railroads used by U.S. companies and kidnapping foreigners for ransom.  A Chiquita spokesman told the Wall Street Journal, “Our actions were always motivated to protect the lives of our employees and their families.”  The Panel moved the cases to Florida because a similar case already pending there appeared to be more advanced than the other lawsuits, and because Florida is closer to Colombia than the other districts with ongoing litigation. 

The Transfer Order provided that actions not included in the order could be treated as potential tag-along actions, referencing the later two shareholder derivative actions. “Tag-along” cases refer to cases with similar subject matter that may be filed simultaneously or shortly after the cases currently under consideration.  On March 24, 2008 the Office of the Clerk in the Southern District of Florida took jurisdiction over the remaining two Derivative Actions as tag-along cases.  All of the transferred actions were assigned to the Honorable Kenneth A. Marra.

On March 3, 2008 the Derivative Actions Plaintiffs filed a Motion to Consolidate Related Shareholder Derivative Actions and Establish a Leadership Structure (“Motion”).  The Motion requested making the law firms Coughlin Stoia Geller Rudman & Robbins LLP (“Coughlin Stoia”), and Cohen, Placitella & Roth P.C. (“Cohen Placitella”) the co-lead derivative counsel for the Derivative Actions.  The Plaintiffs concurrently requested that the Court execute a pretrial order  transferring the Derivative Actions to the Southern District of Ohio based on the argument that coordination with the other MDL actions in Florida would be inefficient and unnecessary.

Judge Marra held a case management conference with all parties on May 16, 2008, and issued subsequent case management orders that kept the Derivative Actions in the Southern District of Florida for the time being.  Judge Marra issued an Order on August 12, 2008 naming Stewart L. Cohen, Esq., Arthur C. Leahy, Esq., and the law firms Cohen Placitella and Coughlin Stoia as co-lead counsel for Plaintiffs in the four Derivative Actions.  Mr. Cohen is a partner for Cohen Placitella, and Mr. Leahy is a partner for Coughlin Stoia.  The management orders give co-lead counsel the authority to speak for the plaintiffs in pretrial procedural matters as well as in settlement negotiations, and make co-lead counsel responsible for coordinating appearances and motions by all of the plaintiffs.

Because technological problems with the Clerk’s electronic filing system prevented formal consolidation of the shareholder derivative actions, the management orders created a pragmatic solution.  The Court and the parties will treat the Derivative Actions as if they were consolidated for all pretrial purposes and pleadings. 

The management orders also required the Plaintiffs to file a Verified Consolidated Shareholder Derivative Complaint (“Complaint”) to serve as the operative initial pleading for all plaintiffs. Co-lead derivative counsel filed the Complaint on September 11, 2008.  The following post will cover the Complaint in detail.

The primary materials for this post are available on the DU Corporate Governance website.

Friday
Mar212008

Chiquita and the Costs of Doing Business

We have discussed on this Blog the plea deal by Chiquita Brands International made in connection with payments to an organization in Columbia designated by the US State Department as a terrorist organization.  The sentencing memorandum described the payments as a "business decision."

Anarticle in the WSJ noted that a suit has been filed against Chiquita by relatives of five missionaries killed in Columbia, alleging that the payments by the Company were a "contributing factor" in the deaths.  It is apparently the fifth suit of this type, with the requested damages reaching exorbitant levels.  As one pleading described:  "Chiquita has been sued civilly in four separate cases in four federal district courts by the families of the hundreds of victims of the AUC's murderous rampage in Columbia, with these plaintiffs collectively seeking nearly $8 billion in damages from Chiquita."

But Chiquita's troubles go beyond these suits.  The payments were known at the highest levels of the company, including the board of directors.  As theSentencing Memorandum noted:  "Defendant Chiquita continued to pay the AUC even after one of its directors acknowledged in an internal email, on December 22, 2003, that 'we appear [to] be committing a felony.'"

The payments, therefore, raise questions about the actions of the board.  No individuals were charged in the criminal action.  At least four derivative suites have, however, been filed in various jurisdictions.  Pursuant to an order of the Multi District Litigation Panel, the cases have all been transferred to the Southern District of Florida.  A motion to consolidate the cases is pending.   

