Guilty pleas and regulatory settlements often trigger follow-on private litigation. Courts have often taken a broad interpretation of what can constitute securities fraud, allowing these cases to move forward through the motion to dismiss stage, costing companies dearly in both money and reputational harm.

The breach by Telefonaktiebolaget LM Ericsson (Ericsson) of its 2019 deferred prosecution agreement (DPA) lead almost immediately to one such securities fraud case. On March 3, 2022 – just one day after Ericsson announced that it had been notified by the DOJ of the 2019 DPA breach, an Ericsson investor commenced a securities fraud class action in the U.S. District Court for the Eastern District of New York (District Court) against Ericsson and certain of its executives. On June 8, 2022, Boston Retirement System (BRS) was appointed lead plaintiff in the action.

However, Ericsson has been able to nip this particular case in the bud early. In May 2023, the District Court dismissed the action with prejudice. On September 3, 2024, the U.S. Court of Appeals for the Second Circuit (Court of Appeals) affirmed the District Court’s decision. This article discusses the circumstances giving rise to the action, BRS’ allegations and the Court of Appeals’ reasoning.

See “Lessons From the Dismissal of the Embraer Securities Fraud Class Action” (May 2, 2018).

Ericsson’s FCPA Settlements and Subsequent Guilty Plea

Ericsson, a multinational networking and telecommunications company headquartered in Stockholm, Sweden, began operating in Iraq after the withdrawal of the U.S. military in 2011, earning about $1.9 billion in revenue through 2018, according to BRS’ amended complaint (Complaint). During that time, Ericsson was the subject of DOJ and SEC investigations into its practices in developing countries, including Djibouti, China, Vietnam, Indonesia and Kuwait. At the end of 2019, Ericsson:

• entered into a DPA with the DOJ (2019 DPA), which included a three-year monitorship, an undertaking to strengthen its compliance program and a requirement to report to the DOJ any evidence or allegations of potential FCPA violations;
• settled the SEC’s civil enforcement action;
• agreed to pay nearly $1.06 billion in civil and criminal penalties, disgorgement and prejudgment interest; and
• its subsidiary, Ericsson Egypt Ltd., pleaded guilty to one count of conspiracy to violate the FCPA.

See “Lessons From Telecom Giant Ericsson’s Billion-Dollar Record-Setting Deal” (Jan. 8, 2020).

Internal Investigation of Activities in Iraq

While the DOJ and SEC investigations were in progress, Ericsson retained Simpson Thacher to investigate the company’s operations in Iraq, the Complaint alleges. Days after the SEC and DOJ resolutions, Simpson Thacher delivered a confidential report to Ericsson (Iraq Report), which allegedly detailed tens of millions of dollars of suspicious payments in Iraq over nearly a decade, as well as FCPA violations and possible payments to a known terrorist organization.

Breach of DPA and New Guilty Plea

On February 15, 2022, in response to media inquiries about the Iraq Report, Ericsson issued a press release concerning its activities in Iraq. On March 2, 2022, Ericsson issued a second press release announcing that it had been notified by the DOJ that it had breached its DPA by failing to disclose fully all facts and evidence regarding the alleged bribery schemes in China and Djibouti or the potential FCPA violations in Iraq. The class action suit was filed the next day.

A year to the day later, Ericsson pleaded guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA and one count of conspiracy to violate the internal controls and books and records provisions of the FCPA, which had been deferred pursuant to the 2019 DPA. It also agreed to pay an additional criminal penalty of more than $206 million and extend the monitorship under the 2019 DPA by one year.

See “Ericsson Pleads Guilty and Faces Other Consequences for Failing to Comply With 2019 DPA” (Mar. 29, 2023).

Fraud Allegations

The Complaint named as defendants Ericsson as well as its CEO Börje Ekholm, CFO Carl Mellander and Chief Legal Officer Xavier Dedullen (together, Defendants). BRS sought to represent a class of investors who purchased Ericsson’s American Depositary Shares (Shares) between April 27, 2017, and March 1, 2022 (Class Period).

