Report of the Special Litigation Committee Chiquita Brands Intl Inc 2009
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Case 0:08-md-01916-KAM
Document 202
Entered on FLSD Docket 02/25/2009
Page 1 of 2
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO.: 08-01916-MD-MARRA/JOHNSON
IN RE: CHIQUITA BRANDS
INTERNATIONAL, INC. ALIEN
TORT STATUTE AND SHAREHOLDER
DERN ATNE ACTION
_ _ _ _ _ _ _ _ _ _ _ _ _ _----'1
This Document Relates to:
DERN ATNE ACTIONS.
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THE SPECIAL LITIGATION COMMITTEE OF CHIQUITA BRANDS
INTERNATIONAL, INC.'S NOTICE OF FILING JOINT DECLARATION OF
HOWARD W. BARKER, JR., WILLIAM H. CAMP AND DR. CLARE HASLER
The Special Litigation Committee of nominal defendant Chiquita Brands International,
Inc., through undersigned counsel, hereby files its Joint Declaration of Howard W. Barker, Jr.,
William H. Camp, and Dr. Clare M. Hasler in support of The Special Litigation Committee of
Chiquita Brands International, Inc.' s Motion to Dismiss and Incorporated Memorandum of Law..
RespectfuJly submitted,
FRIED, FRANK, HARRIS, SHRIVER &
JACOBSON LLP
Attorneys for the Special Litigation Committee of
Chiquita Brands International, Inc.
One New York Plaza
New York, NY 10004
Phone: 212.859.8000
Fax: 212.859.4000
TEW CARDENAS LLP
Four Seasons Tower, 15th Floor, 1441 Brickell Avenue, Miami, Florida 33131-3407 • 305-536-1112
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TEW CARDENAS LLP
Attorneys for the Special Litigation Committee of
Chiquita Brands International, Inc.
Four Seasons Tower, 15th Floor
1441 Brickell Avenue
Miami, Florida 33131
Phone: 305/536-1112
Fax: 305/536-1116
By:
s/Joseph A. DeMaria
Joseph A. DeMaria, Esq.
Fla. Bar No. 0764711
Email: jad@tewlaw.com
CERTIFICATE OF SERVICE
I HEREBY CERTIFY that I electronically filed the foregoing with the Clerk of the Court
by using the CM/ECF system on February 25,2009. I also certify that the foregoing document is
being served this day on all counsel of record registered to receive electronic Notices of
Electronic Filing generated by CMIECF, and in accordance with the Court's First Case
Management Order ("CMO") and the June ·10, 2008 Joint Counsel List filed in accordance with
theCMO.
By-,-:----=:::s/~J,;=-o=se"-!=p=h'-';AF.'-"D=:...e=M=ar=i=a
Counsel
520113.1
-2TEW CARDENAS LLP
Four Seasons Tower, 15th Floor, 1441 Brickell Avenue, Miami, Florida 33131-3407 • 305-536-1112
Case 0:08-md-01916-KAM
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRlCT OF FLORIDA
CASE NO.: 08-01916-MD-MARRAIJOHNSON
IN RE: CHIQUITA BRANDS
INTERNATIONAL, INC. ALIEN
TORT STATUTE AND SHAREHOLDER
DERIVATIVE ACTION
_ _ _ _ _ _ _ _ _ _ _ _ _---.;1
This Document Relates to:
DERIVATIVE ACTIONS.
--------
---.;1
JOINT DECLARATION OF HOWARD W. BARKER,
JR., WILLIAM H. CAMP, AND CLARE M. HASLER
HOWARD W. BARKER, Jr., WILLIAM H. CAMP, and CLARE M. HASLER
hereby declare under penalty of perjury, pursuant to 28 U.S.C. § 1746, that the foregoing is true
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and correct:
1.
I, Howard W. Barker, Jr., was appointed to serve as a member ofthe Special
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Litigation Committee (the "SLC") of Chiquita Brands International, Inc. ("Chiquita" or "the
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Company") by the Board of Directors of Chiquita (the "Board") on April 3, 2008.
2.
I, William H. Camp, was appointed to serve on the SLC by the Chiquita
Board on April 3, 2008.
3.
I, Clare M. Hasler, was appointed to serve on the SLC by the Chiquita
Board on Apri13, 2008.
4.
The SLC was authorized by the Board to consider and determine the
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Company's response to the filing of six derivative complaints between October 12, 2007 and
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January 15,2008 in federal and state courts throughout the country. In March and April 2008,
the four federal derivative actions were transferred to this Court by the multi-district litigation
panel, and, on September 11, 2008, plaintiffs filed the Verified Consolidated Shareholder
Derivative Complaint (the "Amended Complaint").!
5.
We jointly submit this declaration in support of the SLC's Motion to
Dismiss the Amended Complaint. The statements in this Joint Declaration are based upon our
personal knowledge.
6.
Attached as Exhibit A to this Joint Declaration is the final Report of the
SLC, which summarizes the SLC's investigative efforts and fmdings, and its determinations as to
whether, in exercising its business judgment in the best interests of Chiquita and all of its
shareholders under New Jersey law, the claims alleged in the Amended Complaint against 26
current and former Chiquita directors and officers should be pursued, dismissed, or otherwise
resolved (the "SLC Report"). An Executive Summary is also attached.
7.
The SLC Report is organized as follows:
•
Section I sets forth an Introduction to the SLC Report. It constitutes
a brief summary of the claims alleged in the Amended Complaint,
the investigation conducted by the SLC, and the structure ofthe SLC
Report;
•.
Section II sets forth the process by which the SLC was formed and
how the SLC, with the assistance of its counsel, evaluated the
independence of its members;
•
Section III sets forth the work plan that the SLC followed in
investigating the claims alleged in the Amended Complaint;
•
Section IV sets forth the factual findings of the SLC;
In addition to this multi-district lawsuit centralized in the U.S. District Court for the Southern District of
Florida, the SLC's authorization covers the following other state court actions: (i) Servo Employees Int'l
Union v. Hills, ·et aI., No. A07-11383 (Ct. of Common Pleas, Hamilton County Ohio) and (ii) Hawaii
Annuity Trust Fundfor Operating Engineers v. Hills, et aL, No. c-379-07 (N.J. Super Ct. Ch. Div.).
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Section V sets 1<n'th the legal analysis oftbe SLC with respect to
each of the claims set :fOrth in the Amended Complaint asainst
each of'the 26 defendants named thctein.
•
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The factual statements and f'Jndings contained In the Sl.c Report are based
upon our personal knowledge as to the Sf.c's tbnnaIiot1t independence, and investigative steps,
and upon the evidence that the SLC developed and anal~ during its iuVCllligation.
9.
Attached as Hxhi'bit B 10 this Joint DedllJ1ltion is a true and correct copy of
the m;o~tion ofthe Board. dated Apri13~ 2008, whereby the Board created the SLC an<!
autb.ori2x:d the SLC to, among other thin~ ~der and detcnniDc the Company's response to
10. Attached a.'i F..xbibit C to this Joint Declaration is a 1IUC and coacet copy of
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the Company's Form Def 14-A, Glt::d April 1S. 200i~ which, among o1hcrtbings, states 'that the
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Company detennined that each ofthe SLC members is an independent directOr.
Dated: Coral Gab,[" Florida
FcbllW')' lL 2009
Dated: .Forsyth, lllinois
. ltcbruary _ , 2009
Member ofthe Special LitigatiOll.
Committee ofChiquimBrantk IntemaIioDaJ. Inc.
William H. ('.amp
Member ofthe Speeial Litisation
Commll.ll:e or Chiquita Bl'8Jlds InternaliOllal, (nc.
~t.Ub.~
.IIoward W. Barker;Jt:
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Woodland, California
February ---' 2009
CJare M. flasler
Member ofCbt Spocial Litiption
Committee pi ChkpIira Brands InIm1aflcmal, Inc.
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Seclion V ~lS fonh the legll1 analysts ofthe SLC wil:h re4Pect to
'each of the r;.1~ set forth in the An1Ctldcd CompllJint agaiMt
..,eB.ch afthe 26'deft;ndantl ~ed,therein. ' .
'Th~ f~n,al ~1S and findings contained in tliC SLC R~ are based
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onaJ.1mowledge ~ ,t9 the SLCt, fontla~on, ind¢9cndtnee, and In.vesti~tive step~,
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and.\lpon the eVideof;e,1lla(tllc; '$L~, devel!?ped and analyzed
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the rcsoluti
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A.ttaehed as EXhibit B 10 this Joint DeclaratiOn 1$ a aw: Il1ld QO~ect c;J)py ~f
of the Board:. 4~ ~ril 3,2Q08. wheIeby the BoinJ Q"ClI.tC:d: ~~ s.~~ ~
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determine tlie'CoiiipanY"s ~ohSe't~'''-''''---'_':'~--'
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d\ese actions
10.
Attached ~$ Exhibit C to this Joint Declaradoll is a tJUC and COJ'rccl
. , cop>, of
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the Compan: 'l Form pC,f) 4;A, :filed Apti115. 2008, which. BmOtlg oth~ things, states that the
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, CQrnpan¥ d 'ermlned,tbaI.:eA<;!\ ofihe st,c lnem~ i$ ~n ipd~~J'I~ ~~~~~ ... ,~ '.,
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February _ . 2009
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Section V Set$ torth the leat! analysis ofthe SLC with respect to
each bfthe claims $et tQrth in the.An1ended ComplaiDt against
each oftbe 26 defendants named theteln.
•
8.
~ factual state1ltents 8J1d findings contained in the SLC Reyort are based
upon our personal knowledge' as to the SLe's funnation, ip(1ependcnce, and in'VestigaIivc: steps,
and1,lpOn1he evidence that the SLC developed and analyzed during its investigation.
9.
bttaebod as ExhibitB to this Joint Dccla:ratiOXl is a 1JUe and oorrect copy of
1heresolution ofthe Bo~ dated April 3. 2008, whereby the Board created the SLC and
authorized the SLC tot amoPg.other things, COJ]$ide1' Md dettnnine the Company's response to
these actions.
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10. Attached as £xhibit C10 this Joint Dec:1aratlon is a true and correct copy of
the Compants Form Def 14-A, filed April 1S. 2008. which, IlmOIlS other thfn&s. states that the
Company detennine<l that eachof the S1.C memben is an independent dirc:ccor.
DlUtd: Cotal Gables, Florida
February ........, 2009
Dated: Po. IDinoi$
Pebrauy ~ 2009
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Howard W. Barker, Jr.
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William Camp
Member of the Special Liti$Qtion
Committee ofCbiquia Brllllds Intc:tnational, Inc.
Member of the- Spccla1 Litigation
Commiuee of-Chiquita BnnQs JD%cmalional, Inc..
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Case 0:08-md-01916-KAM
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EXHIBIT "A"
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REPORT OF THE SPECIAL LITIGATION COMMITTEE
CHIQUITA BRANDS INTERNATIONAL, INC.
EXECUTIVE SUMMARY
SPECIAL LITIGATION COMMITTEE
HOWARD W. BARKER, JR.
WILLIAM H. CAMP
DR. CLARE M. HASLER
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP
MICHAEL R. BROMWICH
DAVID B. HENNES
WILLIAM G. MCGUINNESS
FEBRUARY 2009
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This report summarizes and synthesizes the facts that have been developed in
the investigation conducted by the Special Litigation Committee (the "SLC") of the
Board of Directors (the "Board") of Chiquita Brands International, Inc. ("Chiquita" or
the "Company") of allegations contained in the Verified Consolidated Shareholder
Derivative Complaint (the"Amended Complaint" or "Am. Comp!."). The Amended
Complaint was filed on behalf of the Company in the U.S. District Court for the
Southern District of Florida on September 11, 2008. This report also presents the SLC's
determinations, based on the exercise of its business judgment under New Jersey law,
taking into account the best interests of Chiquita and its shareholders, as to whether the
claims alleged in the Amended Complaint should be pursued, dismissed, or otherwise
resolved.
The claims in the Amended Complaint arise principally out of payments made
by Chiquita's Colombian subsidiary, c.I. Bananos de Exportaci6n S.A. ("Banadex"),
from approximately 1989 through January 2004 to left-wing guerrilla and right-wing
paramilitary groups, including the Fuerzas Armadas Revolucionarias de Colombia, or
the Revolutionary Armed Forces of Colombia, known as the "FARC," and the
Autodefensas Unidas de Colombia, or the United Self-Defense Forces of Colombia,
known as the"AUC." As a result of certain of those payments to the AUC, Chiquita
pled guilty in March 2007 to violating U.S. anti-terrorism laws and agreed to pay a $25
million criminal fine. The primary focus of the SLC's investigation was to determine
whether any of the named defendants, who were senior officers and directors of
Chiquita at various points during this period, breached their duties of care or loyalty to
the Company as a result of these payments, and to form a judgment as to whether it is
in the best interests of Chiquita to pursue any such claim.
I.
FORMATIONOFTHESLC
By resolution dated April 3, 2008, the Board formed the SLC in response to the
filing of six derivative complaints between October 12,2007 and January 15,2008 in
federal and state courts throughout the country (the "Derivative Litigation"). In March
and April 2008, the four federal derivative actions were transferred to this Court by the
multi-district litigation panel, and, as stated above, on September 11, 2008, plaintiffs
filed the Amended Complaint, which alleges claims on behalf of Chiquita for different
forms of breach of fiduciary duty against twenty-six current and former Chiquita
officers and directors.
The SLC is comprised of three non-management Chiquita directors: (i) Howard
W. Barker, Jr., a former partner at KPMG LLP, (ii) William H. Camp, a former senior
executive at Archer-Daniels Midland Company, Inc., and (iii) Dr. Clare M. Hasler, the
Executive Director of the Robert Mondavi Institute for Wine and Food Science at the
University of C~lifornia, Davis. All three directors were appointed to the Board after
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Chiquita had ceased making the payments that the Amended Complaint alleges to be
wrongful.
In its April 3 resolution, the Chiquita Board authorized the SLC to investigate the
claims made in the Amended Complaint, and to determine the Company's response to
those claims. The Board granted the SLC "the full and exclusive authority to consider
and 'determine whether or not the prosecution of the claims asserted in the Derivative
Litigation ... is in the best interests of the Company and its shareholders, and what
action the Company should take with respect to the Derivative Litigation." The SLC
was also given the authority to engage whatever resources it considered necessary to
assist with its investigation.
II.
THE
SLC's INVESTIGATION
The claims set forth in the Amended Complaint formed the basis for the scope of
the SLC's investigation, but the SLC considered all of the relevant tacts gathered during
the course of its investigation even if those facts did not fall precisely within one of the
asserted claims. The Amended Complaint alleges generally that the defendants
breached their fiduciary duties, and committed corporate waste, beginning in at least
1989 and continuing to the present, by:
(1)
causing Chiquita to make payments to the FARC and the Ejercito de
Liberaci6n Nacional, or the National Liberation Army ("ELN"), from 1989
to 1997, or failing to be aware of those payments (Am. CompI. 11: 100);
(2)
causing Chiquita to make payments to the AVC, from approximately 1997
through February 2004, or failing to be aware of those payments (Am.
CompI. 11: 100);
(3)
conducting an alleged "fire sale" of Chiquita's Colombian operations
(Banadex), in June 2004 as a result of the pending Department of Justice
investigation (Am. CompI. 11: 127);
(4)
causing Chiquita to enter a guilty plea and pay a $25 !I'l;illion fine in March
2007 in order to protect individual officers and directors from prosecution
(Am. CompI. 11: 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. CompI. 11 129);
(6)
causing Chiquita to make false or misleading statements in its public
filings regarding (i) the nature of the payments to the AVC and (ii)
Chiquita's efforts to comply with the law in general, or allowing such false
statements to be made (Am. CompI. 11: 60-99); and
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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. CompI. 1119).
During the course of its investigation, the SLC members and its counsel consulted with
Lead Counsel for the plaintiffs, appointed by Order dated August 13, 2008, to confirm
that the scope of the SLC's investigation was appropriate, and the SLC was assured that
it was.
The SLC, through and with the assistance of counsel, conducted an independent,
in-depth, and extensive factual investigation of these allegations, including conducting
seventy interviews of fifty-three of Chiquita's current and former directors, officers,
employees, and outside advisors, and reviewing more than 750,000 pages of
documents. The SLC hired the international law firm of Fried, Frank, Harris, Shriver &
Jacobson LLP (" Fried Frank" or "SLC Counsel") to assist it in all facets of its
investigation and to provide legal advice regarding whether the pursuit of the claims
alleged in the Amended Complaint would be in the best interests of the Company.
During its investigation, the SLC received the full cooperation of the Company,
the Company's current and former outside counsel, and all of the individual defendants
named in the Amended Complaint. The SLC benefited substantially from the work
previously done by others in reviewing the payments made by Chiquita's Colombian
subsidiaries to guerrilla and paramilitary groups in Colombia. Many of the facts
underlying the Amended Complaint were the subject of a lengthy Department of Justice
("DOT") investigation of the payments, which culminated in the Company's March 2007
guilty plea. The SLC has been able to make use of the materials generated by Chiquita
and its outside counsel during that investigation, to the extent the SLC found them
reliable.
Because there is no serious dispute that the payments were made to both
guerrilla groups and paramilitariesat various times during the period 1989 to 2004, the
focus of the SLC's investigation was to determine the role and culpability, if any, of
each of the defendants named in the Amended Complaint. The SLC fully understood
that it was required to evaluate the reasonableness of.the conduct of the various
participants, which required an understanding of facts well beyond those contained in
the criminal information and factual proffer entered in connection with the Company's
guilty plea.
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III.
THE
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SLC's FACTUAL FINDINGS!
Overview. Between 1989 and 2004, Chiquita, through its Colombian affiliates
and its subsidiary, Banadex, made payments to left-wing guerrilla groups, generally the
FARC and the ELN, and right-wing paramilitary groups associated with the AUC.
During this period, the political situation in Colombia, violent and tumultuous for some
time as a result of drug trafficking and other causes, saw the rise of both left-wing
guerrillas, which sought to overthrow the elected Colombian government, and rightwing paramilitaries, which were initially formed in response to the extreme lawlessness
caused by guerrilla violence. The payments were justified within the Company on the
grounds that they were necessary to protect the Company's employees and
infrastructure from violence. The Company's operations were located near the towns of
Turbo and Santa Marta, in, respectively, the northwest and northern regions of
Colombia, rural areas conducive to banana growing but generally outside the
Colombian government's ability to provide security and protection.
The SLC found that, from the time they began in approximately 1989, these
payments were known to certain members of senior management at Chiquita (which is
headquartered in Cincinnati, Ohio), and to other.members of management and the
Board at different times. Since the mid-1970s, Chiquita had developed detailed internal
reporting and monitoring practices designed to satisfy the requirements of the Foreign
Corrupt Practices Act of 1977 (the "FCPA"). The Company's FCPA compliance
program, which was supervised by the Company's Internal Audit and Legal
Departments, gathered information on alliegal"facilitating payments" to government
officials, which are generally permitted under the FCPA, as well as information on
other "sensitive" payments. Beginning in the early 1990s, the Company's FCPA
reporting system captured the payments to the guerrilla groups and later the payments
to paramilitary organizations.
The FARe Payments. The payments to the guerrillas began in or around 1989
and stopped in or around 1997, diminishing and then ending as the paramilitary
organizations gained strength. During that period, the Company sought and obtained
opinions from both in-house and outside counsel that the payments to the guerrilla
groups did not violate Colombian law because they were the product of extortion. In
October 1997, around the time the guerrilla payments were ending, both the FARC and
the ELN, the main guerrilla groups to which payments were made, were designated by
the U.S. Department of State as a Foreign Terrorist Organization ("FTO"). With this
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The factual findings contained in this Executive Summary relate only to the first four claims
summarized above, which lie at the core of the allegations in the Amended Complaint. The facts
relating to the remaining three claims - the acquisition of Atlanta AG, alleged false statements in
public disclosures, and alleged excessive compensation - are treated at length in the body of the
SLC Report.
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designation, it became a felony under u.s. law to knowingly provide "material
support" to the FARC and the ELN.
The Convivir-AUC Payments. The SLC found that, in late 1996 or early 1997,
two senior Banadex employees were summoned to a meeting in MedellIn, Colombia
with the well-kri.own and notorious leader of the AUC, Carlos Castafio. At this
meeting, Castano told the Banadex managers that the AUC was expelling the FARC
from the region, arid that the AUC knew that Banadex had been making payments to
the FARe. Castano made it clear to the Banadex managers that the AUC expected that
Banadex would pay the AUC from that point forward.
Based on Castano's reputation for violence and the tone of the meeting, the
Banadex personnel, having experienced murders, kidnapping, and property destruction
for many years at the hands of the guerrillas, sincerely believed that the AUC would
harm Banadex's people and property if the payments were not made. They took the
implied threat very seriously. A short time later, after being contacted by an AUC
representative, Banadex employees made four cash payments to the AUC, although the
SLC found no evidence that Chiquita management in Cincinnati knew of these
payments.
The SLC was unable to determine why, after only four payments, the direct
payments to the AUC stopped. However, around that time, Banadex began making
payments to a "convivir," a govemment-licensedand promoted security organization.