We shall keep an eye on this case.  It raises serious questions about the board's fiduciary responsibilities.  The derivative action filed in Ohio alleges for example that the board violated the duty of loyalty by, among other things, "willfully and knowingly" making decisions "that caused the Company to engage in conduct that violated federal law."  Because the case is now pending in Florida and because Chiquita is incorporated in New Jersey, the case will be free of the biases of the Delaware courts and need not rely on the pro-management decisions emanating from that jurisdiction.  It may, therefore, provide a potentially useful vehicle for defining the duties of directors.  

We have included some of the filings in the case on the DU Corporate Governance web site, including several of the complaints and the motion to consolidate. 

Tuesday
Sep182007

Chiquita, Colombian Terrorists, and "a Cost of Doing Business"

We take a break from our many posts on the SEC's current proposals to amend Rule 14a-8, the shareholder proposal rule.  We will resume next week, focusing on the alternative proposal that would amend Rule 14a-8 to prohibit, in some instances, the exclusion of a bylaw requiring the inclusion of shareholder nominees in the company's proxy statement.  This is the so called access proposal.  For now, we return to another common theme of the Blog, corporate governance and the impact of SOX. 

SOX attempted to reduce the instances of false disclosure by giving gatekeepers such as accountants and the audit committee of the board more authority and greater involvement in the disclosure process.  But as the criminal action against Chiquita Brands International shows, there are limits to this method of reducing improper behavior.  Sometimes even when the gatekeepers know what is going on, the activity continues.

As we have already written, Chiquita agreed in March 2007 to plead guilty to one felony for making payments to a terrorist organization in Colombia.  We have obtained a copy of the Government Sentencing Memorandum in the case and it is posted on the DU Corporate Governance web site.  The sentencing hearing was held on Monday, Sept. 17, 2007 and the plea approved. 

Chiquita operated a subsidiary in Colombia that produced bananas.  According to the Sentencing Memorandum discloses, Chiquita "paid money to [the AUC] a violent, right-wing terrorist organization in the Republic of Colombia" over a six year period, from 1997 through Feb. 4, 2004.  Along with other organizations, it was "responsible for a staggering loss of life in that country." 

How often were the payments made?  "Defendant Chiquita paid the AUC, directly or indirectly, nearly every month.  From 1997 through February 4, 2004, defendant Chiquita made over 100 payments to the AUC totaling over $1.7 million." 

What was the impact of the payments?  Again, according to the Sentencing Memorandum:

  • "The money that defendant Chiquita paid to the AUC (and to the FACRC and the ELN before that) was put to whatever use the terrorists saw fit.  Money is fungible.  Regardless of the Company's motivations, defendant Chiquita's money helped buy weapons and ammunition used to kill innocent victims of terrorism.  Simply put, defendant Chiquita funded terrorism."

Was this something done by low or mid level employees without management's awareness?  That once it became known to management, the practice came to an end?  Not quite.  Again, the Sentencing Memorandum:

  • "Defendant Chiquita continued to pay the AUC even after the payments were brought directly to the attention of its senior executives during a Board meeting held in September 2000." 
  • "Defendant Chiquita continued to pay the AUC after gaining direct knowledge of the AUC's designation as a Foreign Terrorist Organization in September 2002."
  • "Defendant Chiquita continued to pay the AUC even after its outside counsel emphatically and repeatedly advised the Company, Beginning in late February 2003, to stop the payments."
  • "Defendant Chiquita continued to pay the AUC after Department of Justice officials admonished the Company, on April 24, 2003, that the payments were illegal and could not continue." 
  • "Defendant Chiquita continued to pay the AUC even after one of its directors acknowledged in an internal email, on December 22, 2003, that 'we appear [to] be committing a felony.'"

And the Company's motivations?  As the Memorandum noted, "Defendant Chiquita claimed that it made the payments to protect its employees."  But at the same time, the Memorandum made these comments: 

  • "Defendant Chiquita's reason for being in Colombia was, of course, to produce bananas profitably.  And there is no question that defendant Chiquita profited from its Colombian operations during the period that the Company paid the AUC.  According to defendant Chiquita's records, from September 10, 2001 (the date of the AUC's designation as a Foreign Terrorist Organization), through January 2004, the company earned approximately $49.4 million in profits for its Colombian banana-producing operations.  Indeed, by 2003 the Company's Colombian operations were its most profitable." 

Said another way, the Sentencing Memorandum described the attitude towards the payments, at least in the beginning, as a "cost of doing business."

  • "Whatever motivated defendant Chiquita at the start, the Company made a business decision to remain in Colombia and pay the AUC for over six years. Officers of defendant Chiquita and Banadex [the Colombian subsidiary] referred to the payments as an unsavory 'cost of doing business' at their inception in 1997.  When the internal investigation about the payments was presented to the board in September 2000, the Board treat them as a routine business matter -- a tolerable expense to be kept low."

