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.