While the Banadex personnel became aware early on of the close relationship between
the corivivir and the AUC, that connection was not initially made clear to Chiquita
executives in Cincinnati, who at first believed that the Company was paying for
legitimate security services. The convivir payments began in Turbo no later than 1997
and continued to be made on a regular basis thereafter.
The Company's Internal Audit and Legal Departments in Cincinnati promptly
identified the convivir payments. As a result, from May 1997 through early September
1997, senior Chiquita management engaged in a review of the payments. The Chiquita
Legal Department reviewed materials distributed by the government of Colombia
attesting to the legality of the convivir. In addition, the Legal Department sought and
received legal opinions from in-house counsel concerning their legality. Finally, during
a visit to Colombia, a Chiquita lawyer discussed the matter directly with senior
Banadex lawyers. In early September 1997, as part of its normal FCPA reporting
process, the convivir payments were disclosed to the Audit Committee, which was told
that the payments were made for security services and were legal. These periodic
reports to the Audit Committee continued over time.
In the spring of 2000, a member of Chiquita's Legal Department noticed a
payment to a new convivir on an FCPA report, this time in Santa Marta, and when he
inquired further about the payment, the explanation he received from Banadex
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employees made him suspicious that there might be a link between the convivir and the
paramilitaries. As a result, [Chiquita Employee #1]* traveled to Colombia to investigate
the possible link between the convivir and the paramilitaries, a link he confirmed based
on how the Castafio meeting was related to him during his interviews of Banadex
personnel. Chiquita then sought guidance from in-house and outside Colombian
counsel regarding the legality of these payments, at least some part of which were now
understood to be going to the paramilitaries, and received opinions stating that the
payments were justified under Colombian law because, like the guerrilla payments in
earlier years, they were the product of extortion. This conclusion was communicated to
Chiquita's Audit Committee in mid-September 2000.
The FTO Designation. On September 10, 2001, the u.s. Department of State
designated the AUC as an FTO, just as it had previously designated the FARC and
ELN.2 The designation made it a felony to knowingly provide material support to the
AUe. Even though the designation was reported in major national and local
newspapers in the U.S., the SLC found no evidence that anyone in the Chiquita Legal
Department, in senior management, or on the Board was aware of the designation until
almost eighteen months later, in late February 2003.
The Company's payments to the AUC, through two separate convivirs,
continued following the FTO designation. In the spring of 2002, a faction of the AUC
based in Santa Marta began demanding direct cash payments, rather than receiving
payment through the convivir. New payment procedures were developed, and
Banadex began making cash payments directly to the AUC in Santa Marta; the
payments to the convivir in Turbo were not affected. In April 2002, a new group of
directors, appointed to the Board after the Company emerged from Chapter 11
bankruptcy proceedings in. mid-March 2002, were briefed about the payments,
including the recent demand for cash paym~nts in Santa Marta. These directors, like
those before them, were told that the payments were legal.
FTO Discovery. The SLC found that on February 20,2003, while searching the
Internet for information concerning the AUC (in connection with potentially changing
the payment process in Santa Marta), [a Chiquita lawyer] discovered the FTO
designation. [The Chiquita lawyer] told Robert Olson, the Company's General Counsel,
The names of certain people have been redacted in the publicly-filed version of this Report. The
redactions have been made based on the SLC's understanding that the publication of the names
of these individuals, and the description of their roles, could pose serious risks to their safety and
the safety of members of their families. An unredacted version of the Report is being filed with
the Court.
2
Shortly thereafter, on September 23, 2001, President Bush issued Executive Order 13224, which
prohibited any U.S. person from, among other things, engaging in transactions with any foreign
organization determined by the Secretaries of the State and Treasury to be a "SpeciallyDesignated Global Terrorist" ("SDGT"), without first obtaining a license from the U.S.
government. The AVC was designated an SDGT on October 31, 200~.
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the next day. Olson then promptly sought the advice of the Company's regular outside
counsel, Kirkland & Ellis LLP ("K&E"), which advised the Company that it could not
make further payments unless it disclosed them to the government. Immediately upon
learning of the FTO designation, Olson directed that the cash payments to the AUC in
Santa Marta be suspended, although 1).e did not order that the payments to the convivir
in Turbo stop, because he failed to recall the connection between the convivir in Turbo
.and the AUC that had been explained to him in September 2000. Two more payments
were made to the convivir before Olson was reminded of the connection.
Audit Committee Response. Five weeks after it was discovered, on April 3, 2003,
Olson informed the full Board about the AVC's FTO designation at a regularly
scheduled Audit Committee meeting. At that point, the Chairman of the Audit
Committee, Roderick Hills, a former Chairman of the SEC, concluded that this was a
matter to be handled by the Audit Committee. Ori April 24, 2003, the Company fully
disclosed the payments to DOT at a meeting that was set up by Hills and attended by
senior DOT officials, including the then-Assistant Attorney General for the Criminal
Division, Michael Chertoff.
At the meeting, Hills made the argument that if the Company could not continue
to make the payments, its people and property would be in grave jeopardy and it
would have to leave Colombia, which would result in a foreign policy problem for the
U.s. Hills argued that other U.S.-based multinational companies would likely not be
able to operate in Colombia because of the reach of the AUC and the Company's
understanding that they too were making payments to the AUC for similar reasons.
The result would be a mass corporate exodus from the country, which in tum would
threaten the relations of the U.S. with Colombia, a strong ally in South America. During
the meeting, Chertoff clearly told the Chiquita representatives that the payments were
"illegal," but also acknowledged that the situation was "complicated," and that DOT
would consult with other agencies of the government on the policy issue raised by Hills
and get back to Chiquita.
DaY s response to Chiquita's disclosure at this meeting later became the subject
of bitter controversy between the Company and the government. While the SLC
concluded that there was no dispute over the words that were spoken at the meeting,
the Company and DOT sharply disagreed about whether DOT clearly understood, or, at
a minimum, should have understood, that Chiquita would have to continue to make the
payments to the AUC while DOT resolved the policy issue the Company had raised.
The evidence showed that the Company believed that it had implicit permission to
continue making the payments until the policy issue was resolved. Although DOT did
not say anything to the contrary at the time, it ultimately took the position that the
payments made after the April 24 meeting were illegal and that nothing said at the
meeting provided even the suggestion that the Company had a safe harbor to make the
payments while the policy issue was resolved. These post-disclosure payments were
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aggressively investigated by DOJ and formed a central part of the factual basis for
Chiquita's guilty plea.
Following the April 24 meeting, the Company awaited a response on the policy
issue it had raised. On April 30, Hills and Olson reported to the Audit Committee on
the meeting with Chertoff. They advised the Committee that based on the meeting,
they believed prosecution for historical payments was unlikely, but the issue of
continued payments was left open. In the meantime, after a two-month delay, the
Company resumed making the payments because it believed they could no longer be
deferred without serious risk of harm to its employees and infrastructure, and because
neither Chertoff nor any other DOJ official had explicitly said that the payments must
stop. The payments resumed in May 2003 and continued through January 2004.
However, the SLC could not conclusively establish who authorized the payments to
resume or, ultimately, to stop.
DOl Investigation. Throughout the spring and summer of 2003, Hills and K&E
continued to have encouraging, high-level contacts with DOJ, which included two
conversations between Chertoff and Hills around the time.Chertoff left DOJ for the U.S.
Court of Appeals for the Third Circuit. During these contacts, Chertoff commented
favorably on the Company's disclosure and gave comfort that the policy issue raised by
the Company was still being considered. In August 2003, Hills and Olson met with
then-Deputy Attorney General Larry Thompson, who said that Chiquita had done the
right thing in self-disclosing and that the Company was at that time neither a subject
nora target of the DOJ investigation. Thompson left DOJ less than a week later. No
meaningful further guidance from the government was forthcoming.
Following its meetings with Chertoff and Thompson, Chiquita entered into a
period of voluntary cooperation with DOJ, producing numerous documents and
ultimately making its employees available for the government to interview. While DOJ
requested that the Company refrain from conducting its own investigation, the Audit
Committee began limited fact gathering, including retaining KPMG LLP to perform a
forensic analysis. The Audit Committee,led by Hills, actively managed the Company's
response to the DOJ investigation, and met repeatedly during 2003. However, by early
December 2003, DOJ had raised concerns about the nature and extent of the Company's
cooperation; around the same time, the Board determined to sell Banadex and exit
Colombia, even though DOJ had not yet resolved the policy issue that the Company
raised back in April.
Sale of Banadex. In late January 2004, the Company made its last payment to the
AUe. At the same time, the Company publicly announced that it was in negotiations to
sell Banadex to e.r. Banacol S.A. ("Banacol"), a Colombian-based fruit producer.
Banacol had initially approached Chiquita about buying Banadex in 2002, but the two
companies did not engage in serious discussions until June 2003. In May 2004, after
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nearly eleven months of discussion and negotiations, the Board approved the sale.
Chiquita ended its operations in Colombia in June, when the sale closed.
The DOl Investigation Continues. While the sale of Banadex was being
negotiated, the Company continued to engage in discussions with DOl, but in March
2004, the Company was notified for the first time that it was the subject of the DOl's
investigation. Even so, the SLC found that, towards the end of 2004 and in early 2005,
the investigation appeared to be heading towards a favorable outcome for the
Company. At that time, at the invitation of DOJ, Chiquita made written submissions as
,to why it should not be prosecuted. In early 2005, one of the DOJ lawyers suggested to
K&E that a settlement was being discussed inside DOJ that would resolve the matter
and that a settlement proposal was forthcoming. No settlement proposal came from
DOJ in the weeks and months that followed.
Instead, after close to six months without any contact from DOl, the investigation
was resumed in September 2005, and was marked by far greater aggressiveness than
before. In October 2005, the new prosecutor responsible for the investigation
,demanded (and received) an extended privilege waiver from the Company, covering
the advice that it received from K&E in early 2003. DOJ then informed Chiquita that its
directors were subjects of its investigation and, in November 2005, the Company's
directors were subpoenaed to testify before a grand jury. Ultimately, when DOJ sought
to take testimony from the lead K&E attorney representing Chiquita, the Company was
forced to retain new counsel, and moved quickly to consider and negotiate a settlement.
The Guilty Plea. Beginning in November 2006, the Company entered into
extended negotiations with DOJ regarding the terms of a potential plea agreement. The
two main issues were the charge to which the Company would plead and the size of the
fine it would pay. DOJ initially demanded that Chiquita plead to a charge of materially
aiding a terrorist organization (18 U.S.c. § 2339B), the most serious charge available,
and to pay a fine in excess of $70 million. Chiquita's initial offer included a plea to a
charge of engaging in transactions with a specially-designated global terrorist without a
license (50 U.S.c. § 1705(b)) and a fine of approximately $1 million. Over months of
'intense negotiations, the gap was narrowed - DOJ ultimately agreed to allow the
Company to plead guilty to violating § 1705(b) and pay a fine of $25 million, payable
over five years, after the Company demonstrated that it could not afford a larger fine.
The SLC found that while there was some early negotiation over whether DOJ would
terminate its investigation of individual officers and directors as part of the plea
agreement, DOJ demanded and received the Company's full cooperation in its
continuing investigation of the individuals.
On March 19, 2007, Chiquita pled guilty in the U.S. District Court for the District
of Columbia to one count of knowingly Engaging in Transactions with a SpeciallyDesignated Global Terrorist, in violation of 50 U.S.c. § 1705(b) and 31 C.F.R. § 594.204.
However, the DOl's investigation of the individuals continued. During July and
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August 2007, five then-current and former Chiquita officers and directors made
submissions to DOJ seeking to persuade it not to pursue criminal charges against them.
Ultimately, no criminal charges were filed against any of the individuals. The
Company was sentenced on September 17, 2007, in accordance with the terms of the
plea agreement. This litigation followed.
IV.
THE SLC's ANALYSIS AND CONCLUSIONS
After establishing the relevant facts, the SLC reviewed the factual and legal
merits of each claim and considered whether each claim should be pursued, dismissed,
or otherwise compromised. In reaching its decisions, the SLC was mindful of its
fundamental mission - to determine whether the pursuit of claims is in the best
interests of the Company and its shareholders.
Accordingly, in addition to the factual and legal validity of the claims, the SLC
also considered other relevant factors, including: the motivation of the defendants in
engaging in the allegedly wrongful conduct; the reputational harm to the Compeu:;ty
caused by continued focus on events that occurred years ago; the costs to the Company
of continued litigation, including legal fees for Company counsel and potential
advancement of defense costs to individual defendants; the Company's focus on
compliance and remedial measures and the potential deterrent effect of a lawsuit; and
the continued interference with the Company's ongoing operations by diverting
management time and focus. In the end, after considering the factual and legal merits
of each claim, in conjunction with the factors outlined above, the SLC, in the exercise of
its business judgment, concluded that the Amended Complaint should be dismissed in
its entirety.
A.
Payments Made Prior to the September 2001
Designation of the AVC as an FTO
The SLC, in analyzing the conduct of each of the defendants with regard to the
payments, divided its inquiry by time period. The SLC first examined whether the
relevant defendants breached their fiduciary duties in connection with the payments
made to the guerrilla groups beginning in approximately 1989 and continuing through
1997, when the AUC and convivir payments began. The SLC then examined those
payments from 1997 to the AUC's FTO designation, which occurred on September 10,
2001.
Under New Jersey law,3 which closely follows Delaware law, the decision to
authorize, or allow, the payments is protected by the business judgment rule, a judicial
3
Chiquita is incorporated in New Jersey, and thus New Jersey law governs the conduct of
Chiquita's directors and officers. See Int'l Ins. Co. v. Johns, 874 F.2d 1447, 1458 n.19 (11th Cir. 1989)
(providing that the law of the state of incorporation governs the conduct of the officers or
directors of the corporation).
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presumption that the defendants acted in a manner consistent with the duty of care that is, "on an informed basis, in good faith and in the honest belief that the action taken
was in the best interests of the company." Aronson v. Lewis, 473 A.2d 80S, 812 (Del.
1984) (citations omitted). In order to rebut this presumption, it must be shown that the
defendants acted with fraud, illegality, a conflict of interest, gross negligence or without
a rational business purpose. Accordingly, the SLC sought to determine whether there
was evidence that any of these factors existed such that the protections of the business
judgment rule would not apply,
The FARe Payments. The SLC found that the decision to authorize the
payments to the guerrillas beginning in the late 1980s was informed and rational, and
made in good faith. The SLC found that the initial demand for payment was
communicated from Colombia to senior management in Cincinnati, and that, upon
receiving the demand, senior management brought [Banadex Employee #10] to
Cincinnati to gather additional information. After meeting to discuss the issue, the
payment was authorized. The SLC found ample evidence, including specific incidents
of violence against Banadex employees and the FARC's reputation generally, to support
the conclusion that approval was given in good faith and with the honest belief that the
failure to do so would result in harm to the Company's employees and infrastructure.
At the same time, the SLC found no evidence that the decision was motivated by selfinterest or otherwise tainted by fraud. Accordingly, the SLC concluded that this
decision was supported by a rational business purpos~ and was not the product of
gross negligence. See Albert v. Alex Brown Mgmt. Serv., Inc., 2005 WL 2130607, at * 4 (Del.
Ch. Aug. 26, 2005) ("Gross negligence ... involves a devil-may-care attitude or
indifference to duty amounting to recklessness") (internal quotations omitted).
Further, the SLC determined that the continuation of the payments in the belief
that they were necessary in order to safeguard the welfare of the Company's employees
and to protect its property, and that they were not illegal under u.s. and Colombian
law, was reasonable and in good faith. Indeed, following the initial payment, the
Company retained Control Risks, a leading U.K.-based security consulting firm, which,
after conducting a security assessment, advised senior management that the Company
had no meaningful choice but to continue to make the payments. Throughout this
period, senior management continued to be apprised of the violent conditions in
Colombia, and continued to believe that its employees and operations were at risk.
In addition, Chiquita's Legal Department monitored and considered the legality
of the payments at various points in time. It sought and received opinions from
Colombian counsel concerning the legality of the payments, which uniformly
concluded that, under Colombian law, the Company would not be held liable for
making the payments because they were the product of extortion. As to U.S. law,
although the payments were reported within the Company as part of its FCPA
compliance program (which also tracked "sensitive payments"), there was nothing to
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suggest that the payments implicated the FCPA or any other U.s. law. 4 Indeed, the
Company's payments to the FARC were disclosed to the Securities and Exchange
Commission (the "SEC"), DOJ, and the U.S. Attorney's Office for the Southern District
of New York during an investigation commenced by the SEC in 1998 relating to certain
paYments made by Banadex employees to Colombian port officials. None of these
agencies ever suggested that the payments were illegal, or were otherwise improper,
and no enforcement action was ever brought as a result of the payments.
Although the SLC developed no evidence that the payments during this period
were illegal, it concluded that it would have been prudent, at some point, for senior
management to have seriously considered whether Chiquita should continue doing
business in Colombia in view of the rampant violence and continued instability.
Indeed, the SLC questioned why there appeared to be no serious discussion about the
possibility of selling i~s farms in Colombia earlier and purchasing fruit rather than
making extortion payments. However, whether or not it would have made the same
decision, the SLC concluded that the defendants did not breach their duty of care in
making the payments.
The Convivir-AUC Payments. The SLC also found that none of the defendants
breached their duty of care when, in 1997, the Company began paying the convivir. 5
The SLC found that, once members of senior management learned of the convivir
payments in approximately April or May of 1997, it took reasonable steps to better
understand the nature of the convivir and the legal implications of the payments. They
participated in detailed discussions regarding the documentation, budgeting, and
approval required for the payments. They conducted an inquiry into the nature of the
payments, which included speaking directly with Banadex personnel in Colombia, and
reviewing government-generated documents related to the payments. Further, they
obtained legal opinions from local in-house counsel, continued monitoring the
payments through FCPA reporting procedures, and reported the convivir paYments to
the Audit Committee as part of the FCPA reporting process.
Based upon these efforts, senior management reasonably and in good faith
believed, at least initially, that the convivir was a legitimate government-sponsored
security provider and that the payments were, under both Colombian and u.s. law,
legal in all respects. There is no evidence that the defendants knew of the Castano
meeting or the connection between the convivir and the AUC at this time. Accordingly,
4
As noted above, the U.S. Department of State designated the FARC as an FTO on October 8, 1997.
While the evidence is mixed, the weight of the evidence suggests that the Company had stopped
making payments to the FARC by this time. In any event, the SLC found no evidence that
anyone at Chiquita became aware of the FARC's FTO designation at or around the time it
occurred.
5
As noted above, before the convivir payments began, Banadex made four payments to the AVe,
although the SLC found no evidence that Chiquita management knew of these payments.
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with respect to the convivir payments, the SLC found no evidence of gross negligence, a
conflict of interest, or any other basis to overcome the protections of the business
judgment rule.
As noted above, in the spring of 2000, a senior in-house lawyer responsible for
the Legal Department's FCPA monitoring became suspicious of a newconvivir
payment and began a new inquiry. Based on information gathered by [Chiquita
Employee #1] during a trip to Colombia, senior management learned of the Castano
meeting and that the Company's payments to the convivir were actually being funneled
to the AUe. As a result, the Company sought and received additional opinions from
Colombian counsel regarding the payments. Those opinions concluded that the
Company had been extorted to make payments to paramilitary organizations, that the
Company had no meaningful choice but to make the payments and, therefore, would
not be subject to liability under Colombian law. These findings were then reported to
the Audit Committee.
Based on its review of these activities, the SLC concluded that the defendants
acted reasonably and in good faith, did not act with gross negligence, and did not suffer
from a conflict of interest - and therefore did not breach their duty of care during this
period of time. In reaching this conclusion, the SLC relied on the reasonable steps taken
to gather information about the payments; the legal opinions received, which confirmed
that the payments were not prohibited by Colombian law; the consistent monitoring of
the payments by the Legal Department; management's consistent reporting about the
payments to the Audit Committee; and the continuing belief that stopping the
payments would place the Company's people and property at risk.
The Board's Oversight. The SLC also examined the oversight exercised by
Chiquita's directors during the period prior to the FTO designation. Under the law, a
failure of oversight occurs when "either (1) the directors knew, or (2) should have
known that violations of the law were occurring and, in either event, (3) that the
directors took no steps in a good faith effort to prevent or remedy that situation, and (4)
that such failure proximately resulted in the losses complained of." In re Caremark Int'l
Inc. Deriv. Litig., 698 A.2d 959, 971 (Del. Ch. 1996) (emphasis added).
This test can be satisfied by showing either that (i) "the directors utterly failed to
implement any reporting or information systems or controls," or "having implemented
such a system or controls, consciously failed to monitor or oversee its operations thus
disabling themselves from being informed of risks or problems requiring their
attention," Stone v. Ritter, 911 A.2d 362, 370 (DeL 2006) (emphasis added), or (ii) that the
directors "had notice of serious misconduct and simply failed to investigate," i.e.,
intentionally ignored "red flags." David B. Shaev Profit Sharing Account v. Armstrong,
2006 WL 391931, at *5 (Del. Ch. Feb. 13,2006). A violation of the duty of oversight
constitutes a breach of the duty of loyalty (not care), and, as such, intentional bad faith
conduct on the part of the directors must be shown.