The penalty for this behavior?  A $25 million fine, to be paid in five annual installments, and corporate probation of five years. The maximum potential fine was $98.8 million, but that was based upon the $49.4 million in profits earned from Sept. 10, 2001 through January 2004. In other words, the one count and the determination of the fine did not take into account the payments made or profits earned from 1997 through September 9, 2001.  Credit was given for self reporting the offense, although the Memorandum noted that "defendant Chiquita also admitted as part of its guilty pleas that it continued to engage in the same criminal conduct after its voluntary disclosure." 

What about the responsible individuals inside the Company?  The Memorandum emphasized that it "was particularly important to make clear that the conduct that lead to the Company's guilty plea was not the act of a rogue employee or mid-level manager."  In other words, it was known at the highest levels within the Company.  Nonetheless, with respect to additional charges in the matter, "the United States has decided not to do so" out of an exercise of prosecutorial discretion.

What are some of the consequences?  Law suits, of course, but not just the usual ones brought by unhappy shareholders.  According to the Company's most recent quarterly report:

  • "Three separate lawsuits have been filed against the company in U.S. federal court claiming that the company is liable for alleged tort violations committed in Colombia. The first lawsuit was filed on June 7, 2007 in the U.S. District Court for the District of Columbia; the second was filed on June 13, 2007 in the U.S. District Court for the Southern District of Florida; and the third, a proposed class action, was filed on July 18, 2007 in the U.S. District Court for the District of New Jersey. The plaintiffs in all three suits claim to be, or claim to be members of a class of, family members or legal heirs of individuals allegedly killed by armed groups that received payments from the company’s former Colombian subsidiary. The plaintiffs claim that, as a result of such payments, the company should be held legally responsible for the death of plaintiffs’ family members. The lawsuits seek unspecified monetary damages. The company believes it has meritorious defenses to the plaintiffs’ claims and intends to defend itself vigorously against the lawsuits."

The facts in this case seem egregious.  In connection with the claims that the payments were meant to protect employees, the Sentencing Memorandum poses a series of unanswered questions that suggest otherwise.  Moreover, despite the claim, the payments came to a quick end once the will existed at the top levels of the Company.  It was the arrival of Fernando Aguirre as CEO in January 2004 that ended the practice.  One month after assuming office, he decided that the payments had to stop, concluding in an email to senior officers:  "At the end of the day, if extortion is the modus operandi in Colombia or any other country, we will withdraw from doing business in such country."  Chiquita sold the Colombian subsidiary about five months later.  It is entirely unclear what prevented Chiquita from taking the same path years earlier.   

As for matters of corporate governance, boards have a fiduciary obligation to profit maximize.  Profit maximization is a concept that requires exclusive focus on the interests of shareholders, not the broader community.  Fortunately, this duty does not apply where it means engaging in illegal activities.  See Miller v. AT&T, 507 F.2d 759 (3rd Cir. 1974).  The facts in Chiquita show why.  There are time when engaging in unsavory activity can be highly profitable.

SOX sought to avoid fraud through a two prong approach that both increased the involvement of gatekeepers in the disclosure process and imposed stiff penalties for violations (witness the potential 20 year prison terms for violations of the certification requirement by the CEO or CFO).  By making individuals responsible, it provides far greater incentive to ensure proper disclosure.  The value of this approach can be seen from Chiquita, where none of the individuals responsible for the behavior were prosecuted and the Company was subjected to a modest financial penalty.  Whatever can be said about the Chiquita incident, the results provided little deterrence to other companies in a comparable situation. 

Monday
Aug062007

Payments to Terrorists: Chiquita Brands and the Role of the Board of Directors

There was an interesting article in the WSJ last week about Chiquita Brands International Inc. and payments made to a violent group in Colombia designated by the Department of State as terrorists. According to the article, Roderick M. Hills, the former Chairman of the SEC, went to the Justice Department in his capacity as chair of the audit committee to disclose the payments. Despite having self reported, a criminal prosecution resulted with Chiquita ultimately agreeing to a plea of one count of engaging in transactions with a specially-designated global terrorist and to pay a fine of $25 million. A grand jury is now apparently weighing a possible indictment of Hills.

