A recent win by Skadden, Arps, Slate, Meagher & Flom in defeating a class action suit against Brazilian aerospace conglomerate Embraer, which acknowledged global bribery allegations as part of a deferred prosecution agreement with U.S. investigators in October 2016, served as a good snapshot of the recently evolved set of challenges faced by those seeking to bring a federal class securities action in the Southern District of New York.

In Employees Retirement System of the City of Providence v. Embraer, 16-cv-06277, the plaintiffs, represented by Pomerantz, alleged the company and its top officers violated a number of securities laws and rules. The source of the violations during the class period from early January 2012 to late November 2016 centered on Embraer's violation of the Foreign Corrupt Practices Act.

The company would admit in October 2016 that, between 2007 and 2011, several high-level executives helped bribe government officials in the Dominican Republic, Saudi Arabia, Mozambique and India to the tune of $11.5 million. In exchange, the company received contracts worth more than $83 million in profits, according to court papers.

In their complaint, the plaintiffs alleged a number of ways in which Embraer failed to adhere to securities rules. In each, U.S. District Judge Richard Berman of the Southern District of New York pointed to the state of securities pleadings to nullify the arguments.

To begin with, the plaintiffs argued that the company was “duty bound” of the “certainty of the fraud” once the government's investigations began—a premise, as the defendants called it, that the company admit to wrongdoing “before it had even been charged and before the investigations were even complete.”

Berman agreed, pointing to two recent cases. In the U.S. Court of Appeals for the Second Circuit's 2014 decision in City of Pontiac Policemen's System v. UBS, the court held that “disclosure is not a rite of confession, and companies do not have a duty to disclose uncharged, unadjudicated wrongdoing.” Likewise, in a suit as part of the long-standing securities litigation tied to the Petrobras public corruption scandal, the district court in September 2017 found in In re Banco Bradesco S.A. Securities Litigation that the bank had disclosed enough when it acknowledged that investigations were happening and a negative outcome could happen—just as Embraer had.

The plaintiffs' argument that the company was obligated to disclose that some of its money was received because of bribes was also unavailing. In In re Sanofi Securities Litigation, the pharmaceutical company was sued for not flagging the financial benefits of its illegal marketing and kickback scheme. Citing the district court's September 2016 decision, Berman found that, absent an allegation that the financial statements were actually false, it's not a securities violation.

An attempt to hold Embraer liable for its own internal codes of ethics similarly failed. Another district case tied to the Petrobras scandal, In re Braskem SA Securities Litigation, involved a company that had rules that forbade bribery, yet it was accused of doing just that. Quoting from the Ninth Circuit's January 2017 decision in Retail Wholesale v. Hewlett-Packard, the district court held that “a code of ethics is inherently aspirational,” adding that, absent more than an “undisclosed breach of this standard of conduct,” breaking your own rules is “not actionable under securities laws.”

The plaintiffs also challenged Embraer's stated belief that it didn't need to estimate reserves for the investigation into its conduct—even as the company ended up paying $945.3 million in fines and disgorgement. Berman turned to the U.S. Supreme Court's landmark 2015 decision in Omnicare v. Laborers District Council Construction Industry Pension Fund. A claim cannot be stated simply because an opinion is wrong, Berman noted, and here Embraer's opinion about reserves was based on advice from outside counsel.

“Plaintiff does not plead that this statement was (insincerely) not truthful or that management (and its outside counsel) did not believe what they were stating publicly,” the judge wrote.

Lastly, Embraer was accused of not maintaining adequate internal controls, namely because even after the DPA went into effect, at least one senior executive with oversight responsibility for the employees engaged in illegal activity remained employed and undisciplined. Two relevant district decisions from 2015 were noted—In re Petrobras Securities Litigation, which found less particularized claims sufficient to proceed, and In re PetroChina Securities Litigation, in which the lack of particularity doomed the claim.

Berman found that the PetroChina case was the more similar of the two.

“Plaintiff, in the instant case, relies exclusively upon general assertions about Embraer's internal controls—and tortuously (and unpersuasively) tries to relate them to the fact that some current Embraer employees knew about or participated in (publicly disclosed) pre-class period bribery at various points between 2004 to 2011,” he wrote.

Berman granted, then, the defendant's motion to dismiss with prejudice.

Pomerantz partner Jeremy Lieberman, who led the plaintiffs' legal team, agreed that “the courts are struggling” with many of these securities-related issues. But from his perspective, there's just as much good law that sides with his clients as not. He pointed to the recent revival of the lawsuit against Alibaba Group Holding Ltd. by the Second Circuit last year, and the 2014 dismissal by the same circuit of the securities suit against JinkoSolar, as offering different views on company's liabilities when it comes to disclosing wrongdoing.

“Yet somehow the district courts, and even sometimes the court of appeals, are coming up with divergent points of view,” he said, adding that he respectfully disagreed with Berman's decision and is considering appeal with his client.

Embraer's defense team from Skadden included partners Jay Kasner, Christopher Malloy and Scott Musoff. The firm did not return a request for comment.