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As an initial matter, prior to September 10,2001, the Company committed no
violation of law with respect to the payments. Therefore, because the payments did not
violate U.S. or Colombian law during this period, there was nothing for the directors to
act upon or detect, a prerequisite for liability. Thus, the SLC has concluded that this
claim lacks legal merit. Even so, the SLC examined the adequacy of the reporting
systems and controls in place at the Company during the period, and found that the
Board had legally adequate reporting systems in place at the time.
During this period, Chiquita had a duly constituted Audit Committee, which
met periodically throughout each year. The Company had in place a robust FCPA
compliance and reporting program, which included reporting on non-FCPA "sensitive"
payments. As part of this program, the Audit Committee received quarterly, and later
semi-annual, reports from the Legal Department regarding all facilitating payments
made by the Company. The Audit Committee also received periodic updates from the
Company's Internal Audit Department and the FCPA and other sensitive payments
were subject to internal audits. Chiquita's Audit Committee retained Ernst & Young,
LLP ("E&Y~') as the Company's independent, outside accountant. Given these separate
but interrelated oversight mechanisms, there is no basis for the SLC to conclude that
Chiquita's Board "utter[ly] fail[ed] to attempt to assure a reasonable information and
reporting system exist[ed]." Caremark, 698 A.2d at 971.
Conclusion. For this period, the SLC concluded that the management defendants
did not breach their duty of care in authorizing and allowing the payments to continue
to be made, and that the director defendants did not breach their duty of loyalty in
exercising oversight over the Company's operations as a whole. In addition, as detailed
in this Report, the SLC found other significant legal impediments that raise serious
doubts about the viability of any claim based on these payments. 6
B.
Payments Made After the FTO Designation on
September 10, 2001
The legal framework for the Company's payments in Colombia changed on
September 10, 2001, when the U.S. Department of State designated the AUC as an FTO.
6
While the SLC viewed none of these legal issues as necessarily dispositive, they each add
substantial uncertainty as to the viability of any claim based on conduct during this period and
raise serious questions as to whether the costs of pursuing any such claim outweigh any potential
benefit. The impediments include (i) that the Company has not yet suffered any harm as a result
of these payments, because they were not the subject of the Company's guilty plea, (ii) that the
defendants are protected by a release from liability contained in the Company's Chapter 11
bankruptcy plan covering all conduct that occurred prior to March 19, 2002, (iii) under the
exculpatory clause contained in Chiquita's Certificate of Incorporation, Chiquita's directors and
officers cannot be held monetarily liable for breaches of the duty of care, and (iv) absent the
uncertain application of a tolling doctrine, the six-year statute of limitations period may bar
claims arising out of events that occurred prior to October 12, 2001.
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At that point, knowingly making such payments to the convivir/ AUC became a felony
under U.S. law. Accordingly, the SLC first investigated when and how the defendants
became aware of the designation. After a thorough review of available evidence, the
SLC found no evidence that senior Chiquita management or the Board was aware of the
FTO designation at any time prior to late February 2003. This conclusion is based upon
the DOl's extensive inquiry into this issue, but also, and more importantly, on the SLC's
own independent review of relevant documentary evidence and interviews of
numerous witnesses. Having found that the defendants were not aware of the
designation for almost eighteen months after it occurred, the SLC next considered
whether the defendants breached their fiduciary duties by that very failure to become
aware of the designation while continuing to make the payments during that period.
Senior Management. As an initial matter, the SLC found that senior
management reasonably and in good faith relied on the Legal Department to keep the
Company aware of material legal developments'? The SLC concluded that this reliance
was reasonable given that the Legal Department was generally well regarded by senior
management. Indeed, from all outward indications, the Legal Department seemed to be
adequately informed about, and to be appropriately managing, the situation in
Colombia. Senior management was kept informed of legal issues relating to the
payments during this period, and was aware that the Legal Department had conducted
two inquiries into the payments, the results of which were reported at Audit Committee
meetings. Because the SLC concluded that senior management appropriately relied
upon Olson and the Legal Department to alert it to changes in the law, the SLC
concluded that these defendants did not breach their duty of care by failing to be aware
of the designation and allowing the payments to continue during this period.
Olson. Given senior management's reliance on Olson and the Legal Department,
the SLC was troubled by Olson's performance during this period. The SLC was
concerned that, as the Company's chief legal officer, he had not put in place a system to
monitor developments in U.s. law relating to the Company's overseas operations. This
was particularly true given that the events of September 11, 2001 should have put Olson
on notice that additional steps needed to be taken to determine whether the u.s.
government's fight against terrorism had i'lny impact on the Company's exposure
arising from its extensive overseas operations. Had he implemented such a system,
Olson might well have learned of the AUC's designation as an FTO at an earlier point in
time and lessened the harm ultimately suffered by the Company.8
7
The SLC's findings with respect to the conduct of Robert Olson, the Company's General Counsel,
are discussed separately below.
8
Though he did not implement a system, Olson said that he recalled seeking guidance from an
outside law firm after September 11, 2001 regarding whether legal changes enacted postSeptember 11 imposed new legal requirements on the Company. Although there is some support
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Nevertheless, while the SLC believes that Olson could have done more to protect
the Company, it also concludes that Olson did not breach his duty of care during this
period. First, Olson's Legal Department was comprised of senior lawyers who oversaw
the affairs of the Company's Colombian operations. These lawyers twice investigated
the payments and reported that the payments did not violate applicable law. Second,
Olson, on the whole, diligently worked to ensure that the Company had effective
compliance systems, including Chiquita's robust FCPA compliance system. Finally, the
statute that the Company violated was, in the SLC's view, obscure, which was reflected
by the fact that it had not been used as a prosecutive tool by DOJ prior to 2003 and was
not widely known even among criminal law specialists. Thus, for these and other
reasons, the SLC concluded that Olson's conduct does not warrant litigation against
him based on his failure to put additional legal monitoring systems in place.
The Board's Oversight. As with the prior period, the SLC examined the
oversight exercised by the Board during this period in which, for the first time, the .
Company was making payments to an organization on the FTO list, although it was not
yet aware of the AUC's designation. 9 As with the prior period, the Board continued to
have a fully-functioning Audit Committee, a robust FCPA compliance and reporting
program, E&Y as its outside auditor, and periodic reporting by the Internal Audit
Department. At all times, the directors continued to believe that the payments, which
were reported to the Audit Committee as part of the Company's FCPA program (both
pre- and post-bankruptcy), were legal, and the directors had no reason to believe
otherwise.
The SLC also considered whether there were any "red flags" that would have
alerted the Board to the fact that the Company was violating the law during this time. 10
In that regard, the SLC identified two potential red flags: (i) the events of September II,
2001 themselves and their impact on the political, social and legal climate in the U.S.,
and (ii) coverage of the AUC's FTO designation in U.S. national and local media in the
fall of 2001.
The SLC considered whether the events of September 11, 2001 should have
prompted the Board to direct a review of Chiquita's international operations to ensure
for Olson's claim in the outside law firm's billing records, the lawyer on Olson's staff who dealt
with the law firm recalled the request for such guidance being limited to licensing issues.
9
This period covered two different groups of directors, since upon the Company's exit from
bankruptcy, on March 19, 2002, a majority of the Board was replaced and new directors were
appointed.
10
The Amended Complaint does not specify any alleged "red flags" or events that should have
alerted the director defendants to the fact that the payments violated U.S. law and were
intentionally ignored. See Am. CompI. 'II 155. However, as part of its investigation, the SLC
independently sought to discover if any of these events existed and to examine the adequacy of
the Board's response to those events.
16
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compliance with applicable anti-terrorism laws. In the SLC's view, conducting such a
review would have been advisable, and indeed, the SLC was aware of examples of
multinational companies that, in fact, conducted such reviews. However, the events of
September 11 concerned fundamentalist Middle Eastern terrorism, not local groups
operating in rural areas of South America that posed no direct threat to U.S. territory.
Accordingly, the SLC determined that September 11 did not constitute a "red flag"
alerting the directors to the possibility that the Company was breaking the law in
Colombia, especially because they had been told that the payments were legaL See
Stone, 911 A.2d at 370 (defining "red flags" as "facts showing that the board [] was
aware that [the company's] internal controls were inadequate, [and] that these
inadequacies would result in illegal activity").
Next, the SLC found that the pre-bankruptcy directors were not aware of the
news reports of the designation in the fall of 2001, and thus, those reports could not
have been a "red flag" to them. See In re Citigroup, Inc. S'holders Litig., 2003 WL
21384599, at *2 (DeL Ch. June 5, 2003) ("'[r]ed flags' are only useful when they are either
waived in one's face or displayed so that they are visible to the careful observer").
Further, even if the directors had .read those reports, it is doubtful whether news reports
of the designation, without more, constituted a "red flag" for purposes of this claim. See
McCall v. Scott, 239 F.3d 808, 819-20 (6th Cir. 2001) (applying Delaware law) (finding
press reports were a "red flag" only when taken as a whole with other compelling facts,
including, alleged internal audit reports of fraud and a DOJ investigation).l1
Thus, the SLC concluded that the directors engaged in legally adequate oversight
during this period and therefore did not breach their duty of loyalty.
c.
Post Discovery of the FTO Designation:
February 2003 - Ianuary 2004
The February 20, 2003 discovery of the FTO designation again changed the legal
framework in which the SLC analyzed the defendants' conduct. In the absence of the
FTO designation, or knowledge of it, the decision to make the payments would
continue to be protected by the business judgment rule. However, where a knowing
violation of the law exists, the business judgment analysis no longer applies, and.
11
The SLC also investigated the allegations in the Amended Complaint explicitly imported from
the ATAI ATS litigation that the defendants caused or allowed the Company to provide or
facilitate the provision of weapons and drugs to the AVe. See Am. CompI. 'f['f[ 15, 126. The SLC
found evidence of only three specific incidents of smuggling, all of them by third parties. The
SLC found no evidence that any Chiquita employees committed wrongdoing in connection with
these incidents or that any member of senior Banadex or Chiquita management had prior
knowledge of or involvement in them. The evidence shows that, in each instance, the event was
reported internally, appropriately investigated, and any necessary remedial steps were taken.
Despite requests made by the SLC to all lead counsel in the ATAI ATS cases for any evidence
supporting claims that Chiquita was involved in drugs and arms smuggling, no such evidence
was provided.
17
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director liability may be premised on a breach of the duty of loyalty. See, e.g., Desimone
v. Barrows, 924 A.2d 908, 934-35 (Del. Ch. 2007) ("[B]y consciously causing the
corporation to violate the law, a director would be disloyal to the corporation and could
be forced to answer for the harm he has caused. . .. The knowing use of illegal means
to pursue profit for the corporation is director misconduct"); Metro Commc'n Corp. BVI
v. Advanced Mobilecomm Techs, Inc., 854 A.2d 121, 131 (Del. Ch. 2004) (same); Roth v.
Robertson, 118 N.Y.S. 351, 352-53 (N.Y. Sup. Ct., Erie County 1909) (directors and officers
of a corporation who engage in an illegal transaction that causes a loss to the
corporation "must be held jointly and severally liable for such damages").
The SLC reviewed the conduct of management after the designation was
discovered on February 20, and the conduct of the Board, after it was advised of the
designation at the April 3 Audit Committee meeting. After considering all of the
evidence, the SLC could not conclude that the conduct at issue would constitute a
violation of the duty of loyalty because the SLC found that the defendants acted in good
faith in resuming the payments after the Company disclosed them to senior DOJ
officials, including Assistant Attorney General Michael Chertoff, on April 24, 2003.
Olson and Hills. Olson and Hills, more than anyone else at Chiquita, were
responsible for directing the Company's legal strategy. Both provided several similar
reasons for allowing the payments to continue following the Chertoff meeting. Olson
and Hills both said that, as a result of the Chertoff meeting, they believed in good faith
that DOJ understood that the payments would have to continue as long as Chiquita
remained in Colombia. In addition, they were both aware of the repeated assurances
received from senior DOJ officials, including Chertoff and Deputy Attorney General
Larry Thompson. Further, at a September 4, 2003 meeting, K&E specifically informed
DOJ that the payments were continuing and invited a directive to stop the payments,
which was not provided. While these discussions were occurring, beginning in June
2003, the Company.began the process of exploring the sale of Banadex. Finally, K&E,
which had strongly counseled the Company to stop the payments before the April 24
meeting, did not repeat that advice in the months that immediately followed it. Based
on these facts, the SLC found that Hills and Olson held the good faith belief that the
Company was not exposing itself to additional risk by continuing the payments after
the April 24 meeting.
Above all else, the SLC found, on the basis of mote than twenty-five hours of
interviews spread over four separate occasions, that Olson held the sincere belief that
Banadex employees would be physically harmed if the payments stopped. Based on
what he had been told by Olson and others, Hills also held the good faith belief that
Banadex employees would be harmed if the payments were not made. Faced with this
dilemma, Hills and Olson allowed the Company to continue to make the payments.
Under those circumstances, the SLC did not find that Hills or Olson acted in blatant
disregard for the law or to advance any personal interest, the hallmarks of a breach of
the duty of loyalty.
18
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In addition, the SLC found that, following the April 3 Audit Committee meeting,
Olson appropriately played a role that was subordinate to Hills, who, at that point, took
charge of the Company's response to the DOJ investigation. Indeed, the SLC believes
that although his conduct was not without its flaws and shortcomings, Hills provided
strong and dedicated service as an outside director, taking charge of the situation in
Colombia, which he had no role in creating, and providing active and thoughtful
direction of the Company's response.
However, in the SLC's view, Olson committed several key errors ill judgment
along the way. The SLC was troubled by the fact that Olson inadvertently allowed two
payments to be made to the convivir in February and March 2003, prior to disclosure to
DOJ, even though it credited his explanation that he had forgotten the AUC-Turbo
convivir connection. The SLC was also concerned that it took Olson five weeks to
inform the Audit Committee of the FTO designation, while he waited for a regularly
scheduled meeting to occur. The SLC again credited Olson's explanation for the delay
in informing the Audit Committee - that he wanted to collect all of the relevant
information prior to raising the issue - but believes it would have been a far better
practice to inform the Committee much earlier. Finally, the SLC found that Olson did
not make clear to the Audit Committee members that the payments would continue
pending further guidance from DOJ. Given the exposure to the Company created by
the continued payments - each one constituted a violation of federal law - Olson (along
with Hills) should have ensured that the Audit Committee explicitly understood, and
approved of, the resumption of the payments. However, given the evidence of his good
faith, the SLC concluded that none of these errors in judgment rose to the level of a
breach of duty.12
.
As to Hills, the SLC was troubled by the fact that he did not make clear to the
Audit Committee that payments had continued and did not keep himself fully
informed about the status of the payments. The SLC was further troubled by certain
evidence indicating that, in December 2003, Hills had heard from DOJ, both directly or
indirectly, that it wanted the Company to stop making the payments, but that he took
no steps to act on that information (indeed, five more payments were made after he
received this news). To the SLC, this message signaled a shift in DOJ's position, and
was the type of guidance that the Company had been seeking from DOJ. Ultimately,
the SLC concluded that the central message communicated clearly to Hills at that time
was that DOJ was dissatisfied with the Company's cooperation with its investigation,
and, in that context, conveyed the message that the payments could not continue
indefinitely, which Hills viewed as unremarkable. As a result, Hills did not view these
comments as a directive to stop the payments, but instead focused on what he took to
12
The SLC also considered Olson's performance as a whole in assessing whether he breached his
duty of care to the Company, a claim not raised in the Amended Complaint, and concluded that,
while he made several errors of judgment relating to his handling of Colombia, he did not breach
his duty.
19
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be the core problem - Dars view that the Company was not cooperating sufficiently
with its investigation.
In sum, the SLC found that Hills and Olson believed, in good faith, that the
Company could continue to make the payments while DOJ considered the issue,
directed the Company's response to the DOJ investigation and kept substantially
informed about it, and sought and received guidance from, among others, K&E, neither
of which advised the Company that it should stop making the payments between the
Chertoff meeting in April 2003 and January 2004. Under these circumstances, the SLC
could not conclude that, even though the payments were a violation of the law, the
actions of Hills and Olson in allowing th.em to ~e made constitute a breach of the duty
of loyalty.13
Other Directors. The remaining non-management directors relied heavily on
Hills to direct the Board's response to the DOJ investigation, perhaps too heavily at
times. The SLC was not able to pinpoint exactly when each of the then-directors
learned that the payments had resumed after the Chertoff meeting. Certain of the
directors assumed, based upon Olson and Hills' statements that the payments were
illegal, that the Company had suspended making them indefinitely. Others believed,
based upon Olson and Hills' statements that the payments were necessary to protect
lives, that the Company was continuing to make them. The SLC was troubled by the
lack of clarity at the Board level regarding the status of the payments during this critical
time, and the Audit Committee's failure in not taking steps to ensure that it was kept
fully and contemporaneously informed about the status of the continuing payments
throughout this period. 14
However, the SLC concluded that, in allowing the payments to be made, the
directors acted in good faith, and to advance the best interests of the Company. At the
April 3, 2003 Audit Committee meeting (attended by the full Board) at which the Board
was first informed of the FTO designation, the directors appropriately allowed Hills to
take control of the Board's response to the situation, and, with his guidance, directed
the Company to disclose the fact of the payments to DOJ. At the April 30, 2003 Audit
Committee meeting, Hills and Olson reported on theThertoff meeting, including their
shared view that criminal liability for past payments was unlikely, and that the
13
Beyond Olson, senior management played a minimal role in causing, or allowing, the payments
to continue during this period. Senior management relied upon the Audit Committee to direct
the Company's actions with respect to the payments. The SLC found this reliance on the Audit
Committee, and Hills in particular, to be reasonable and appropriate under the circumstances
given Hills' extensive governmental experience, and active role in overseeing the situation,
including his regular contact with DOJ officials,· outside counsel, and Olson.
14
In the end, the SLC found that each of the directors, at some point prior to January 2004 learned
that the Company was in fact continuing to make the payments, and caused, or allowed, the
Company to make further payments knowing that those payments were in violation of federal
law, and analyzed the claim on that basis.
20
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government had, in effect, deferred a final answer on the question of continuing
payments pending consultations with other agencies in the federal government. After
this, the Audit Committee continued to receive regular updates on relevant
developments, including the status of the Company's communications with DOJ, the
adequacy of the Company's disclosures regarding Colombia, the possible sale of
Banadex, and the security situation in Colombia. Finally, the Audit Committee sought
advice and assistance from numerous outside professionals, including K&E and KPMG,
and none of those professionals advised the Board that the payments h.ad to stop prior
to Tanuary 2004 when the payments ended.
Thus, the SLC found that, on the whole, the non-management directors were
informed with respect to the Colombia issue; justifiably relied, in good faith, on
Roderick Hills, as Chair of the Audit Committee, to direct the Company's response to
the DOT investigation; received and relied upon advice from outside counsel and
outside consultants; and believed, in good faith, that the Company was acting
appropriately under the circumstances, including to protect the Company's employees
and infrastructure. In addition, the directors moved promptly to stop operating in
Colombia, while proteCting the Company's interests, once it became apparent that it
would not receive a substantive response from DOT on the policy issue it had raised.
While the SLC in hindsight might have acted differently and relied less on the
assurances of DOT officials in allowing the payments to continue as long as they did, the
SLC could not conclude that this conduct constitutes a breach of the duty of loyalty on
the part of these directors.
The SLC is fully aware that the facts gathered, and conclusions reached, during
its investigation may appear anomalous in the wake of the factual proffer and criminal
information that accompanied Chiquita's guilty plea, and indeed in light of the guilty
plea itself. DOT, of course, was focused on the relatively narrow question of whether
the payments violated 18 V.S.c. § 2339B on 50 V.S.c. § 1705(b). However, the SLC
approached the facts relating to the payments from avery different perspective: the
SLC's task was to investigate and analyze the facts in order to determine if there is any
basis to hold the individual defendants civilly liable for their actions as a result of a
breach of duty to the Company and its shareholders. In assessing the reasonableness of
the defendants' conduct, it was necessary to look at all surrounding facts and
circumstances, including the reasons and motives for making the payments. In
engaging in this analysis, the SLC had the benefit of substantial evidence never sought
or obtained by DOT - multiple interviews with Olson and Hills, during which the SLC
was able to explore all the relevant dimensions of their roles in connection with the
payments. Thus, the St,C took into account all the facts surrounding the decision to
continue to make the payments, which included, most fundamentally, the Company's
voluntary disclosure at the Chertoff meeting.
21
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D.
Document 202-3
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The Decision to Sell Banadex to Banacol
The next issue that the SLC analyzed was whether the defendants breached their
fiduciary duties to the Company when, in May 2004, during the DOJ investigation, they
authorized the sale of Banadex to Banacoi. In the Amended Complaint, the plaintiffs
claim that this was a "fire sale" that deprived the Company of fair value for the asset.
See Am. Compi. 1I 17. As an initial matter, this claim appears to be at odds with
plaintiffs' claim that the Company should not have made the payments, because
continuing to do business in Colombia without making the payments was not a viable
option. In any event, based on its detailed review of the sale process, the SLC found the
sale of Banadex was orderly and rational and reflected a sustained effort to produce the
best value for the Company's shareholders.