The implication of the article was that companies confront heightened risk if they self report their own misdeeds. As the article noted: "The investigation illustrates the recent posture taken by U.S. authorities to prosecute aggressively even when companies turn themselves in for breaking the law."

But in fact it illustrates no such thing. This is not the usual case of a company discovering improper behavior, putting a stop to it, and self reporting to the government. This is a case that involves a fundamental breakdown in the system of corporate governance.

First, this was not the only payment problem incurred by Chiquita's Colombian subsidiary. It had already been found to have made improper payments to government officials by the SEC, with Chiquita subjected to a $100,000 fine. See SEC v. Chiquita Brands International, Inc., Litigation Release No. 17169 (D DC Oct. 2. 2001). In other words, the board and management was on notice that there were problems with this particular subsidiary, specifically in connection with the making of improper payments.

Second, the payments in Colombia were made to Autodefensas Unidas de Colombia (AUC), an organization described in the factual proffer as "a violent, right-wing organization" (a copy of the Proffer will be posted later today on the DU Corporate Governance web site). As one US Attorney described in the WSJ article:

  • "I regarded this as a murder investigation," from the start, says Roscoe Howard Jr., former U.S. Attorney for Washington, D.C., who helped lead the Chiquita prosecution before he left his position in 2004. "Even though Chiquita didn't murder anyone, that's what the money was used for -- to buy weapons."

Moreover, the role of the AUC was not lost on the US Government. It was designated as a foreign terrorist organization in September 2001.

Third, the payments had been discussed and apparently approved by persons in the highest echelons of management. Again, according to the Proffer:

  • "Defendant CHIQUITA'S payments ot the AUC were reviewed and approved by senior executives of the corporation, to include high-ranking officers, directors, and employees. . . An in-house attorney for CHIQUITA conducted an internal investigation into the payments and provided Individual C [listed only as a high ranking official] with a memorandum detailing that investigation. The results of the internal investigation were discussed at a meeting of the then-Audit Committee of the then-Board of Directors in defendant CHIQUITA'S Cincinnati headquarters in or about September 2000."

In other words, this was not a case where a company's management discovered improper behavior and went right to the authorities. This behavior was apparently widely known among top management and allowed to continue.

Fourth, as the WSJ Article indicated, Hills joined the board in 2002 and almost immediately learned about the payments. Nonetheless, it took a year before he reported them to the Justice Department. Moreover, the decision to self report only occurred after the matter was brought to the attention of outside counsel and the entire board. Outside counsel (apparently Kirkland & Ellis), according to the Proffer, indicated that the company "must stop [the] payments." A report was made to the full board and at least one member "objected to the payments." It was after that meeting that officials met with officilas at the Department of Justice.

Fifth, Justice Department officials, according to the Proffer, informed Chiquita officials (including, apparently, Hills) that the payments to the AUC "were illegal and could not continue." Moreover, several months later, officials at Chiquita were told by outside counsel that DOJ officials "have been unwilling to give assurances or guarantees of non-persecution; in fact, officials have repeatedly that they view the circumstances presented as a technical violation and cannot endorse current or future payments." Nonetheless, the payments continued until February 2004.

Finally, the WSJ left the impression that Chiquita and Hills were being treated harshly. Compare that to an article in the LA Times which suggested that some in the US Attorneys Office wanted more rigorous prosecution at an earlier date and were possibly stymied by higher ups in the Justice Department. That Article indicated that Congress was conducting an investigation. Id. ("As part of an inquiry into corporate payments to violent groups in Colombia, a group of congressmen wants more details about the Justice Department's handling of the Chiquita Brands International Inc. case, including whether the department was too lenient and why it took four years to file criminal charges after the banana company admitted making payoffs.").

This is not, therefore, a case where a company learns about a bad practice and immediately coming clean. It is the story of illegal payments that were known at the top levels of management, continued for seven years, went to a violent terrorist group, and were self reported only when the entire board and outside counsel learned about them. Indeed, the history of payments apparently went back beyond 1997. As the WSJ article noted, "Chiquita had previously paid another violent group until it was declared a terrorist organization in 1997."

There were no doubt moments when Chiquita was truly in a difficult spot. The articles indicate that the payments were made to ensure the security of employees in Colombia. But that might explain the payments for the time it took to either provide adequate security or exit the country. In fact, the payments to AUC continued for seven years, from 1997 to 2004.

Whatever happens to Hills, as a director with fiduciary obligations to shareholders, he (and the entire board) should, once they knew, have put an end to these payments. That they did not is a remarkable failure of governance.