BRS alleged the Defendants had knowingly made multiple materially false and misleading statements and omissions during the Class Period. The crux of the Complaint is that Defendants touted the 2019 resolution of the SEC and DOJ investigations and improvements to Ericsson’s anti-corruption efforts while knowing of its “rampant corruption” in Iraq.

Plaintiffs in securities fraud cases must plead fraud with a high degree of specificity. Consequently, the Complaint detailed 16 allegedly false and misleading statements concerning:

• the source of Ericsson’s business growth in the Middle East (Business Growth Statements);
• its anti-corruption policies and program (Policy Statements); and
• the resolution of the DOJ FCPA investigation, the robustness of its compliance program and the risk of future government enforcement action (FCPA Statements).

BRS claimed those statements were false because, at the time they were made, Ericsson had:

• secured lucrative contracts in Iraq through bribery and bid rigging;
• made protection payments to ISIS to obtain access to certain terrorist-controlled transportation routes and cities;
• intentionally bypassed its own compliance systems; and
• concealed its illegal conduct from regulators and investors.

Defendants allegedly engaged in a scheme to deceive the investing public, artificially inflate and maintain the price of Ericsson’s Shares and cause investors to purchase Shares at artificially inflated prices. The three-count Complaint alleged:

• all Defendants violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b‑5 thereunder, which make it unlawful to engage in fraudulent or deceptive conduct in connection with the purchase or sale of securities (Counts I and II); and
• the individual Defendants were liable for Ericsson’s fraud as control persons pursuant to Section 20(a) of the Exchange Act (Count III).

See “Civil Litigation in the Aftermath of FCPA and U.K. Bribery Act Investigations” (May 13, 2020).

Motion to Dismiss

Defendants moved under Rule 12(b)(6) to dismiss the Complaint for failure to state a claim. A claim for violation of Section 10(b) and Rule 10b‑5 under the Exchange Act must allege:

• a misstatement or omission by the defendant that is both material and false or misleading;
• an intention to deceive, i.e., scienter; and
• loss causation.

On May 24, 2023, the District Court issued a Decision and Order granting Defendants’ motion in its entirety and dismissing the Complaint with prejudice. The District Court determined that none of the Business Growth Statements, Policy Statements or FCPA Statements were actionable. Additionally, even if any of such statements were actionable, BRS had failed to establish the Defendants had acted with scienter. Because BRS failed to establish its primary fraud claims, its control person claim against the individual Defendants also failed.

On BRS’ appeal, the Court of Appeals issued a Summary Order affirming the District Court’s judgment.

Alleged Misstatements Not Actionable

While the DOJ found Ericsson to be in violation of the terms of its DPA, the District Court found that the statements the company made about its compliance program and business health generally, as well as its compliance with the FCPA, were not of the type on which investors should have relied.

Policy Statements

Three of the Defendants’ alleged misstatements concerned Ericsson’s anti-corruption policies and procedures:

• Its 2016 corporate governance report referred to its “high standards,” “code of conduct,” conducting business with a “strong sense of integrity” and ensuring compliance with legal and regulatory requirements.
• Its 2017 foreign issuer annual report referred to its “zero tolerance approach to corruption” and detailed anti-corruption policies.
• Its 2017 Form 20‑F mentioned a new “vetting process that focuses on ethics and compliance.”

Those were general policy- and compliance-related statements, rather than specific assurances of actual compliance, the District Court reasoned. Moreover, the fact that the Policy Statements were made during the pendency of DOJ and SEC investigations did not change their “milquetoast corporate-speak” nature. In fact, that context would make investors even less likely to rely on them. Additionally, Ericsson had qualified its statements by warning that it might fail to comply with its governance standards and could not guarantee that future violations would not occur.

The Court of Appeals agreed. “We have repeatedly held that ‘general statements about reputation, integrity, and compliance with ethical norms are inactionable ‘puffery,’ meaning that they are too general to cause a reasonable investor to rely upon them,” it said. The Policy Statements “consisted of generalized statements about ethics and compliance, such that no reasonable investor would rely upon them.”

See “Avon Class Action Dismissal Illustrates Challenges of FCPA-Related Shareholder Derivative Suits” (Oct. 22, 2014).