The SLC found that Banacol approached Chiquita about a sale nearly a year
before the DOJ investigation had begun. After Chiquita contacted Banacol in June 2003
to begin serious discussions about a potential sale, the parties negotiated for nearly a
year, with Chiquita trying to obtain the best terms possible. During these negotiations,
the Board received regular updates on the status of the negotiations, including at least
six presentations by management. Because the Company was concerned that
premature disclosure of the DOJ investigation might provide Banacol with leverage in
the negotiations, it waited until the very end of the negotiation process to advise it of
the investigation. Finally, the deal was subject to a market-check when the negotiations
were publicly disclosed in a January 26,2004 press release, five months before the
agreement with Banacol was signed. Based on all these facts, the SLC concluded that
the Board did not breach its fidUciary duty in authorizing the sale of Banadex.
E.
The Decision to Plead Guilty in March 2007
The final claim that is asserted in the Amended Complaint arising directly from
the payments is that the defendants breached their fiduciary duties by causing the
Company to enter into the plea agreement in March 2007, pursuant to which the
Company agreed to, among other things, pay a $25 million fine. The plaintiffs allege,
specifically, that the defendants acted with a conflict of interest in authorizing the plea
because it was sought solely to protect themselves from prosecution. See Am. Compi. 1I
118-19. The SLC examined this issue and found that the Board did, at the outset, seek to
avoid the prosecution of individual officers and directors, but that its motivation for
doing so was not self interest, rather, it was concern about the harm to the Company
that would result from such prosecutions, including substantial cost and additional
reputational harm. Regardless, there was no such protection, as the allegations in the
Amended Complaint are directly contradicted by the terms of the plea agreement itself,
which specifically required the Company to cooperate in any continuing investigation
of the individuals, which it did.
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On the whole, the SLC found the Board to have engaged in a careful and
reasonable process in approving the plea. The Board met repeatedly to consider and
analyze offers and counter offers; the directors engaged in numerous conversations
amongst themselves and with management; and they were advised by experienced
counsel, including the current u.s. Attorney General Eric Holder and former U.s.
Attorney General Dick Thornburgh. Ultimately, through extended and contentious
negotiations, senior management and the Board, all of whom participated actively in
the process, were able to reduce the amount of the fine sought by the government from
$70 million to $25 million, paid over five years, and plead to a lesser statutory offense
than originally demanded by the government. In short, the facts do not support a
finding of conflict of interest or gross negligence in connection with the decision to
enter into the plea.
Moreover, under the circumstances, the Company's only choice was to enter into
a plea agreement or proceed with a criminal trial. The Company had made payments to
an FTO in violation of federal law and DOJ had made clear that, in the absence of an
acceptable settlement, it would prosecute the Company. Under those circumstances,
the SLC found that the defendants decided to enter into plea negotiations based
primarily upon the consequences of losing a trial, including the potential for a crippling
and potentially catastrophic criminal fine. The SLC concluded that these reasons were
rational and valid, and do not suggest a breach of duty in any respect. 15
V.
CONCLUSION
Chiquita has suffered significant harm as a result of the payments that were
made in Colombia after the AUC was designated as an FTO. Over the course of the last
six years, the Company has endured a costly and exhaustive DOJ investigation, which
resulted in the Company pleading guilty to a felony and paying a substantial fine, and
continued litigation. This has significantly diverted senior management and the Board
from its main mission -working to grow and improve Chiquita's business for the
benefit of all of its shareholders.
IS
The remaining three ancillary claims - the acquisition of Atlanta AG, alleged false statements in
public disclosures, and alleged excessive compensation - are treated at length in the body of the
SLC Report. Insum, the decision to acquire Atlanta, contrary to plaintiffs' allegations, had
nothing to do with Colombia (it was approved six months before the discovery of the FTO
designation) and was made for good faith business reasons and on an infqrmed basis after
several months of consideration. Decisions regarding compensation were likewise made on an
informed basis, typically with ·the advice of an outside consultant, and were not, in fact, excessive
under the circumstances. Finally, the SLC found nothing improper about the Company's
disclosures or that any of the defendants knew, or should have known, that they were false or
misleading.
23
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The SLC began its work with an exhaustive investigation and analysis of the
factual and legal basis for any potential claims, as well as possible defenses to those
claims. As noted above, in many cases, there are formidable, if not insurmountable
obstacles to the assertion of those claims. Ultimately, the SLC was asked to decide
whether, if the facts supported such claims, it is in the Company's best interests to
pursue them, which is a much more complex question.
After careful consideration, the SLC has determined, in the exercise of its
business judgment, to seek dismissal of the Amended Complaint in its entirety. That
dismissal is based largely on the factual and legal merits of the claims as outlined
above. However, in exercising its business judgment, the SLC also took into account
additional factors that are relevant to the analysis.
First, the fact that there was no evidence that any defendant, at any time, acted in
bad faith or was motivated by self-interest weighed heavily in the SLC's deliberations.
While the SLC believes that, at times, the defendants made mistakes, some more
significant than others, those mistakes were made in the belief that the actions being
taken were in the best interests of the Company and were to protect the lives of the
Company's employees.
Second, the SLC concluded that the reputational harm associated with
prolonging what has already been six continuous years of investigation and litigation,
with continued emphasis on the Company's actions in Colombia, would inflict
substantial further damage on the Company. Rather than pursuing these claims, which
the SLC found to be at best questionable and to have significant factual and legal flaws,
the SLC concluded that the Company's interests are better served by moving forward
with efforts to restore its image as a leading seller of bananas, tropical fruit, and other
food products.
Third, the SLC concluded that the costs that will be incurred in connection with
these claims, including legal fees for the Company to pursue the claims effectively and
for counsel for the individual defendants - for whom, under its charter and New Jersey
law, the Company may be required to advance fees - outweigh any potential recovery
that may be obtained in the future, especially given the weaknesses of the claims.
Fourth, the SLC found that management and the Board appropriately focused on
the adequacy of the Company's compliance measures and remedial actions
implemented following this episode. As a result, the SLC believes that an event of this
nature is unlikely to recur, and therefore, the deterrent effect of bringing a claim against
former officers and directors, whom the SLC concluded acted in good faith, is
outweighed by the negative impact such claims would have on the Company's current
management. Moreover, the SLC, in a project led by Mr. Barker, who also serves as the
Chair of the Board's Audit Committee, is in the process of reviewing the improvements
to the Company's compliance program that have already been made to determine
24
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whether any further enhancements are necessary, and will make recommendations to
management as the SLC concludes are appropriate.
Finally, as noted above, the SLC carefully considered the fact that, in its view,
continuing with this litigation would serve to further divert management from its core
mission, which is to increase shareholder value by expanding the profits of the
business.
Accordingly, the SLC, in the exercise of its business judgment, taking all of these
factors into account, is now seeking by motion filed February 25, 2009 to dismiss the
Amended Complaint in its entirety.
25
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Document 202-4
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EXHIBIT "A"
Continuation - Part 2
Page 1 of 269
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REPORT OF THE SPECIAL LITIGATION COMMITTEE
CHIQUITA BRANDS INTERNATIONAL, INC.
SPECIAL LITIGATION COMMITTEE
HOWARD W. BARKER, JR.
WILLIAM H. CAMP
DR. CLARE M. HASLER
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON LLP
MICHAEL R. BROMWICH
DAVID B. HENNES
WILLIAM G. MCGUINNESS
FEBRUARY 2009
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Table of Contents
Page
I. INTRODUCTION ...........................................................................................................................1
II. THE SLC AND ITS FORMATION .................................................................................................3
A.
Board Resolution .....................................................................................................3
B.
The Members of the Special Litigation Committee ............................................4
C.
SLC Independence Review ....................................................................................6
D.
SLC Compensation ................................................................................................15
E.
Retention of Counsel .............................................................................................15
III. SLC INVESTIGATIVE WORK PLAN .........................................................................................16
A.
Overview.................................................................................................................16
B.
Meetings with Company and Audit Committee Counsel...............................16
C.
Documents Reviewed ...........................................................................................17
D.
Interviews ...............................................................................................................18
E.
The SLC’s Good Faith Attempts to Cooperate with Lead Counsel................24
F.
SLC Meetings .........................................................................................................26
IV. FACTUAL FINDINGS................................................................................................................27
A.
The Formation of Banadex and the Early Security Situation in
Colombia ................................................................................................................27
B.
Payments to Guerrilla Groups.............................................................................30
C.
The Company’s Payments to Convivirs and the AUC ....................................45
D.
1998 – The SEC Investigation Begins ..................................................................56
E.
Santa Marta Convivir Payments..........................................................................60
F.
Robert Thomas’s Investigation into the Convivir Payments ..........................62
i
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Table of Contents
(continued)
Page
G.
Corporate Responsibility Initiative – 2000 .........................................................69
H.
May 7, 2001 [Outside Law Firm] Legal Opinion...............................................70
I.
May 8, 2001 Audit Committee Meeting .............................................................71
J.
Arms and Drug Smuggling..................................................................................72
K.
FTO Designation – September 10, 2001 ..............................................................75
L.
The Company’s Bankruptcy Reorganization and the New Board.................78
M.
The New Audit Committee Learns of the Payments .......................................80
N.
Acquisition of Atlanta AG....................................................................................81
O.
Discovery of the FTO Designation ......................................................................82
P.
Disclosure to DOJ ..................................................................................................90
Q.
Payments in Colombia Resume...........................................................................95
R.
Additional Public Disclosures Regarding Colombia........................................96
S.
Further Contact with the Government ...............................................................97
T.
Initial Banacol Proposal ......................................................................................100
U.
Additional Public Disclosure .............................................................................103
V.
Further Communication with the Government ..............................................104
W.
September 2003: Retention of K&E and KPMG By the Audit
Committee............................................................................................................107
X.
Document Collection and the Concerns Raised by Colombian
Employees ............................................................................................................111
ii
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Table of Contents
(continued)
Page
Y.
November 2003 – January 2004: Growing Concerns About the
Investigation ........................................................................................................113
Z.
Continuing Concerns About Continuing the Payments and
Chiquita’s Cooperation ......................................................................................119
AA.
Winter 2004: Aguirre Becomes CEO, End of Payments,
Continued Investigation into Banacol Deal ....................................................122
BB.
Spring 2004: Subpoenas are Issued and the Sale of Banadex is
Approved .............................................................................................................129
CC.
OFAC Presentation and Thompson Memorandum Submission..................133
DD.
Supplemental Thompson Memorandum Submission ...................................135
EE.
Quiet Period: November 2004 – Summer 2005...............................................136
FF.
Fall 2005: Transition of Chiquita Investigation to AUSA Malis....................136
GG.
Covington & Burling LLP Takes Over For K&E .............................................138
HH.
Plea Negotiations .................................................................................................139
II.
Compensation & Severance ...............................................................................146
JJ.
Remedial Measures .............................................................................................153
V. APPLICABLE LAW AND ANALYSIS OF THE CLAIMS ..............................................................156
A.
Summary of Relevant Legal Standards ............................................................157
B.
Breach of Duty in Connection with Payments to the FARC and
the ELN From Approximately 1989 to 1997....................................................165
C.
Breach of Duty in Connection with Payments to the AUC From
Approximately 1997 Through February 2003.................................................184
iii
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Table of Contents
(continued)
Page
D.
Breach of Duty in Connection with Payments to the AUC After
Discovery of the FTO Designation in February 2003 Through
January 2004.........................................................................................................199
E.
Analysis of Olson’s Performance as General Counsel ...................................214
F.
Allegations Concerning Drugs and Arms Smuggling ...................................217
G.
Breach of Duty in Connection with Conducting an Alleged “Fire
Sale” of Chiquita’s Colombian Operations .....................................................219
H.
Breach of Duty in Connection with the Guilty Plea .......................................225
I.
Breach of Duty in Connection with the Acquisition of Atlanta AG.............232
J.
Breach of Duty For Causing or Allowing Chiquita to Make False
Statements in its Public Filings .........................................................................236
K.
Breach of Duty in Connection with Compensation and Severance
Decisions ..............................................................................................................250
L.
Business Judgment Considerations...................................................................259
VI. CONCLUSION ........................................................................................................................261
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INTRODUCTION
This report summarizes and synthesizes the facts that have been developed in
the investigation conducted by the Special Litigation Committee (the “SLC”) of the
Board of Directors (the “Board”) of Chiquita Brands International, Inc. (“Chiquita” or
the “Company”) of allegations contained in the Verified Consolidated Shareholder
Derivative Complaint (the “Amended Complaint”). The Amended Complaint was filed
on behalf of the Company in the U.S. District Court for the Southern District of Florida
on September 11, 2008. This Report also presents the SLC’s determinations as to
whether the claims alleged in the Amended Complaint should be pursued, dismissed or
otherwise resolved, based on the exercise of its business judgment under New Jersey
law, and taking into account the best interests of Chiquita and its shareholders.
The allegations in the Amended Complaint arise principally out of payments
made by Chiquita’s Colombian subsidiary, C.I. Bananos de Exportación S.A.
(“Banadex”), to left-wing guerrilla and right-wing paramilitary groups, including the
Fuerzas Armadas Revolucionarias de Colombia, or the Revolutionary Armed Forces of
Colombia, known as the “FARC,” and the Autodefensas Unidas de Colombia, or the
United Defenses of Colombia, known as the “AUC,” from approximately 1989 through
January 2004. Following a work plan developed at the outset of the investigation with
SLC counsel, Fried, Frank, Harris, Shriver & Jacobson LLP (“Fried Frank” or “SLC
Counsel”), the SLC’s investigation included the collection of a broad array of relevant
documents, the review of those documents, and the interviews of witnesses with
knowledge of the matters under investigation. At the conclusion of the interview
process, the SLC met with its counsel to review and analyze the factual findings of the
investigation, and to discuss the legal conclusions that followed from those findings.
This Report summarizes the factual findings, factual conclusions, and legal analysis of
the claims contained in the Amended Complaint and others identified by the SLC.
The SLC Report is organized as follows:
Section II describes the process by which the SLC was formed, identifies the
members of the SLC and their professional backgrounds, and describes how the SLC,
with the assistance of Fried Frank, evaluated the independence of its members.
Section III describes the work plan that the SLC followed in investigating the
claims alleged in the Amended Complaint, describes the documents that were collected
and reviewed, the interviews that were conducted, and the process by which the SLC
and counsel analyzed the evidence and reached its conclusions.
Section IV describes in detail the factual findings reached by the SLC as a result
of its investigation. Because the events investigated span the period 1989 to the present,
the presentation of the SLC’s factual findings is divided chronologically into three
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sections. The first section describes relevant events during the period 1989 to 1997,
during which time payments were made by Banadex to guerrilla groups in Colombia,
and includes details of the security situation that caused the Company to make the
payments. The second section describes the payments to the convivirs and the AUC
starting in or around 1997 and extending through September 2001, when the U.S.
Department of State designated the AUC as a Foreign Terrorist Organization (an
“FTO”). The third section describes and analyzes the events that took place after the
Company’s discovery of the designation of the AUC as an FTO, including the
Company’s disclosure of the payments to the Department of Justice (“DOJ”) in April
2003, the investigation of the Company by DOJ, and the Company’s decision to enter
into a guilty plea in March 2007.
The SLC’s factual findings also include evidence developed by the SLC
concerning various other issues alleged to constitute wrongdoing in the Amended
Complaint, including the Company’s alleged facilitation of the provision of weapons
and drugs to the AUC in Colombia, the sale of Banadex in June 2004, and the
acquisition of a German fruit distributor, Atlanta AG, in March 2003. Finally, the
factual findings summarize evidence developed by the SLC relevant to allegations that
the defendants caused the Company to make false and misleading public statements,
and caused the Company to pay excessive compensation and make wasteful severance
arrangements with senior officers and directors alleged to have committed wrongdoing
related to the Colombia payments.
Finally, Section V describes the legal standards applicable to the claims set forth
in the Amended Complaint and applies those legal standards to the facts developed
during the investigation. This section also details the other business considerations that
the SLC considered in reaching its determinations.
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THE SLC AND ITS FORMATION
This section of the report sets forth the authorization provided to the SLC by the
Chiquita Board, describes the background of the SLC members, details the
independence review conducted by SLC Counsel, and summarizes the compensation of
the SLC.
A.
Board Resolution
Following the filing of the Derivative Litigation,1 on April 3, 2008, the Chiquita
Board adopted a resolution (the “Resolution”) that established the SLC. See Chiquita
Brands Int’l, Inc., Resolution of the Board of Directors Forming Special Litigation
Committee (Apr. 3, 2008). The Resolution delegated to the SLC the authority and
power to:
investigate, review, and analyze the facts, allegations, and
circumstances that are the subject of the Derivative
Litigation, as well as any additional facts, allegations, and
circumstances that may be at issue in any related inquiry,
investigation or proceeding
Id.
The Board further delegated to the SLC:
the full and exclusive authority to consider and determine
whether or not the prosecution of the claims asserted in the
Derivative Litigation or any other claims related to the facts,
allegations, and circumstances of the Derivative Litigation is
in the best interests of the Company and its shareholders,
1
In addition to this multi-district lawsuit centralized in the U.S. District Court for the Southern
District of Florida, the term “Derivative Litigation,” as defined in the Resolution, includes the
following other state court actions: (i) Serv. Employees Int’l Union v. Hills, et al., No. A07-11383 (Ct.
of Common Pleas, Hamilton County Ohio) and (ii) Hawaii Annuity Trust Fund for Operating
Engineers v. Hills, et al., No. c-379-07 (N.J. Super Ct. Ch. Div.). The SLC reviewed the complaints
filed in the pending Ohio state court action (Serv. Employees Int’l Union v. Hills, et al.) and the New
Jersey state court action (Hawaii Annuity Trust Fund for Operating Engineers v. Hills, et al.) and
found that all of the substantive allegations against Chiquita’s officers and directors asserted
therein are also contained, in far greater detail, in the Amended Complaint filed in the multidistrict federal litigation. Therefore, the SLC’s conclusions in this Report apply with equal force
to the allegations contained in the Ohio and New Jersey state court actions. In any event, the
action filed in the New Jersey state court has been dismissed, and that dismissal has been
affirmed by the Appellate Division (a discretionary appeal to the New Jersey Supreme Court is
pending).
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and what action the Company should take with respect
thereto. . . .
Id. The Resolution also gave the SLC the authority to retain outside counsel and other
advisors it deemed necessary to perform its duties. The Resolution designated nonmanagement Chiquita directors Howard W. Barker, Jr., William H. Camp, and Clare M.
Hasler, all of whom are independent of Chiquita management, as the members of the
SLC.2
B.
The Members of the Special Litigation Committee
1.
Howard W. Barker, Jr.
Howard W. (“Skip”) Barker joined the Chiquita Board on September 21, 2007 as
an independent director, and has served as the Chair of the Board’s Audit Committee
since that time.
Barker graduated from Florida State University in 1972 with a B.S. in
Accounting. Upon graduation, Barker joined Peat, Marwick, Mitchell & Co., the
accounting firm that, in 1987, became KPMG LLP. Barker spent thirty years at Peat
Marwick and KPMG, and served in numerous positions of increasing responsibility at
the firm. In 1982, Barker became a partner at Peat Marwick, and spent three years in the
company’s Executive Education Program in New York, where he developed training
programs for clients. Barker then transferred to KPMG’s Stamford, Connecticut office,
where he worked primarily on audits and mergers and acquisitions, but also remained
involved in teaching and training KPMG employees. He retired from KPMG in 2002.
Since 2003, Barker has served on the boards of directors of (i) Medco Health
Solutions, Inc., a pharmacy benefit manager with the nation’s largest mail order
pharmacy operations, and (ii) priceline.com, Inc. (“Priceline”), a leading online travel
service. He is Chair of the Audit Committees of both boards, and also serves on the
Compensation Committee of the Medco board, and the Nominating and Corporate
Governance Committee of the Priceline board.
Barker is also a member of several professional societies, including the American
Institute of Certified Public Accountants, the Connecticut Society of Certified Public
Accountants, and the Florida Society of Certified Public Accountants.
2
Applying standards adopted by the Board that are consistent with New York Stock Exchange
criteria for independence, the Company has found Barker, Camp, and Hasler each to be an
“independent director.” See Chiquita Brands Int’l, Inc., Proxy Statement (Form Def 14-A) (Apr.
15, 2008).
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William H. Camp
William H. Camp joined the Chiquita Board on April 3, 2008 as an independent
director and has served as the Chair of the Board’s Compensation Committee since
November 2008.
In 1967, Camp enrolled at Danville Area Community College, in Danville,
Illinois, but left after one year to join the United States Navy. Camp served in the Navy
for four years, and was honorably discharged in 1972. Following his discharge, Camp
returned to the Danville Area Community College and earned his Associate’s Degree in
1975. In 1977, Camp received a B.S. in Business Administration from the University of
Illinois, Champaign-Urbana. Upon graduation, Camp joined the A.E. Staley
Manufacturing Company, an oilseed and corn refiner headquartered in Decatur,
Illinois. In 1985, Archer Daniels-Midland Company, Inc., a leading agricultural
processor (“ADM”), bought a division of A.E. Staley.
Camp held various positions of increasing authority and responsibility during
his career at A.E. Staley and then at ADM. Some of the highlights are: from 1985 to
1990, he held responsibility for ADM’s North American Soybean Merchandising; from
1991 to 1999 he was Vice President of ADM’s Rail Transportation, with responsibility
for all of ADM’s rail transportation throughout North America, Canada, and Mexico,
President of the American River Transportation Company, and President of ADM
Trucking; from 1999 to 2000, he was President of ADM South America, with
responsibility for ADM’s operations in Brazil, Argentina, Bolivia, and Paraguay; from
2000 until 2002, he was President of ADM’s North American Oilseed Group; from 2002
until 2005, he was Senior Vice President of ADM’s Global Oilseeds, Cocoa, and Wheat
Milling, including ADM’s North American, South American, European, and Asian
operations; in 2005, he became the Executive Vice President of Global Processing; in
2007, he became the Executive Vice President – Asian Strategy, the position that he held
until his retirement from ADM in 2007.
Camp currently serves as Chairman and CEO of Accelegrow Technologies, Inc.,
a start-up located in West Point, Georgia. From 2006 to 2007, he served on the boards of
directors of (i) Wilmar International Limited, Singapore, a soybean and palm oil
manufacturer and trader in Asia, and (ii) Agricore United, Canada, an agricultural grain
cooperative.
3.
Dr. Clare M. Hasler
Dr. Clare M. Hasler joined the Chiquita Board on October 11, 2005 as an
independent director, and has served on the Board’s Compensation Committee since
that time.
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Hasler enrolled at Central Michigan University in fall 1975 where she spent oneand-a-half years. She transferred to St. Clair Community College for one semester.
Hasler then attended Michigan State University beginning in fall 1977 and received her
B.S. in Nutrition in 1981. In 1984, Hasler earned a masters degree in Nutrition from
Penn State University. She then obtained a dual Ph.D. in Environmental Toxicology
and Human Nutrition from Michigan State University in 1990.
After obtaining her dual Ph.D., Hasler served a two-year post-doctoral
fellowship at the National Cancer Institute in Bethesda, Maryland. In October 1992, she
became an Assistant Professor in the Department of Food Science and Human Nutrition
at the University of Illinois, Champaign-Urbana, and served in that position until 2003.
In 2003, Hasler received a Masters in Business Administration from the University of
Illinois. Hasler then became the first Executive Director of the Robert Mondavi Institute
for Wine and Food Science (the “Mondavi Institute”) at the University of California,
Davis, the position that she currently holds. As Executive Director of the Mondavi
Institute, Hasler is responsible for programming and vision-development efforts, as
well as serving as the University’s primary liaison to the wine and food industries.
Hasler is an international authority on “functional foods,” which are foods or dietary
components that may provide a health benefit beyond basic nutrition.
In addition to her post at the Mondavi Institute, Hasler has performed outside
consulting work, primarily for scientific advisory boards. She is currently the Women’s
Wellness Advisor for Nature Made Vitamins; serves on the Scientific Advisory Board of
Reliv International, Inc., a leading manufacturer of proprietary nutritional supplements;
serves on the Nutrition Committee of the Almond Board, an organization supervised by
the U.S. Department of Agriculture; serves on the Scientific Advisory Board of both the
Mushroom Council, a trade group funded by mushroom growers, and the Cranberry
Group, a cooperative of Ocean Spray and Wisconsin cranberry growers; and serves on
the board of the Journal of Medicinal Food and of several nutraceutical journals,
including the Journal of the American Nutraceutical Association.
Hasler is also a member of a number of professional societies, including the
American Association for Cancer Research, the American Association of Cereal
Chemists, the American Association for the Advancement of Science, the American
Nutraceutical Association, the American Society for Nutritional Sciences, and the
Institute of Food Technologists.
C.
SLC Independence Review
Prior to conducting any substantive investigative work, the SLC and its counsel,
Fried Frank, engaged in a thorough review of the independence of each SLC member
with respect to the defendants named in the Amended Complaint. In conducting the
independence review, the SLC was guided by principles of New Jersey and Delaware
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law regarding the independence of special litigation committees. Accordingly, the SLC
and its counsel sought to determine whether its members were, “for any substantial
reason, incapable of making a decision with only the best interests of the corporation in
mind.” In re Oracle Corp. Deriv. Litig., 824 A.2d 917, 938 (Del. Ch. 2003) (emphasis in
original); see also In re PSE&G S’holder Litig., 801 A.2d 295, 314 (N.J. 2002) (“Directorial
independence ‘means that a director’s decision is based on the corporate merits of the
subject before the board rather than extraneous consideration or influence’”) (quoting
Aronson v. Lewis, 473 A.2d 805, 816 (Del. 1984)).3
The factors that the SLC considered in its independence review included: (i) the
SLC members’ involvement, if any, in the actions at issue in the Derivative Litigation;
(ii) the SLC members’ financial interest, if any, in the actions at issue in the Derivative
Litigation; (iii) the SLC members’ professional and personal relationships, if any, with
the defendants in the Derivative Litigation; (iv) the SLC members’ mutual connections
with the defendants in the Derivative Litigation, if any, to institutions, businesses,
charitable organizations, or other entities; and (v) the judgments made by the SLC
members, if any, about the veracity of the claims alleged in the Derivative Litigation.
The SLC and its counsel also considered any other factors that would “weigh on
the mind of a reasonable special litigation committee member . . . in a way that
generates an unacceptable risk of bias.” Oracle, 824 A.2d at 938-39 (“a director may be
compromised if he is beholden to an interested person. Beholden in this sense does not
mean just owing in the financial sense, it can also flow out of personal or other
relationships to the interested party”) (internal quotations and citations omitted).4 To
explore these issues, Barker, Camp and Hasler separately met with SLC Counsel in mid-
3
As noted above, Chiquita is incorporated in New Jersey, and thus New Jersey law governs the
conduct of Chiquita’s directors and officers. See Int’l Ins. Co. v. Johns, 874 F.2d 1447, 1458 n.19
(11th Cir. 1989). However, New Jersey courts seek guidance from the Delaware courts, which are
preeminent in analyzing and interpreting corporate law. See, e.g., IBS Financial Corp. v. Seidman &
Assocs., L.L.C., 136 F.3d 940, 949-50 (3d Cir. 1998) (“When faced with novel issues of corporate
law, New Jersey courts have often looked to Delaware’s rich abundance of corporate law for
guidance”). New Jersey courts look to New York law as well. See Francis v. United Jersey Bank,
432 A.2d 814, 821 (N.J. 1981).
4
See also Beam v. Stewart, 845 A.2d 1040, 1051 (Del. 2004) (doubts about a director’s independence
may arise “because of financial ties, familial affinity, a particularly close or intimate personal or
business affinity”); Biondi v. Scrushy, 820 A.2d 1148, 1166 (Del. Ch. 2003) (finding that an SLC
lacked independence where the SLC Chairman “publicly and prematurely issued statements
exculpating one of the key company insiders whose conduct [was] supposed to be impartially
investigated by the SLC”), aff’d, 847 A.2d 1121 (Del. 2004); Katell v. Morgan Stanley Group, Inc.,
1995 WL 376952, at *8 (Del. Ch. June 15, 1995) (“When a special committee’s members have no
personal interest in the disputed transactions, this Court scrutinizes the members’ relationship
with the interested directors”) (citation omitted).
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May to review each of their respective backgrounds, and to discuss their relationships
with current and former Company officers and directors.
1.
Howard W. Barker, Jr.
Based upon Fried Frank’s review of Barker’s background, Fried Frank and
Barker jointly concluded that he was independent and financially disinterested from the
defendants in the Derivative Litigation. Specifically, Barker: (i) with one minor
exception discussed below, had no involvement in any of the actions at issue in the
Derivative Litigation; (ii) had no financial interest in the actions at issue in the
Derivative Litigation; (iii) had no professional or personal relationship with any of the
defendants; (iv) was not aware of any mutual connections to any institutions,
businesses, charitable organizations, or other entities with any of the defendants; and
(v) had made no pre-judgments about any of the claims alleged in the Derivative
Litigation.
Although Barker joined the Board after the Company had stopped making the
payments in Colombia, he is named as a defendant in the Amended Complaint. The
Amended Complaint does not actually mention Barker by name in any substantive
allegation, but the SLC inferred his inclusion as a defendant to relate to its claim that
certain severance decisions made by the Board following discovery of the Colombia
issue were improper, a claim that is subordinate to the primary claim, which is that the
payments in Colombia were a breach of duty.
The Amended Complaint alleges, in general, that the Board improperly granted
severance to Chiquita executives who were involved in making, or were aware of, the
payments to the FARC and AUC. See Am. Compl. ¶ 119. The only severance decision
in which Barker participated was for defendant Robert Kistinger, which was made at
the October 25, 2007 Board meeting, the first meeting Barker attended as a Chiquita
director.5 Based upon a review of the facts, Fried Frank and Barker concluded that,
given that the issue was decided at his first Board meeting and that he had no prior
experience with Chiquita’s Colombia issues, or with Kistinger, he could fairly and
impartially consider this claim. Nonetheless, out of an abundance of caution, Barker
recused himself from the SLC’s deliberation and decision-making with respect to this
claim.
In any event, the fact that Barker served on the Board at the time the challenged
action took place does not render him interested under the law. See Kaplan v. Wyatt, 499
5
With respect to Kistinger, the Amended Complaint also alleges that the Board improperly
allowed him to remain employed by the Company. See Am. Compl. ¶ 144. However, Kistinger
left the Company in March 2008, and thus, the SLC analyzed this claim as one relating to his
severance.
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A.2d 1184, 1189 (Del. 2005) (“The mere fact that a director was on the Board at the time
of the acts alleged in the complaint does not make the director interested or dependent
so as to infringe on his ability to exercise his independent business judgment of whether
to proceed with the litigation”); Kindt v. Lund, 2003 WL 21453879, at *3 (Del. Ch. May 30,
2003) (upholding the SLC’s independence even though one of its two members “was on
the board, approved the challenged transactions, and is a defendant” because that
member “had no financial interest in any of the transactions”); Katell, 1995 WL 376952,
at *7 (affirming the SLC’s independence notwithstanding the fact that its sole member
was “not only a defendant in this lawsuit, but is the very general partner who approved
the disputed transactions” because the undisputed facts demonstrated that the SLC
member had no financial interest in the underlying transaction).
The plaintiffs, in the Amended Complaint, allege that Barker lacks independence
for several additional reasons, none of which have merit. See Am. Compl. ¶¶ 137,
141(g).
First, the plaintiffs allege that Barker lacks independence because he “spent his
entire career as a ‘Big Six’ accountant,” and thus “he had an ingrained hostility toward
shareholder suits.” Am. Compl. ¶ 141(g). This conclusory allegation – that accountants
are inherently opposed to shareholder suits and thus cannot act independently – is
unsupported by fact or law and makes no logical sense. See, e.g., Kaplan, 499 A.2d at
1189-90 (“Allegations of natural bias not supported by tangible evidence of an interest
on the part of the Committee in the outcome of the litigation do not demonstrate a lack
of independence”).
Second, the plaintiffs claim further that Barker, who retired from KPMG in 2002,
would be reluctant to recommend that the Company sue his fellow directors because
“KPMG is the independent auditor of several companies on whose boards several of the
Chiquita Defendants currently serve.” Am. Compl. ¶ 137. Courts routinely reject this
type of vague, unsupported and insubstantial argument as insufficient to raise a serious
question regarding independence. See, e.g., In re J.P. Morgan Chase & Co. S’holder Litig.,
906 A.2d 808, 822 (Del. Ch. 2005) (“the plaintiffs attempt to rely on a mere inference that
because a former executive of a major corporation owns a small percentage of the
corporation’s outstanding shares and that corporation does business with a national
bank, somehow that former executive could not act independently of the bank’s CEO as
a director of the bank. The allegations . . . are simply not enough”).
Third, the plaintiffs allege that Barker is a “close personal friend” of Aguirre, and
thus he may be disabled from vigorously investigating the defendants. Am. Compl. ¶
137. The plaintiffs cite “media reports” as their source for this allegation, but do not
identify which “media reports,” and the SLC has not found any media reports that
would support this claim. Most significantly, however, Barker is not, in fact, a close
personal friend of Aguirre. Barker first met Aguirre when Barker joined the Chiquita
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Board in September 2007, one month before the first derivative action was filed. Barker
and Aguirre have never socialized outside of Board-related events. Moreover, the
plaintiffs fail to explain how a friendship with Aguirre would preclude Barker from
independently investigating the claims alleged against all defendants. Finally, even if
true, “[a]llegations of mere personal friendship . . . standing alone [ ] are insufficient to
raise a reasonable doubt about a director’s independence.” Beam, 845 A.2d at 1050
(citation omitted).
Fourth, the plaintiffs allege that Barker lacks independence because defendant
and former Chiquita director Gregory C. Thomas, who served as a director from
November 2000 to March 2002, also worked at KPMG at one time. See Am. Compl. ¶
137 n.8. Thomas worked at KPMG (then Peat, Marwick, Mitchell & Co.) from 1969 to
1977, reaching the level of senior manager. Barker joined KPMG in 1972, but did not
know Thomas at KPMG, and in fact, has never met Thomas. The plaintiffs fail to
explain how Barker’s independence would be compromised by the fact that he and
Thomas once worked for the same large accounting firm. This allegation is not enough
to raise a serious question about Barker’s impartiality. See Kaplan, 499 A.2d at 1189
(finding that a party challenging an SLC member’s independence must show that the
factor allegedly affecting independence was “such an influence on [the SLC member] or
the Committee that [it] prevented them from basing their decisions on the corporate
merits of the issues”); see also Oracle, 824 A.2d at 938.
Fifth, the plaintiffs allege that Barker lacks independence because both he and
defendant Robert Kistinger are past and current members of the American Institute of
Certified Public Accountants (“AICPA”). See Am. Compl. ¶ 137, n.8. As an initial
matter, Barker had never met Kistinger until Kistinger was interviewed by the SLC on
November 11, 2008. More fundamentally, AICPA is a national, professional
organization for Certified Public Accountants, much like the American Bar Association
is a national, professional organization for lawyers. According to its website, AICPA
currently has over 338,000 members. Thus, the plaintiffs are, in essence, asserting that
an SLC member cannot be independent if he or she is part of the same profession as one
of the defendants. This is illogical, impractical, and unsupported by law.
2.
William H. Camp
Based upon Fried Frank’s review of Camp’s background, Fried Frank and Camp
jointly concluded that he was independent and financially disinterested from the
defendants in the Derivative Litigation. Specifically, Camp, who joined the Board on
April 3, 2008, months after the Derivative Litigation was filed: (i) had no involvement
in any of the actions at issue in the Derivative Litigation; (ii) had no financial interest in
the actions at issue in the Derivative Litigation; (iii) had no professional or personal
relationship with any of the defendants; (iv) was not aware of any mutual connections
to any institutions, businesses, charitable organizations, or other entities with any of the
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defendants; and (v) had made no judgments about any of the claims alleged in the
Derivative Litigation. This conclusion is consistent with the Amended Complaint, as
the plaintiffs made no allegation that Camp lacks independence for any reason.
3.
Dr. Clare M. Hasler
Based upon Fried Frank’s review of Hasler’s background, Fried Frank and
Hasler jointly concluded that she was independent and financially disinterested from
the defendants in the Derivative Litigation. Specifically, Hasler: (i) with two minor
exceptions discussed below, had no involvement in any of the actions at issue in the
Derivative Litigation; (ii) had no financial interest in the actions at issue in the
Derivative Litigation; (iii) had no professional or personal relationship with any of the
defendants; (iv) was not aware of any mutual connections to any institutions,
businesses, charitable organizations, or other entities with any of the defendants (other
than the nominal defendant, Chiquita, as discussed below); and (v) had made no prejudgments about any of the claims alleged in the Derivative Litigation.
The SLC identified two potential issues concerning Hasler’s independence,
which Fried Frank and Hasler concluded did not adversely affect her ability to serve on
the SLC.
First, the Amended Complaint alleges two claims, in general, which apply to
Hasler based on the timing of her service on the Board. Those claims are based on
Hasler’s role in approving (i) the Company’s entering into the plea agreement in March
2007, and (ii) the severance arrangements of Robert Olson and Robert Kistinger in 2006
and 2007, respectively, and the compensation of Fernando Aguirre in 2006 and 2007.
Am. Compl. ¶¶ 118, 141(d). Because Hasler was not on the Board when any of the
payments in Colombia were made, Fried Frank and Hasler concluded that she could
fairly and impartially consider these claims. Moreover, as discussed above, the fact that
Hasler served on the Board at the time these actions were taken does not render her
interested under the law. See Kaplan, 499 A.2d at 1189; Kindt, 2003 WL 21453879, at *3;
Katell, 1995 WL 376952, at *7. Nonetheless, out of an abundance of caution, Hasler
recused herself from the SLC’s deliberation and decision-making with respect to these
claims as to all the defendants.
Second, the SLC and its counsel carefully considered the relationship between
Chiquita, and its subsidiary Fresh Express, and UC Davis, where Hasler is the Executive
Director of the Mondavi Institute within the College of Agricultural and Environmental
Sciences (the “CAES”). In particular, the SLC examined certain charitable contributions
made by Chiquita and Fresh Express to the CAES, which Hasler identified during her
initial independence review conducted by Fried Frank before the Amended Complaint
was filed. In order to gather additional information regarding this issue, counsel for the
SLC interviewed the following witnesses: (i) Jim Lugg, Executive Vice President of
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Global Food Safety at Chiquita, (ii) Melissa Haworth, Director of Major Gifts at UC
Davis, and (iii) Tanios Viviani, former President of Fresh Express and currently the
President of Global Innovation and Emerging Markets and Chief Marketing Officer at
Chiquita. In addition, SLC Counsel requested and received documents relating to the
contributions from both Chiquita and UC Davis. The following is a summary of the
facts related to the contributions.
History of Contributions. Between 1970 and June 2005, Chiquita made two gifts to
UC Davis – $1,000 in October 1992, and $17,650 in August 2003. Hasler did not become
affiliated with UC Davis until she became the Executive Director of the Mondavi
Institute in February 2004. In June 2005, Chiquita acquired Fresh Express, Inc.,
including its subsidiary, Trans-Fresh. At the time, Fresh Express and Trans-Fresh had a
long history of making contributions to fund agricultural research at UC Davis.
Between 1970 and 2005, Fresh Express and Trans-Fresh had contributed $167,466 to UC
Davis for research. According to Lugg, who worked for Trans-Fresh beginning in the
late 1960s, and was involved in making the contributions, most of the contributions
made to UC Davis at that time were so-called quid pro quo gifts, common in the
agricultural gifting community, targeted at specific research areas in the hopes of
employing the recipients upon graduation. At least six current employees came to
Fresh Express as the result of such programs.
Fresh Express Scholarship Fund. Following Chiquita’s acquisition of Fresh Express,
Haworth, Director of Major Gifts at UC Davis, contacted Fresh Express in the hope that
it would continue to contribute to the college’s programs. During 2006, Lugg and
Viviani had several conversations about continuing Fresh Express’s connection with UC
Davis. They believed that Fresh Express should continue to make contributions and
further its relationship with UC Davis, but shift those contributions away from narrow
research grants in favor of unrestricted scholarship grants, in order to facilitate an
increase in highly qualified food scientists, and thus strengthen the industry as a whole.
In June 2006, Fresh Express executives, including Viviani and Lugg, visited UC
Davis. While recollections vary slightly as to the extent of Hasler’s participation in this
meeting, all agreed that her role was minimal. In December 2006, Dean of the CAES
Neal Van Alfen and Haworth met with Fresh Express executives at Fresh Express’s
offices. Hasler was not involved in planning, and was not present at, this meeting.
Ultimately, in January 2007 and February 2008, the Chiquita Brands International
Foundation made two $25,000 contributions to UC Davis to establish the Fresh Express
Graduate Student Fund.
Viviani had complete autonomy to make the gifts (no one else at Chiquita
approved or ratified the gift). Viviani did not contact Hasler regarding the decision to
contribute to the scholarship fund, nor did Viviani contact her to inform her that the
donations had been made. The decision regarding which student(s) will receive the
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scholarship funds will be made solely by the Graduate Group at UC Davis, a committee
that acts independently from Department Chairs and selects students based on need
and merit. Hasler does not have any involvement in, or influence over, the Graduate
Group. Hasler did not, and does not, receive any direct benefit from these donations. 6
To put these contributions in perspective, UC Davis defines “major gifts” as no
less than $25,000. Over $100 million in private funds were donated to UC Davis in the
2007 fiscal year (July 2006 to June 2007) and approximately $200 million more was
donated in the 2008 fiscal year (July 2007 to June 2008). In the 2008 fiscal year, at least
2,012 different entities made philanthropic donations to the CAES. Thus, the Fresh
Express grants amount to a de minimis amount of the CAES’s overall corporate
donations.