FCPA Statements

The Complaint details nine alleged misstatements concerning:

• the end of the SEC and DOJ FCPA investigations;
• Ericsson’s awareness of follow-on investigations in other countries;
• ongoing improvements to its ethics and compliance program and controls;
• “zero tolerance when it comes to corruption”;
• cooperation with regulatory authorities; and
• continued “transparency” with investors regarding its conduct in Iraq.

Most of Ericssons’ statements regarding the 2019 DPA and FCPA investigations were not actionable because the company “gave ubiquitous warnings to investors regarding the possibility of future compliance failures and investigations,” said the District Court. In light of its repeated warnings in public filings, no reasonable investor would have viewed those statements as “assurances of actual compliance.” Moreover, companies are under no obligation to disclose to investors “uncharged, unadjudicated wrongdoing.”

One of the individual Defendants made the statement regarding follow-on investigations in other countries in response to an inquiry regarding other government investigations, noted the District Court. Thus, failure to mention the Simpson Thacher investigation did not render that statement materially misleading.

Here, too, the Court of Appeals agreed with the District Court’s reasoning, explaining that “Ericsson’s statements regarding the DPA were sufficiently limited to the scope of the FCPA investigations by the government that had already occurred and conveyed nothing about any internal investigations.” Moreover, the allegedly misleading statements about resolution of the SEC and DOJ FCPA investigations and post-resolution monitoring of its compliance program were “non-actionable expressions of puffery and corporate optimism,” the Court of Appeals reiterated.

Critically, the FCPA Statements were accompanied by ubiquitous warnings about the possibility of future compliance failures and government investigations, including:

• “Ericsson may fail or be unable to comply with laws or regulations and could experience penalties and adverse rulings in enforcement or other proceedings.”
• “[Ericsson] cannot assure [that violations of laws and regulations] do not occur.”
• “[Ericsson] may be subject to further adverse consequences following our recent resolutions with the [DOJ and SEC] of the previously disclosed investigations under the FCPA.”
• “[T]here can be no assurance that the remedial measures we have taken [in relation to the DPA] and plan to take in the future will be effective or that there will not be a finding of material weakness in our internal controls.”

Business Growth Statements

Four of the alleged 16 misstatements concerned the growth of Ericsson’s business in the Middle East. Ericsson attributed that growth to new broadband projects, investments in research and other positive business developments – without disclosing its corrupt conduct in securing and executing contracts in Iraq, the Complaint alleged. Ericsson’s statements were not sufficiently specific to make them actionable, determined the District Court. They referred only generally to “growth,” did not mention any specific projects and did not mention Iraq. Because the Business Growth Statements were too general to require further disclosure, they were not materially misleading.

BRS did not appeal the District Court’s decision with respect to the Business Growth Statements. Thus, the Court of Appeals did not rule on them.

Scienter

A plaintiff can prove scienter by showing the defendant’s motive and opportunity or by demonstrating strong circumstantial evidence of recklessness or conscious misbehavior, noted the District Court. BRS failed to establish that any of the individual Defendants acted with scienter. “In sum, even viewed holistically, BRS’s allegations do not support a strong inference of scienter,” it said. For example:

• Scienter could not be inferred from the alleged importance of Ericsson’s operations in Iraq to its overall business, as its business in Iraq accounted for less than one percent of its global revenues.
• The fact that Ericsson operated in a country with reported corruption was not sufficient to put the Defendants on notice of actual bribery or corruption by Ericsson employees there.
• Confidential witnesses’ allegations that Ericsson maintained a database for contract payments and that one corrupt employee reported directly to one of the individual Defendants were insufficient. They did not allege that any of the individual Defendants was aware of the particular information in the database or aware of the employee’s corrupt conduct.
• Mere knowledge of the internal and government investigations and the 2019 DPA did not support an inference that the individual Defendants knew of misconduct in Iraq at the time of the alleged misstatements.
• Defendant Ekholm’s seat on the Ericsson board did not give rise to an inference of scienter in the absence of any allegation that he learned information about corruption in Iraq through that position.

Because the Court of Appeals determined that the Complaint did not allege any actionable misstatements by the Defendants, it did not address the issue of whether they had acted with scienter.