Similarly, the gifts represented a small fraction of Chiquita’s overall giving. In
2007, the Chiquita Brands International Foundation gave $380,091 in donations to
various educational and charitable institutions, including at least fifteen universities. In
2006 and 2007, Chiquita made annual charitable contributions of approximately $1.3
million, and additional in-kind contributions of rejected produce. For example, Fresh
Express recently donated $200,000 to Hartnell College, a California agricultural school,
to help build a new wing of the school dedicated to agricultural study.
E. coli Research Grants. In January 2007, prompted by a recent E. coli outbreak in
spinach, Fresh Express announced that it would provide up to $2 million for
multidisciplinary research to help the fresh-cut produce industry avoid future E. coli
outbreaks. In April 2007, Fresh Express awarded $2 million to fund nine separate
research projects designed to further the understanding of contamination by E. coli in
lettuce and leafy greens. The projects were chosen by an independent and voluntary
panel of scientific advisors from a total field of sixty-five proposals. All proposals were
required to address one or more areas of needed research identified by the panel. One
of the proposals selected by the panel of scientific advisors, out of the sixty-five
applications, came from a research team at the Western Institute for Food Safety and
Security at UC Davis. Hasler played no role in making this decision and had no
influence over the independent panel. Hasler does not benefit from this grant in any
way.
SLC Conclusion. On June 24, 2008, the SLC held a telephonic meeting to, among
other things, review the facts relating to these contributions and consider Hasler’s
independence; Hasler did not participate. At the conclusion of this meeting, SLC
6
The plaintiffs allege that director defendant Robert Fisher personally visited the Mondavi
Institute and donated $25,000 on behalf of Chiquita to provide financial support to graduate
students. See Am. Compl. ¶ 137. This did not happen. In fact, Fisher was not involved in any
way in establishing the Fresh Express Graduate Student Fund.
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members Barker and Camp determined that Chiquita’s contributions to UC Davis did
not affect Hasler’s ability to fairly and impartially consider the claims asserted in the
Amended Complaint given (i) the nominal amount of the contributions, both from the
perspective of Chiquita and UC Davis, (ii) Hasler’s lack of involvement in soliciting the
contributions, (iii) Hasler’s lack of involvement in approving the contributions, (iv) that
Hasler does not benefit directly from the contributions, (v) that future contributions will
not be impacted by the outcome of the Derivative Litigation, and (vi) that Hasler
believed that the donations would have no affect on her ability to fairly and impartially
consider the claims against the defendants.
This conclusion is consistent with special litigation committee independence case
law. For example, in Oracle, 824 A.2d at 947-48, in denying the SLC’s motion to dismiss
the case, the court determined that a material issue of disputed fact existed as to
whether the SLC members were independent due, in part, to the significant ties to
Stanford University that two of the defendants and the two SLC members shared. At
the time, both SLC members were professors at Stanford, and two of the defendants
were significant donors. Id. One defendant director received his undergraduate and
graduate degrees from Stanford (and was a student of one SLC member), and had
donated over $14 million to Stanford through his foundation and personal funds,
$50,000 of which was donated in appreciation for a speech made by one of the SLC
members at the defendant director’s request. Id. at 931-32. The second defendant, Larry
Ellison, Oracle’s CEO, had donated almost $10 million to Stanford through the Ellison
Medical Foundation. Id. at 932. At the time the litigation was pending, Ellison was
reportedly considering donating $150 million or more to create the “Ellison Scholars
Program” at Stanford. Id. at 933.
Because the two members of the SLC were both professors at Stanford, the Court
found that the connections between the SLC members and the defendants, viewed
together, “would weigh on the mind of a reasonable special litigation committee
member . . . in a way that generates an unacceptable risk of bias.” Id. at 947; see also
Lewis v. Fuqua, 502 A.2d 962, 967 (Del. Ch. 1985) (independence of single member SLC
was questionable given that he was the President of Duke University, which had
recently received $10 million from the primary defendant director, who was also a
Trustee of the University).
The web of relationships that created doubts as to the independence of the SLC
members in Oracle do not bear any meaningful resemblance to those presented here: in
Oracle, the amounts of the donations were significantly larger, they were made directly
by the individual defendants (not the nominal defendant, as here), and, at least in one
instance, were specifically tied to a speech given by one of the SLC members. In
addition, both the defendants and the SLC members had significant institutional ties (to
Stanford), which do not exist here. See, e.g., In re J.P. Morgan Chase & Co. S’holder Litig.,
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906 A.2d at 822-23 (rejecting challenge to the independence of two directors who were
the President and a trustee of the American Museum of Natural History, because
plaintiffs “never state how JPMC’s contributions [to the museum] could, or did, affect
the decision-making process of the [directors],” and in fact did not “even go so far as to
indicate what percentage of the museum’s overall contributions are made by [the
corporation]”).
Finally, the Amended Complaint alleges that Hasler, like Barker, is also a close
personal friend of Aguirre. See Am. Compl. ¶ 137. There is no evidence to support this
claim. Like Barker, Hasler met Aguirre when she joined the Chiquita Board in October
2005 and does not socialize with Aguirre outside of Board-related events. Further, as
noted above, even if true, allegations of mere personal friendship are insufficient to
raise a reasonable doubt about a director’s independence. See Beam, 845 A.2d at 1050
(citation omitted).
D.
SLC Compensation
As approved by Chiquita’s Compensation Committee, each of the SLC members
is being compensated as follows in connection with their service on the SLC: (i) a $3,000
per month fee; (ii) a $1,000 in-person meeting fee; and (iii) a $500 telephonic meeting
fee. This compensation was determined following a review of compensation paid to
special litigation committee members at comparable companies.
E.
Retention of Counsel
After interviewing several law firms, on May 5, 2008, the SLC retained Fried
Frank as counsel in connection with its investigation of the claims alleged in the
Amended Complaint. Fried Frank had no prior attorney-client relationship with any of
the individual defendants or with any of the members of the SLC. With one minor
exception, Fried Frank had no prior attorney-client relationship with Chiquita. Fried
Frank’s representation of Chiquita ended in the mid-1990s; was handled by a partner
who is no longer with the firm; and had nothing to do with Chiquita’s Colombian
operations.
15
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III.
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SLC INVESTIGATIVE WORK PLAN
A.
Overview
The SLC, with the assistance of SLC Counsel, conducted a detailed and thorough
factual and legal investigation in order to determine whether it is in the best interests of
the Company and its shareholders to pursue, settle, or dismiss any or all of the claims
asserted in the Amended Complaint. The SLC members have been involved in every
aspect of planning and executing the investigation. At the outset of the investigation,
the SLC reviewed and authorized a plan of investigation for SLC Counsel. SLC Counsel
conducted seventy interviews of fifty-three individuals, and one or more SLC members
participated in a significant number of these interviews, including the interviews of,
among others, (i) former and current executives of the Company, (ii) former and current
directors of the Company, and (iii) other former and current Company employees, both
from the Company’s U.S. and Colombian operations.
In addition, SLC Counsel reviewed approximately 750,000 pages of documents,
and the SLC members themselves have reviewed a substantial number of pertinent
documents. The SLC members also received summaries of each of the interviews
conducted by SLC Counsel, regardless of whether an SLC member participated. SLC
Counsel performed a substantial amount of legal research and analysis, the results of
which were considered by the SLC periodically throughout the investigation. The SLC
held nine formal meetings during the course of its investigation, and held additional
informal conference calls during which issues raised throughout the investigation were
discussed. The investigation was directed by the SLC members in all respects.
B.
Meetings with Company and Audit Committee Counsel
At the outset of its investigation, SLC Counsel met with current and former
counsel to the Company and the Audit Committee, including attorneys from Kirkland
& Ellis LLP (“K&E”), Covington & Burling LLP (“Covington”), and Kirkpatrick &
Lockhart Preston Gates Ellis LLP (“K&L Gates”). The purpose of these meetings was to
enable the SLC to benefit from the knowledge and experience of these firms in dealing
with many of the events and issues relating to the Amended Complaint and to identify
the universe of potentially relevant documents. Given the substantial amount of
overlap between the allegations in the Amended Complaint and the investigation
conducted by DOJ, the SLC determined that it would be in the best interests of the
Company’s shareholders to avoid duplication and draw upon those materials to the
extent practical and appropriate.
16
Case 0:08-md-01916-KAM
C.
Document 202-4
Entered on FLSD Docket 02/25/2009
Page 23 of 269
Documents Reviewed
Based on its document requests, the SLC requested and received (or was
permitted to review) over 750,000 pages of documentary evidence from the Company,
outside counsel to the Company and Audit Committee, the Company’s former outside
auditor, Ernst & Young (“E&Y”), and the individual defendants.
By category, the documents reviewed by the SLC and its counsel include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
7
DOCUMENTS
Minutes of Chiquita’s Board, Audit Committee, Compensation Committee, and
Nominating and Governance Committee meetings from 1990 to 2007.
Talking points and agendas for Board and Audit Committee meetings.
Foreign Corrupt Practices Act reports reviewed by the Audit Committee and the
Board from 1990 through 2007.
E&Y reports, presentations, memoranda, and management letters.
KPMG reports, presentations, and memoranda.
Certain publicly-available information, including SEC filings and news media
reports.
Over 50,000 documents gathered and produced to DOJ during its investigation
from 2003 through 2007 in response to informal requests and subpoenas.7
E-mails, memoranda, and handwritten notes produced by current and former
directors, including notes taken at Board and Audit Committee meetings.
Chiquita’s correspondence with DOJ, the U.S. Attorney’s Office, and the SEC
regarding the investigation.
Internal audit reports and memoranda.
Correspondence, memoranda, and internal documents relating to the Company’s
Colombian operations.
Reports and memoranda created by certain outside consultants to the Company
and the Audit Committee.
Debriefs of the grand jury testimony given by Chiquita directors and personnel in
connection with the DOJ investigation.
Deloitte Touche Tohmatsu reports, presentations, and memoranda.
Accounting documents regarding the acquisition of Atlanta and the sale of
Banadex.
During the course of the DOJ investigation, DOJ requested from the Company all documents
relating to the guerrilla and paramilitary payments, which the Company produced. SLC Counsel
reviewed the DOJ subpoenas (and voluntary requests), and the Company’s responses, and
believes that the Company’s responses were thorough and complete, and therefore did not
believe it necessary to request additional documents on this issue.
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16. Deposition transcripts from the SEC investigation of the Company that began in
1998 and lasted until October 2001.
D.
Interviews
At a meeting on July 28, 2008, based upon a preliminary review of pertinent
documents and the recommendation of SLC Counsel, the SLC determined which
witnesses to interview to advance the purposes of the investigation. The SLC directed
its counsel to seek interviews with fifty-six individuals, including the twenty-six
defendants and thirty non-defendants, whom it believed had relevant knowledge of the
underlying facts, with the understanding that the list might be modified as new facts
were learned and the investigation proceeded. The SLC and its counsel conducted
interviews of the following defendants, all of whom are or were employed by or
affiliated with Chiquita, between September 2008 and January 2009:8
DEFENDANT
Fernando Aguirre
Morten Arntzen
Jeffrey Benjamin
John Braukman III
Robert Fisher
Cyrus Freidheim
Clare Hasler
Roderick Hills
8
ROLE
Chairman, Chiquita
Director, CEO, Chiquita
Director, Audit Committee Member,
Chiquita
Director, Audit and Compensation
Committee Member, Chiquita
SVP and CFO, Chiquita
COO, Chiquita
Director, Chiquita
Chairman, Chiquita
CEO, Chiquita
Director, Chiquita
Compensation Committee Member,
Chiquita
Special Litigation Committee
Member, Chiquita
Director, Audit Committee Member,
Chiquita
DATES OF EMPLOYMENT
May 2004 – present
January 2004 – present
March 2002 – May 2008
March 2002 – February 2007
August 2004 – June 2005
March 2002 – October 2002
March 2002 – present
March 2002 – May 2004
March 2002 – January 2004
October 2005 – present
November 2005 – present
April 2008 – present
March 2002 – May 2007
The SLC initially considered interviewing SLC member Barker, who is also a defendant, but
ultimately decided that such interview would not be necessary. Because he only joined the Board
on September 24, 2007, the only relevant event about which Barker could conceivably have
knowledge is the decision to grant a severance award to Robert Kistinger at a Board meeting on
October 25, 2007 (his first Board meeting as Chiquita director). As noted above, out of an
abundance of caution, Barker recused himself from deliberations and decision-making on the
severance issue as to Kistinger.
18
Case 0:08-md-01916-KAM
DEFENDANT
Durk Jager
Robert Kistinger
Warren Ligan
Carl Lindner
Keith Lindner
Rohit Manocha
Robert Olson
James Riley
Fred Runk
Jaime Serra
Steven Stanbrook
Gregory Thomas
William Tsacalis
Document 202-4
Entered on FLSD Docket 02/25/2009
ROLE
Director, Chiquita
Compensation Committee Member,
Chiquita
Audit Committee Member, Chiquita
Various financial/operations
positions, Chiquita
Executive VP, Operations, Tropical
Products Div., Chiquita
Senior Executive VP, Banana Group,
Chiquita
President and COO, Fresh Group,
Chiquita
VP of Tax, Chiquita
CFO, Chiquita
CEO and Chairman, Chiquita
Chairman, Chiquita
Director, Chiquita
President and COO, Chiquita
Vice Chairman, Chiquita
Director, Audit Committee Member,
Chiquita
VP and General Counsel, Chiquita
SVP and CFO, Chiquita
CFO, Director, Chiquita
Director, Chiquita
Director, Compensation Committee
Member, Chiquita
Director, Chiquita
Audit Committee Member, Chiquita
Compensation Committee Member,
Chiquita
Director, Audit Committee Member,
Chiquita
Director, Financial Control,
Chiquita
Assistant Controller, Chiquita
Page 25 of 269
DATES OF EMPLOYMENT
December 2002 – present
December 2002 – 2004
2004 – present
1980 – 1989
1989 – 1994
1994 – 1997
1997 – March 2008
1992 – May 1998
May 1998 – September 2000
1984 – August 2001
August 2001 – March 2002
March 2002 – May 2002
1981 – March 1997
March 1997 – March 2002
January 2001 – March 2002
August 1995 – August 2006
January 2001 – August 2004
1984 – 1989
1984 – March 2002
January 2003 – present
December 2002 – present
April 2003 – June 2005
April 2003 – November
2008
November 2000 – March
2002
January 1980 – January 1983
January 1983 – July 1984
Controller, Chiquita
July 1984 – April 1987
VP, Financial Administration &
Operations Control, Chiquita
April 1987 – May 1989
19
Case 0:08-md-01916-KAM
DEFENDANT
William Verity
Steven Warshaw
Jeffrey Zalla
Document 202-4
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ROLE
VP and Controller, Chiquita
DATES OF EMPLOYMENT
May 1989 – 2005
VP, Finance & Treasurer, Chiquita
2005 – November 2007
VP, Finance & Enterprise Risk
Management, Chiquita
Director, Audit Committee Member,
Chiquita
Director of Corporate Planning,
Chiquita
CAO and CFO, Chiquita
President and COO, Chiquita
CEO, Chiquita
Director, Chiquita
Various positions, Chiquita
November 2007 – January
2008
May 1994 – March 2002
VP and Corporate Responsibility
Officer, Chiquita
VP, Treasurer and Corporate
Responsibility Officer, Chiquita
SVP and CFO, Chiquita
2000 – 2003
1985 – 1990
1990 – March 1997
March 1997 – August 2001
August 2001 – March 2002
1997 – March 2002
1990 – 2000
2003 – 2005
2005 – present
The SLC also conducted interviews of the following non-defendants between
September 2008 and January 2009.9 A brief description of each individual’s position at
the Company or role in the events at issue (and period in which they served, where
appropriate) is detailed below:
INDIVIDUAL
ROLE
DATES OF EMPLOYMENT OR
ENGAGEMENT WITH CHIQUITA
[Banadex
Employee #10]*
[Banadex
Employee #3]
[Redacted]
[Redacted]
[Redacted]
[Redacted]
1998 – November 2001
November 2001 – June 2004
June 2004 – present
March 1992 – October 1999
9
This list does not include individuals interviewed by the SLC in connection with its
independence review, described above.
*
The names of certain people have been redacted in the publicly-filed version of this Report. The
redactions have been made based on the SLC’s understanding that the publication of the names
of these individuals, and the description of their roles, could pose serious risks to their safety and
the safety of members of their families. An unredacted version of the Report is being filed with
the Court.
20
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Document 202-4
INDIVIDUAL
Entered on FLSD Docket 02/25/2009
ROLE
Page 27 of 269
DATES OF EMPLOYMENT OR
ENGAGEMENT WITH CHIQUITA
[Banadex
Employee #5]
[Banadex
Employee #2]
Jack Devine
Dennis Doyle
[Redacted]
February 1998 – October
1999
[Redacted]
November 1999 – June 2004
[Redacted]
June 2004 – present
[Redacted]
1990 – June 2004
[Redacted]
June 2004 – present
Outside consultant, The Arkin Group
N/A
In-house counsel, Chiquita
1984 – 1987
VP and COO, Banana Group,
Chiquita
Chiquita President, Far East, Middle
East, Australia & Asia Region,
Chiquita
SVP, Regulatory Affairs, Chiquita
1987 – 1989
Outside consultant
2003 – present
[Banadex
Employee #4]
[Redacted]
1977 – 1997
[Redacted]
1997 – present
Ronald
Goldstock
Jennifer
Hammond
Audrey Harris
Independent outside consultant
N/A
Outside consultant, KPMG LLP
N/A
Outside counsel, Kirkland & Ellis
LLP
Senior Counsel and Assistant
General Counsel, Chiquita
Paralegal, Chiquita
N/A
David Hills
Barbara
Howland
[Banadex
Employee #1]
Michael Kesner
1989 – 2002
2002 – 2003
1991 – July 2001
1988 – 1992
Administrator, Corporate Secretary’s
Office, Chiquita
Assistant Corporate Secretary,
Chiquita
[Redacted]
1992 – 1998
[Redacted]
1989 – February 2000
[Redacted]
February 2001 – present
Outside consultant, Deloitte Touche
21
1998 – present
1980 – 1989
N/A
Case 0:08-md-01916-KAM
Document 202-4
INDIVIDUAL
Entered on FLSD Docket 02/25/2009
ROLE
Page 28 of 269
DATES OF EMPLOYMENT OR
ENGAGEMENT WITH CHIQUITA
Steven Kreps
Tohmatsu
Internal Audit, Chiquita
Manager, Management Reporting,
Chiquita
Director, Financial Controls,
Chiquita
Director, Finance & Operations
Control, Chiquita
Director, Internal Audit, Chiquita
VP, Internal Audit, Chiquita
Elliott Leary
Jeffrey Maletta
[Chiquita
Employee #3]
[Chiquita
Employee #2]
Edwin Pisani
[Chiquita
Lawyer]
Christopher
Reid
Indra Rivera
Thomas
Schoenbaechler
Jorge Solergibert
January 1991 – September
1991
October 1991 – March 1996
April 1996 – September 1998
October 1998 – January 2000
January 2000 – June 2000
June 2000 – August 2006
Outside consultant, KPMG LLP
Outside counsel, K&L Gates
[Redacted]
1994 – 1996
[Redacted]
1996 – December 2001
[Redacted]
December 2001 – July 2006
[Redacted]
July 2006 – December 2007
[Redacted]
December 2007 – present
[Redacted]
[Redacted]
[Redacted]
[Redacted]
[Redacted]
[Redacted]
[Redacted]
Auditor, Ernst & Young
[Redacted]
1975 – 1978
1978 - 1980
1980 - 1984
May 1975 – June 1987
July 1987– June 1989
July 1989 – January 2003
January 2003 – January 2006
N/A
1992 – present
Auditor, Ernst & Young
Internal Audit, Chiquita
N/A
N/A
N/A
Auditor, Ernst & Young
March 2002 – November
2007
N/A
Assistant General Counsel, Chiquita
1990 – present
22
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INDIVIDUAL
Document 202-4
Entered on FLSD Docket 02/25/2009
ROLE
Page 29 of 269
DATES OF EMPLOYMENT OR
ENGAGEMENT WITH CHIQUITA
James
Thompson
Robert Thomas
Dick
Thornburgh
Laurence
Urgenson
SVP and Chief Compliance Officer,
Chiquita
General Counsel, Chiquita
Senior Counsel, Chiquita
Outside counsel, K&L Gates
Outside counsel, Kirkland & Ellis
LLP
April 2006 – August 2006
August 2006 – present
1988 – December 2000
N/A
N/A
The SLC interviewed Aguirre, Arntzen, Benjamin, Fisher, Harris, Roderick Hills,
Kreps, Kistinger, Maletta, Olson, Thompson, and Stanbrook on more than one occasion.
Hills and Olson have each been interviewed on four separate occasions.
Of the original interviews authorized by the SLC, only one individual has
refused the SLC’s request to be interviewed, namely, Wilfred “Bud” White, who served
as Chiquita’s Vice President of Internal Audit from 1988 until 1997. Three other
witnesses were unavailable to the SLC. The SLC was unable to interview [Chiquita
Employee #1] who passed away in November 2008 before he could be interviewed.
The SLC was likewise unable to interview [Chiquita Employee #1’s assistant], who
passed away in April 2007. Finally, the SLC was unable to interview defendant Oliver
Waddell, who served as a Chiquita director and member of the Audit Committee from
1994 to March 2002, due to a debilitating mental illness that has been documented by
Waddell’s physician and attorney.
While the SLC has reason to believe these individuals may have had information
relevant to its investigation, the SLC believes this information would be largely
cumulative or corroborative of information provided by other witnesses, and thus does
not believe that the unavailability of these witnesses has materially affected its ability to
gather the facts necessary to conduct its investigation or reach its conclusions.
In addition, the SLC directed its counsel to seek interviews of certain current and
former DOJ personnel that it believed might have information relevant to its
investigation. To that end, the SLC followed the procedures set forth at 28 C.F.R. §§
16.22, 16.24 and 16.26 to seek information from DOJ personnel relevant to their
professional and employment responsibilities. In accord with those procedures, the
SLC filed a written request with DOJ (a “Touhy request”), dated July 31, 2008, seeking
the interviews of the following current and former DOJ officials:
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Document 202-4
DOJ Personnel
Michael Chertoff
Larry Thompson
Alice Fisher
Jonathan Malis
Michael Taxay
Entered on FLSD Docket 02/25/2009
Page 30 of 269
Position
Former Assistant Attorney General,
Criminal Division
Former Deputy Attorney General
Former Deputy Assistant Attorney
General, Criminal Division
Assistant U.S. Attorney, District of
Columbia
Former Trial Attorney in the
Counterterrorism Section, Criminal
Division
DOJ denied this request on September 25, 2008. The SLC appealed the denial by
letter dated November 28, 2008, narrowed the scope of its request to Chertoff and
Thompson, and provided DOJ with certain supplemental information on January 15,
2009. At this time, the SLC’s appeal is pending.
Nonetheless, while the SLC believes the interviews of Chertoff and Thompson
would be useful, the SLC does not believe that its inability to interview these
individuals has materially affected its ability to gather the facts necessary to conduct its
investigation or reach its conclusions. This is due to the extensive documentary and
testimonial evidence received and reviewed by the SLC regarding the defendants’
contacts with DOJ and the substantial testimonial and documentary evidence of what
transpired at the April 24, 2003 and August 26, 2003 meetings between DOJ and
Company representatives. Indeed, given this evidence (and as detailed below), the SLC
believes that there is no material dispute about what occurred or was said at these
meetings. In the event that the SLC’s Touhy request is granted after this report is filed
with the Court, the SLC will seek to complete those interviews as promptly as possible
and determine what, if any, impact they have on its conclusions.
E.
The SLC’s Good Faith Attempts to Cooperate with Lead Counsel
The SLC also made a good faith effort to cooperate and obtain input from Lead
Counsel in this action. To that end, counsel for the SLC met with court-appointed Lead
Counsel – Cohen Placitella & Roth, P.C.; Coughlin Stoia Geller Rudman & Robbins LLP;
and Rigrodsky & Long, P.A. (collectively, “Lead Counsel”) – on three separate
occasions.10 The SLC members also met directly with Lead Counsel.
10
The firm of Rigrodsky & Long, P.A. was not appointed Lead Counsel in this action. However, at
the request of the Cohen Placitella firm, the SLC agreed to allow Rigrodsky & Long to participate
in the process on an equal footing with the other firms.
24
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On September 22, 2008, counsel for the SLC met with Lead Counsel to provide an
update on the status of the SLC’s investigation and to receive input regarding Lead
Counsel’s view of the scope of the SLC’s investigation and the basis for the claims set
forth in the Amended Complaint. Lead Counsel advised that its claims were based
solely on matters appearing in the public record and that it did not have any non-public
documents on which it was relying that might assist the SLC in its investigation. To
date, Lead Counsel has not provided the SLC with any factual information relating to
the allegations contained in the Amended Complaint.
Pursuant to a cooperation agreement, on October 31 and November 17, 2008,
counsel for the SLC again met with Lead Counsel (in-person and telephonically,
respectively) to provide an update on the SLC’s investigation and receive input from
Lead Counsel regarding the scope of its investigation. During these meetings, counsel
for the SLC provided Lead Counsel with an oral summary of the list of witnesses that
the SLC intended to interview, the groups of documents requested and reviewed by the
SLC, the SLC’s understanding and analytical approach to the claims alleged in the
Amended Complaint, and a detailed summary of the facts adduced to date regarding
those claims. At both meetings, counsel for the SLC requested Lead Counsel’s view
regarding potential additional areas of inquiry on which the SLC should focus, and at
both meetings Lead Counsel stated that it appeared that the scope of the SLC’s inquiry
was appropriate and did not recommend that the SLC take any additional investigative
steps.
Between December 5 and December 19, 2008, pursuant to a confidentiality
agreement, the SLC allowed Lead Counsel to review certain documents collected and
reviewed by the SLC, including a selection of:
1.
2.
3.
4.
5.
6.
DOCUMENTS SHARED WITH LEAD COUNSEL
Minutes, agendas and presentation materials from Chiquita’s Board, Audit
Committee, Compensation Committee, and Nominating and Governance
Committee meetings from 1990 to 2007.
FCPA reporting materials.
Accounting materials.
Documents used by the SLC during its witness interviews.
Materials from the SEC investigation of the Company conducted between 1998 and
2001.
Materials submitted to DOJ during the course of the investigation that resulted in
the Company’s 2007 guilty plea.
Attorneys from each of the three firms comprising Lead Counsel engaged in
review of those documents over the course of approximately seven days. Following
this review, on December 22, 2008, Lead Counsel and counsel for the SLC participated
25
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in a conference call, during which counsel for the SLC provided an update on the status
of the SLC’s investigation.
On January 13, 2009, the members of the SLC (along with SLC Counsel) met with
Lead Counsel. At that time, among other things, the SLC requested that Lead Counsel
provide them with their view of the claims alleged in the Amended Complaint, and the
scope of the inquiry conducted by the SLC. Lead Counsel informed the SLC that, based
on the information they had been provided, it appeared that the SLC’s investigation
covered all of the issues and topics addressed by the Amended Complaint.
F.
SLC Meetings
As noted above, in total, during the course of its investigation, the SLC met
formally nine times, either in person or telephonically.11 During those meetings, the
SLC, with the aid of SLC Counsel, among other things, planned the scope of its
investigation, reviewed pertinent documents and legal memoranda, reviewed the
results of its investigation on an ongoing basis, planned additional investigative steps
needed, and deliberated as to what course of action was in the best interests of the
Company with respect to the claims made in the Amended Complaint.
Two of these meetings (one of which lasted two days) were dedicated, in whole
or in substantial part, to deliberations as to what course of action to take with respect to
the various claims. During these meetings, the SLC members deliberated for over
fifteen hours (the “Deliberation Meetings”). Following the first of the Deliberation
Meetings, which took place on January 13 and 14, the SLC directed its counsel to obtain
further information regarding the communications between DOJ and the Company
during the December 2003 and January 2004 time period. As a result, SLC Counsel
conducted five additional interviews, each attended by one or more of the SLC
members. After this additional work was completed, the SLC met again telephonically
on January 30 to complete its deliberations. The results of the SLC’s factual findings
and deliberations are detailed below.
11
The SLC members reside in geographically disparate locations. Camp resides in Decatur, Illinois,
Barker resides in Coral Gables, Florida, and Hasler resides in Woodland, California.
26
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FACTUAL FINDINGS
A.
The Formation of Banadex and the
Early Security Situation in Colombia
The Company. Chiquita Brands International, Inc. (“Chiquita” or the
“Company”) is a leading producer of bananas, tropical fruit, and other value-added
produce. The Company was founded in 1899, as the United Fruit Company, following
the merger of the Boston Fruit Company and a banana and railroad enterprise that
owned large plantations in Central America and Colombia. Until the mid-1960s, United
Fruit’s Colombian operations were located exclusively in the city of Santa Marta (in the
Magdalena department) but, beginning in 1966, it began operating out of the Urabá
region in the city of Turbo (in the Antioquia department) as well.12 In March of 1989,
ninety years after it first began operating in Colombia, the Company – then called
United Brands – formed Banadex, an export company that consolidated all of the
Company’s Colombian operating divisions.13 Ultimately, in or around the mid-1990s,
the separate management structures of the Company’s Colombian subsidiaries were
consolidated under the management of [Banadex Employee #1].14 See K&E Warehouse
Presentation (Sept. 18, 1999).
During the late 1980s and the early 1990s, Chiquita began to change its banana
production model in Colombia, shifting from a predominantly purchased-fruit
operation to a largely owned-farm operation. Between approximately 1989 and 1994,
Chiquita purchased a number of farms in Colombia and eventually owned over 9,500
acres of farmland in Turbo and Santa Marta. As a result, the number of employees
working in Chiquita’s Colombia operations grew dramatically during this period. In
the late 1980s, the Company had approximately sixty employees in Colombia, but by
the mid-1990s, the Company had approximately 4,000 employees based there.
During this period, the security situation in rural areas of Colombia, including
the regions in which Chiquita operated, became dangerous as a result of the rise of
violent, left-wing guerrilla groups. As the Company expanded its farm ownership in
Santa Marta and Turbo, the presence of the guerrilla groups became an increasingly
12
Turbo and Santa Marta are coastal cities in, respectively, the northwestern and northern regions
of Colombia.
13
See http://www.chiquita.com; MARCELO BUCHELI, BANANAS AND BUSINESS: THE UNITED FRUIT
COMPANY IN COLOMBIA, 1899-2000 (2005).
14
[Biographical and professional information on Banadex Employee #1]
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important factor in the management of Banadex. See Memorandum of KPMG Interview
of [Banadex Employee #9] (Mar. 17, 2003).15
The FARC. The largest guerrilla group operating in Santa Marta and Turbo was
Fuerzas Armadas Revolucionarias de Colombia, or the Revolutionary Armed Forces of
Colombia, known as the FARC. The FARC was founded in 1964 and dedicated to a
Marxist ideology hostile to business and landowners, as well as to the overthrow of the
Colombian government. From its founding in 1964, and through the early 1980s, the
FARC expanded slowly. However, after 1982, the FARC expanded its operations with
the goal of establishing an organized front in each of Colombia’s fifty-one political
divisions. From 1984 to 1987, the FARC took advantage of a cease-fire with the
Colombian government to expand and consolidate its operations in resource-rich areas,
such as Urabá, a commercial agriculture center, and the oil-producing Magdalena
valley.16
The FARC engaged in a variety of illegal activities to support its political and
military goals. For example, the FARC developed connections with the illegal narcotics
industry and imposed taxes on the drug trade. The FARC also supported its activities
by engaging in kidnapping for ransom.17 In addition, it is a matter of public record that
the FARC routinely extorted local and multinational businesses operating in
Colombia,18 a practice known as the “vacuna,” which translates literally to “vaccine.”19
15
This report uses the following citation forms: (i) memoranda are cited as, for example,
Memorandum from Jorge Solergibert to Robert Thomas (Aug. 2000); (ii) emails are cited as, for
example, E-mail from Laurence Urgenson to Roderick Hills, et al. (May 13, 2004); (iii) notes as,
Notes of Audrey Harris (Aug. 4, 2003); (iv) minutes of Board and committee meetings as, for
example, Minutes of Chiquita Board Meeting (May 13, 2004); (v) letters are cited as, for example,
Letter from Cyrus Freidheim to Jeffrey Benjamin (July 23, 2003); and (vi) talking points as, for
example, Robert Olson Talking Points (Dec. 4, 2003).
16
See PETER DESHAZO, ET AL., BACK FROM THE BRINK: EVALUATING PROGRESS IN COLOMBIA 1999-2007
3-5 (Ctr. for Strategic and Int’l Studies, ed., 2007) (hereinafter “DeShazo”); GRACE LIVINGSTON,
INSIDE COLOMBIA: DRUGS, DEMOCRACY AND WAR 180-81 (2004) (hereinafter “Livingston”); Angel
Rabasa & Peter Chalk, COLOMBIAN LABYRINTH, RAND Corp., 23-24 (2001), available at
http://www.rand.org/pubs/monograph_reports/MR1339 (hereinafter “Rabasa & Chalk”).
17
See Livingston, at 180; Rabasa & Chalk, at 26. Indeed, in 2008, substantial public interest was
generated by the rescue of one of the FARC’s most prominent remaining hostages, former
Colombian presidential candidate Ingrid Betancourt, who was kidnapped in 2002 while
campaigning. See Simon Romero, Colombia Plucks Hostages from Rebels’ Grasp, N.Y. TIMES, July 3,
2008, at A1.
18
For example, it has been reported that, “Marxist revolutionaries across the country are cashing in
on Colombia’s oil boom by extorting oil companies and seizing workers for ransom. . . . The ELN
and the Revolutionary Armed Forces of Colombia (FARC) shake down the multinationals, state
companies, and subcontractors and then use the funds to buy weapons and carry out subversive
operations . . . . More often, the guerrillas go after construction workers, geologists, and
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It is estimated that, during the 1990s, FARC derived hundreds of millions of dollars in
revenue from its numerous illegal activities.20 In 1986, the FARC had approximately
3,600 fighters operating in thirty-two fronts; by 1995, that number had increased to
approximately 7,000 fighters operating in sixty fronts.21
As the FARC grew in size and its participation in illegal activities expanded, its
propensity for violence also increased.22 Throughout the 1990s, the FARC committed
numerous acts of extreme violence and captured and destroyed state military bases,
seized a number of towns, and captured 5,000 members of state forces as prisoners of
war.23
The ELN. Although the FARC was the largest guerrilla group in Urabá, during
the period in which Chiquita expanded its farm ownership, the Ejército de Liberación
Nacional, or the National Liberation Army, known as the ELN, also had a significant
presence, particularly in the areas surrounding the ports. The ELN was founded by
urban intellectuals in 1964 as a pro-Cuban revolutionary group.24 The ELN, like the
FARC, supported itself through kidnapping and extortion. After a period of dormancy,
in the 1980s, the ELN reemerged under new leadership and grew substantially. The
ELN grew from approximately 800 combatants operating in three fronts in 1986 to
approximately 3,000 combatants in 1996.25 As a result of its expansion, the ELN became
Colombia’s second-largest guerrilla group and has traditionally been strongest in
northeastern Colombia. The ELN also committed numerous violent acts throughout the
engineers working in Colombia’s remote jungles and mountains.” Patti Lane, As Guerrillas Tap a
Gusher . . . Oil Companies Go on the Defensive, BUSINESS WEEK, Sept. 30, 1996.
19
See Desfinanciar la Guerra: Blindaje de rentas [De-financing the war: Armor of revenues], in U. N. Dev.
Program, EL CONFLICTO, CALLEJÓN CON SALIDA [The Conflict, Alley with an Exit] 290 (2003).
20
See, e.g., Edgar Trujillo Ciro & Martha Elena Badel Rueda, Departamento Nacional de Planeació,
Los Costos Económicos de la Criminalidad y la Violencia en Colombia: 1991-1996 [The Economic Costs of
Criminality and Violence in Colombia: 1991-1996], Archivos de Macroeconomía, Mar. 10, 1998, at 32
(during the period 1991-1996, the FARC derived approximately $390 million per year on average,
most of it from drug trafficking, based on conversion of 390.6 billion 1995 Colombian pesos to
U.S. dollars at the average exchange rate in 1995).
21
See Rabasa & Chalk, at 26-27. By 2000, the FARC had grown to between 15,000 and 20,000
combatants in over seventy fronts. Id. In 2003, the FARC was Colombia’s largest guerrilla group,
with control over about a third of Colombia. See Livingston, at 179.
22
See Livingston, at 184.
23
See Alfredo Rangel Suárez, Parasites and Predators: Guerrillas and the Insurrection Economy in
Colombia, 53 J. INT’L AFFS. 577 (2000) (hereinafter “Suárez”).
24
See Livingston, at 186.
25
See Rabasa & Chalk, at 30-31. By 2000, the ELN had approximately 3,500 combatants in 30 fronts.
See Suárez, 53 J. INT’L AFFS. 577.
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late 1980s and 1990s. It was particularly notorious for blowing up pipelines, and in one
highly publicized incident, in October 1998, the ELN blew up an OCENSA oil pipeline,
killing seventy-three civilian peasants, including thirty-six children.26
This was the political and security environment in which Chiquita was operating
in the late 1980s and early 1990s. Not surprisingly, the Company’s experience was
consistent with the public reporting about Colombia. Chiquita personnel based in
Central America and Colombia were well aware of the guerrilla groups’ violent acts
before the Company received its first demand for payment. Each of the Colombianbased employees interviewed by the SLC credibly related their experience with the
guerrilla groups and stated that, during this time period, the FARC was responsible for
daily acts of violence, including killings.
B.
Payments to Guerrilla Groups
1.
Initial Payments to Guerrilla Groups27
Against this backdrop, at some point between 1987 and 1989, Banadex received a
demand for payment from the FARC in the amount of $10,000, delivered by a FARC
representative to [a Banadex farm manager]. [The Banadex farm manager] told
[Banadex Employee #1] about the demand. According to [Banadex Employee #1], it
was apparent to “everyone” that if the payment was not made, “people would be
kidnapped.” As Banadex’s farm ownership had expanded, the Company’s personnel
had become increasingly aware of the growing risk that it would face extortion
demands. This was the first demand.
26
See Livingston, at 185-88. According to witnesses interviewed by the SLC, in addition to the
FARC and the ELN, the Ejército Popular de Liberación, or the Popular Liberation Army (“EPL”),
was also active in the areas where Chiquita’s banana plantations were located and was
particularly successful in infiltrating its farms.
27
During the course of its investigation, the SLC examined guerrilla payments going back to the
late 1980s, even though there are serious questions as to whether, among other things, claims
premised on these payments, which ended sometime between 1997 and 1999, are barred by the
bankruptcy release issued in connection with Chiquita’s Chapter 11 plan of reorganization
(discussed below in Section V.B.1.C.ii.), which covers all conduct prior to March 19, 2002, and the
statute of limitations (discussed below in Section V.B.1.C.v.). Because the FARC payments were
not the subject of the DOJ’s investigation of the Company, and because there was never any
government enforcement action relating to the FARC payments, despite the fact that they were
fully disclosed to the SEC and DOJ during the 1998-2001 investigation of the Company, the SLC
did not attempt to reconstruct every aspect of the payments to the guerrilla groups in the same
manner as it did for payments to the convivir/AUC in the later period. The SLC did, however,
make a thorough effort to understand, among other things, (i) the security issues relating to
guerrilla activity in Colombia in areas where the Company operated going back to the late 1980s;
(ii) the personnel in the Company responsible for approving and making the payments during
that period; and (iii) the Company’s assessment of the legality of the payments.
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[Banadex Employee #1] then called [Chiquita Employee #2], and told him that
the FARC had demanded an “extortion payment” in Turbo.28 In turn, [Chiquita
Employee #2] called Robert Kistinger, who, at the time, was head of Chiquita’s Latin
American operations based in Cincinnati. 29 According to Kistinger, [Chiquita
Employee #2] told him that the Company had been “approached for protection
money.”
Several weeks after learning about the demand for payment from the FARC,
[Banadex Employee #1] was told to travel to Cincinnati to meet with members of senior
management to discuss the demand. In Cincinnati, [Banadex Employee #1] met with
Kistinger, Dennis Doyle, then-Vice President and Chief Operating Officer (“COO”) of
the Banana Group,30 and Charles Morgan, the Company’s then-General Counsel. 31
[Banadex Employee #1] said that this meeting was brief and memorable, at least for
him. He said that when he communicated the amount of the demand, Doyle
responded, “Let’s pay it.”32 While he did not recall the specifics of this meeting at
which the payment was approved, Kistinger said that executives at the Company had a
“number of discussions” about how to respond to this demand and the future demands
that the Company anticipated. He said, “Everyone understood this was clearly
extortion money. We had an ongoing situation where people were being killed,
infrastructure was being damaged.” According to [Banadex Employee #1], no
alternatives to making the payment were discussed at the meeting.
28
[Biographical and professional information on Chiquita Employee #2]
29
Robert Kistinger joined Chiquita in 1980 and, after holding a series of positions with increasing
responsibilities, became President and COO of the Fresh Group in 1997, the position he held until
he left the Company in March 2008.
30
Dennis Doyle joined Chiquita as an in-house lawyer in 1984 and was the Vice President and COO
of the Banana Group from 1987 to 1989, during which time he oversaw the Colombia operations,
in addition to operations in other regions. From 1989 to 2002, he was the President in charge of
the Far East, Middle East, Australia, and Asia Region and also had responsibilities for the
Company’s European Region. He served as Senior Vice President for Regulatory Affairs from
2002 until 2003, when he left the Company. Doyle currently serves as a consultant for the
Company.
31
Although [Banadex Employee #1] said that [Chiquita Employee #2] also attended this meeting,
[Chiquita Employee #2] did not recall whether or not he attended. [Chiquita Employee #2] said
that he believed that he discussed what transpired at the meeting with both [Banadex Employee
#1] and Kistinger, who both told him that a decision was reached to make the payment.
32
Doyle said that he did not recall (i) the meeting, (ii) the initial demand for payment, or (iii) that
the Company continued to make payments to guerrilla groups after the initial demand. The SLC
found the mutually reinforcing accounts of [Banadex Employee #1], [Chiquita Employee #2], and
Kistinger on how the initial payment was approved to be highly credible.
31
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After the meeting, [Chiquita Employee #2] instructed [Banadex Employee #1] to
meet him at a hotel in Guatemala in order to put the payment process in motion.
[Chiquita Employee #2] had come from Honduras, where he had obtained $10,000 from
the General Manager’s Fund (generally, an account in a division’s general ledger from
which the General Manager is permitted to make discretionary payments), which he
gave to [Banadex Employee #1], who brought it back to Colombia. [Banadex Employee
#1] then delivered the cash (which he arranged to be converted from dollars to pesos) to
[the Banadex farm manager], who in turn delivered the payment to the FARC.
Around the time of the Company’s first payments to the FARC, the Company
sought outside professional help on how to deal with the FARC and the other guerrilla
groups. The Company engaged the services of Control Risks, a UK-based security
consulting company, to assess the security situation in Colombia and advise the
Company on how to deal with what it correctly anticipated to be continuing demands
for payments. Control Risks advised the Company that, while it should negotiate with
the groups to reduce the amount and delay payments as much as possible, in light of
the security situation in Colombia, it had no meaningful choice other than to make the
payments.
Following the initial payment, Banadex continued to make payments in response
to extortion demands on a more or less regular basis, mostly to the FARC but also to
other guerrilla groups. [Banadex Employee #1] believed the initial authorization he
received was sufficient to cover subsequent payments of the same type and for
approximately the same amounts if necessary to ensure the safety of Company
employees and property. [Banadex Employee #1] said that he knew that senior
management in Cincinnati was aware of the payments, the payments were recorded in
the Company’s books, and they were reviewed periodically by [Chiquita Employee #2]
and the Company’s internal auditors.
All payments to guerrilla groups were delivered by an intermediary and were
made in cash. The SLC believes that the total amount of guerrilla payments ranged
from $100,000 to $200,000 per year.
2.
Security Situation in Colombia in the 1990s
Banadex continued to make payments to the FARC and other guerrilla groups
through the early and mid-1990s. During that time period, guerrilla groups in
Colombia continued their state of violent conflict with the Colombian government and,
on numerous occasions, targeted Banadex’s employees and infrastructure.
Witnesses interviewed by the SLC recalled that between 1990 and 1996, guerrilla
groups kidnapped several Banadex employees. For example, in 1990 or 1991, Banadex’s
first Security Director was kidnapped by a group believed to be the ELN. The Security
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Director was able to pass a note to his wife with [Banadex Employee #1’s] phone
number and instructions to call him. [Banadex Employee #2], negotiated the Security
Director’s release.33 According to [Banadex Employee #1], shortly after his release, the
Security Director “had a nervous breakdown” and quit. [Banadex Employee #1]
recalled consulting on the negotiations for the release of at least three other Banadex
employees who were kidnapped.
During this time period, Chiquita’s facilities and infrastructure also sustained
substantial damage at the hands of guerrilla groups. In approximately 1992 or early
1993, [Banadex Employee #1] and [Banadex Employee #3] decided that Banadex should
not make further payments to the ELN because they were no longer viewed as a
credible threat.34 They were wrong. As a result of the refusal to pay, the ELN first
defaced and then destroyed Banadex’s wharf in Turbo. In addition, guerrillas groups
bombed one of Banadex’s packing stations in 1995 and another in 1996. See
Memorandum of KPMG Interview of [Chiquita Employee #3] (Mar. 23 – 24, 2004).
The incident that provided the most dramatic and enduring support for the
belief that there would be serious consequences for a failure to pay the FARC occurred
in 1995. At that time, according to numerous witnesses, approximately twenty-five
passengers traveling on a bus were killed in an attack attributed to the FARC. The
recollection of witnesses varied as to whether most or all of the passengers killed were
Chiquita employees.
No witness interviewed by the SLC was able to confirm that the bus was targeted
solely because it was carrying Chiquita employees, but several witnesses believed that
the FARC targeted the bus because the group believed that the passengers sympathized
with groups with which it was in conflict. The massacre had a major impact on
personnel both in Colombia and Cincinnati in reinforcing the reality of the threat of
violence.
[Banadex Employee #1] described another incident, which the SLC believes
occurred in October 1997, around the time that the payments to the guerrillas ended, in
which Charles Didier, the Company’s then-Quality Control Director in Colombia, was
driving in a Company car while inspecting farms when he was ambushed and shot in
the shoulder. Didier climbed out of the car into a ditch, and the guerrillas who had shot
him approached. According to [Banadex Employee #1], upon seeing Didier, the
guerrillas recognized that he was not their intended target and spared his life.
[Banadex Employee #1] said that he believed that he, in fact, had been the intended
33
[Biographical and professional information on Banadex Employee #2]
34
[Biographical and professional information on Banadex Employee #3]
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target of the attack. Didier’s bodyguard was also badly wounded during this incident.
See Thompson Memorandum Submission to the U.S. Dept. of Justice (Oct. 4, 2004).
[Banadex Employee #1] said that the guerrilla group that attacked Didier was
one to which the Company made payments. After this incident, [Banadex Employee
#1] requested that Company vehicles in Colombia be equipped with level-three
bulletproofing, which is the second-highest level of bulletproofing that exists. See
Memorandum from [Banadex Contract Employee #1] to Colonel Wealker (Sept. 24,
2001); E-mail from [Chiquita Employee #1] to Robert Olson (Dec. 3, 2003).
Finally, [Banadex Employee #1] described an incident that likely followed the
attack on Didier, in which [Banadex Employee #1] and several other employees,
including [Banadex Employee #3], were traveling to a Company farm in Santa Marta in
two separate cars, when the lead car was ambushed by guerrillas. See Memorandum of
KPMG Interview of [Banadex Employee #9] (Mar. 17, 2003). [Banadex Employee #1]
said that the men in the lead car radioed back to the trail car, where [Banadex
Employee #1] was riding, describing the attack at the very moment that men with
automatic weapons opened fire on his car. [Banadex Employee #1] said that no one
was hurt because the cars were bulletproof.35
During this time period, the Colombian military did not – and apparently could
not – defend Chiquita against attack by the guerrilla groups. For example, after the
1992 or 1993 destruction of the Banadex wharf in Turbo, Banadex immediately
contacted the Colombian military for assistance, but was told that the military could not
promptly inspect the wharf because it lacked flashlights and fuel. The Army was direct
in its statements to the Company that it was not able to provide protection. On
January 8, 1995, General Brigadier Alvarez Vargas of the Colombian Army sent a letter
to [Banadex Employee #4]36 stating that the Army had knowledge of a threat against
Chiquita facilities in Zungo and Nueva Colonia. It also stated that the Army, while
“capable of supporting the normal development of [the Company’s] banana
operations,” recommended that the Company “make a greater commitment to increase
35
[Banadex Employee #1] told the SLC that this incident occurred in approximately 1996.
However, he also said that he was kept safe during this incident by the bulletproofing of his car
following the Didier incident. [Banadex Employee #3] also told the SLC that the Didier incident
occurred prior to their ambush by guerrillas. In addition, certain documentary evidence supports
this view and places the Didier incident in 1997 and the ambush of [the Banadex employees] in
1998. See E-mail from [Chiquita Employee #1] to Robert Olson (Dec. 3, 2003).
36
[Biographical and professional information on Banadex Employee #4]
34
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and improve [its] own security.” Letter from General Brigadier Alvarez Vargas to
[Banadex Employee #4] (English translation) (Jan. 8, 1995).37
Based on the ample evidence of repeated acts of violence against the Company’s
employees and facilities, and the acknowledged inability of the Colombian government
to provide protection, the SLC found that the Company had a more than sufficient basis
to fear attack by the guerrilla groups on its employees and property.
3.
Internal Procedures and Accounting
Relating to Guerrilla Payments
Due to security concerns stemming from the incidents described above, and the
possibility that there could be retaliation if the fact of the payments became known to
opponents of the various factions being paid, the guerrilla payments were considered
“sensitive” payments and given special and confidential treatment. Even though the
Company made efforts to limit the number of people who had knowledge of the
guerrilla payments, the SLC believes that personnel in the Internal Audit and
Accounting Departments were able to track the payments on the Company’s books and
records adequately.
Outside Auditor. E&Y, the Company’s outside auditor from at least 1985 to
2008, was generally aware that the Company’s Colombian division was making
“sensitive” payments, but did not regard them as material, either in quantitative or
qualitative terms. Indeed, because, during this time period, Colombia made up a small
percentage of the Company’s revenue relative to other, larger divisions – such as
Panama and Honduras – E&Y considered the Colombian operational results and
expenditures to be largely immaterial to the Company as a whole. For this reason, and
because Colombia did not require the Company to perform statutory audits, E&Y and
the Company’s Audit Committee jointly determined that the Company’s Internal Audit
Department should be responsible for auditing the Colombia division.38 E&Y reviewed
all of Internal Audit’s work to ensure that it followed appropriate auditing
procedures.39
37
There was apparently never a question about the inability of Colombian National Police or any
local law enforcement agencies to provide protection. During this period, the Colombian
government was well-known to be ineffective in protecting against guerrilla activity, in part due
to rampant corruption. See Suárez, 53 J. INT’L AFFS. 577; DeShazo, at 4, 35-36.
38
In the late 1990s, as the Colombian division came to account for a larger percentage of the
Company’s revenue, E&Y began performing targeted, on-site audits of certain “sensitive balance
accounts” as part of its consolidated audit procedures. This was not a full-scale audit, and was
performed with the assistance of Chiquita’s Internal Audit department.
39
Although the SLC interviewed three E&Y partners, Edwin Pisani, Christopher Reid, and Thomas
Schoenbaechler, and reviewed relevant documents produced by E&Y to DOJ, the SLC did not
35
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Payment Procedures. Guerrilla payments were initiated within the Company by
completing a document called a “1016,” which was required by Chiquita’s accounting
procedures for virtually every disbursement. See, e.g., Banadex Form 1016. Each 1016
was approved by [a Banadex employee] and typically included the following
information: (i) the purpose of the payment, (ii) an accounting code, (iii) the date,
(iv) the person requesting payment, and (v) an authorizing signature. For guerrilla
payments, the description on the 1016 was coded (for example, as a payment for
“military transport”) in order to conceal the nature of the payments from local staff in
Colombia. As suggested above, [Banadex Employee #1] and others were concerned
that some Banadex personnel might have had hidden loyalties to differing guerrilla
groups, which could cause them to disclose the payments being made to one group, and
result in retaliation by competing guerrilla groups or factions of the same group against
Banadex.
Once a properly authorized 1016 was submitted to the Accounting Department,
the funds were disbursed. As noted above, all payments to guerrilla groups were
delivered by an intermediary and were made in cash.40
Accounting for Sensitive Payments. The Company’s Internal Audit Department
developed a special accounting process for recording “sensitive” payments, which were
described as payments requiring an “appropriate level of confidentiality” that “would
not fall into other account classifications such as Contributions, Donations, Consulting
Services, Public Relations, etc.” As a general matter, the accounting process involved
(i) ensuring the adequacy of supporting documentation for purposes of compliance
with the Foreign Corrupt Practices Act (“FCPA”), (ii) conducting a quarterly review of
otherwise investigate the auditing services provided by E&Y to the Company or the allegations
pertaining to E&Y in the Amended Complaint. The Amended Complaint alleges that E&Y
“acquiesced in the making or concealment of the improper or illegal payments and their
mischaracterization in Chiquita’s accounting books and records” and “repeatedly certified
Chiquita’s false and misleading financial statements . . . while misrepresenting that they had been
properly audited.” Am. Compl. ¶ 1. However, E&Y is not named as a defendant in the
Amended Complaint and Lead Counsel has advised the SLC that E&Y will not become a party
because its addition would defeat the diversity jurisdiction on which this Court’s jurisdiction is
based. See Am. Compl. ¶ 20. Moreover, E&Y was named as a defendant in a derivative action
filed in New Jersey state court, which, as noted above, has since been dismissed. That action was
filed by one of the firms named as Lead Counsel in this multi-district proceeding. For these
reasons, the SLC concluded it should not expend additional resources of Chiquita or its
shareholders investigating E&Y. In any event, the SLC found no facts suggesting that any illegal
payments were improperly recorded on Chiquita’s books or that Chiquita issued false or
misleading financial statements.
40
[Banadex Employee #1] told the SLC that [Banadex Contract Employee #2] and [Banadex
Contract Employee #1] were two intermediaries that Banadex used to make the guerrilla
payments. [Banadex Contract Employee #2] was[ ]. [Banadex Contract Employee #1] was hired
by the Company to [ ].
36
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sensitive payment transactions, and (iii) providing the underlying payment
documentation to the General Counsel in Cincinnati. This process was described in
memoranda authored by Bud White and distributed widely throughout the Company,
which were redistributed on an annual basis by the Internal Audit Department.41 See,
e.g., Memorandum from Bud White to Distribution List (Apr. 19, 1990); Memorandum
from Steven Tucker to Distribution List (Feb. 20, 1998); Memorandum from Steven
Kreps to Distribution List (Nov. 12, 1999); Memorandum from Steven Kreps to
Distribution List (Nov. 30, 1999). The process applied to payments to guerrilla groups.
Payment Recording. The evidence gathered by the SLC, from documents and
testimony, varies as to how guerrilla payments were recorded in Banadex’s books. The
evidence suggests that the payments were recorded on Banadex’s General Ledger as
either: (i) general manager’s expenses drawn from the General Manager’s fund or
(ii) security payments drawn from an operations account. See Memorandum from
[Banadex Employee #3] to Bud White (May 16, 1995); Notes of Bud White (May 7, 1997).
The guerrilla payments were not explicitly recorded as “guerrilla payments” in
Banadex’s accounting records for the security reasons described above. There is no
evidence, however, that the way in which the Company recorded the guerrilla
payments prevented the Company’s internal auditors from tracking the payments in
the Company’s accounting records.42
Audits. The evidence shows that during routine audits of Banadex’s internal
controls, the Company ensured that “sensitive” payments were appropriately recorded.
For example, as part of the Company’s routine audit schedule, [Chiquita Employee #3],
was sent to Colombia in 1995 with a team to conduct an audit of Banadex.43 [Chiquita
Employee #3] performed the portion of the audit that dealt with “sensitive” and FCPA
payments, and determined that all such payments were properly recorded in Banadex’s
books. [Chiquita Employee #3] and his team identified certain other deficiencies
concerning internal control processes (which he attributed, in part, to the complex legal
structure of the Company’s Colombia operations) and a task force was established to
monitor the division’s internal controls and to reduce general overhead in Colombia,
41
Wilfred “Bud” White was Chiquita’s Vice President of Internal Audit from 1988 until 1997.
42
In addition, during the SEC’s investigation of the Company from 1998 to 2001 (see infra Section
IV.D.), the SEC learned about the Company’s accounting for the guerrilla payments through
witness testimony and documentary evidence, but did not pursue a books and records action on
the basis of these payments.
43
[Biographical and professional information on Chiquita Employee #3]
37
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particularly in the areas of finance and accounting.44 Following the 1995 audit,
[Chiquita Employee #3] became Banadex’s [ ], a position he held until late 2001.
In connection with the payment and accounting processes described above, the
SLC concluded, based on documents and testimony, that Banadex adequately
documented and recorded the guerrilla payments and that the Internal Audit
Department monitored and reviewed “sensitive payments,” a category which included
guerrilla payments.
4.
Legality of Payments to Guerrilla Groups
As noted above, then-General Counsel Charles Morgan was involved in the
initial decision to approve the guerrilla payments. In or around 1992, the Chiquita
Legal Department in Cincinnati focused on the payments being made to guerrilla
groups when then-in-house counsel Robert Thomas noticed what turned out to be a
guerrilla payment recorded on an FCPA report received from Banadex.45
FCPA Reporting. The Company’s FCPA monitoring practices were
comprehensive and detailed. Indeed, Chiquita’s business activities (through its
predecessor, United Brands) were central to the enactment of the FCPA by Congress. In
early 1976, following an investigation by the Securities and Exchange Commission (the
“SEC”) into bribery payments made by United Fruit employees to a Honduran dictator
and other officials, the Company entered into a consent decree, pursuant to which it
instituted certain enhanced compliance measures. On February 19, 1976, the
Company’s Board adopted a “Board Policy,” which prohibited, among other things, the
making of political contributions and payments to government officials in foreign
countries by Company employees. See United Brands Co., Board Statement of Policies
and Procedures (Feb. 19, 1976). These same guidelines were later codified in the FCPA,
enacted shortly thereafter in 1977. As a result, the Company created formalized FCPA
reporting practices, which were maintained and extended in the years that followed.
44
[Banadex Employee #1] told the SLC that the main concern identified in the 1995 audit was how
to properly report guerrilla payments to Cincinnati and that, as a result of the audit, Banadex
began to send certain information about the payments directly to Cincinnati. [Chiquita
Employee #3], who led and recalls the 1995 audit, did not recall the concern about reporting
guerrilla payments being raised. The SLC was unable to determine, from documents or
additional testimony, what, if any, information about the payments was sent to management in
Cincinnati as a result of this audit. It is possible that [Banadex Employee #1] was thinking of the
audit work performed by Bud White and Robert Thomas in mid-1997. (See infra Section IV.C.4.).
45
Robert Thomas began working as a lawyer at John Morell, a Chiquita subsidiary, in the fall of
1988, and then joined the Chiquita Legal department in 1989, where he worked until December
2000.
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Under Chiquita’s FCPA reporting regime, all employees of a certain salary grade
were required to complete a quarterly form detailing any payments that might
potentially be covered by the FCPA. The quarterly report forms submitted by
individuals contained both (i) payments to government officials and (ii) “sensitive”
payments, or payments that the Company treated as confidential, regardless of whether
they were covered by the FCPA, pursuant to the Accounting for Sensitive Payments
memoranda. See Memorandum of KPMG Interview of [Chiquita Employee #3] (Mar. 23
– 24, 2004). Once filled out and returned, these forms were analyzed by Thomas and
Bud White and compiled in a comprehensive FCPA report summary, organized by
country and division, which was then shared with Robert Olson, the Company’s
General Counsel. Olson, who joined Chiquita in August 1995 and served as General
Counsel until August 2006, said that he learned about the guerrilla payments shortly
after joining the Company in 1995, likely in connection with these monitoring practices.
Thomas then presented the FCPA summary reports to the Audit Committee.
Initially, Thomas made these reports on a quarterly basis, but, at some point before
Olson joined the Company in 1995, the Audit Committee requested that they be made
on a semi-annual basis. At the Audit Committee meetings, but not before, Thomas
distributed summary reports to each Audit Committee member and explained the
summaries and any trends in the payments. While documentary evidence shows that
certain employees reported the payments to guerrilla groups on FCPA forms (see, e.g.,
FCPA Questionnaire from [a Banadex employee] (Oct. 20, 1992)), guerrilla payments
were not reported on the quarterly FCPA summaries that were presented to the Audit
Committee.46
Legal Opinions. After Thomas began to focus on the guerrilla payments as a
result of the FCPA reports, the Legal Department began examining the legality of the
payments under Colombian law. On February 4, 1993, David Hills, an in-house lawyer
in Cincinnati with responsibility for Colombia, drafted a memorandum that had been
requested by [Chiquita Employee #1] summarizing but not analyzing a recently enacted
Colombian law (“Law 40”) that set forth penalties for paying, concealing, or failing to
disclose kidnapping ransom and extortion payments.47 See Memorandum from David
Hills to [Chiquita Employee #1] (Feb. 4, 1993). According to Hills, [Chiquita Employee
46
According to Robert Thomas, as a general matter there was “tremendous confusion” in the
Colombia division about whether to report “sensitive” or security payments for FCPA purposes.
Certain Colombian personnel told the SLC that guerrilla payments were included on FCPA
reports provided to Cincinnati, along with other “sensitive” payments. As noted below, Thomas
said that the guerrilla payments did not implicate the FCPA because they were not being made to
government officials.
47
David Hills was an in-house lawyer at Chiquita from 1991 until July 2001, with substantial
responsibility for Colombia. Hills was fluent in Spanish. [Biographical and professional
information on Chiquita Employee #1]
39
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#1’s] primary concern in requesting this memo was whether paying ransom for a
kidnapped employee through its anti-kidnapping insurance policy would be a violation
of the new law. This was not an abstract concern, given the number of kidnappings that
had occurred at Banadex prior to this time.
The Legal Department continued to track Law 40 (the subject of Hills’
memorandum). On June 10, 1994, [a Banadex lawyer] wrote a memorandum to
Thomas, stating that the Constitutional Court of Colombia had recently found Law 40
to be unconstitutional and held that a person who makes kidnapping ransom or
extortion payments “acts in a ‘State of Necessity’ and, therefore, cannot be penalized.”
Memorandum from [Banadex lawyer] to Robert Thomas (June 10, 1994).
According to Thomas, over the years, scrutiny of guerrilla payments by
personnel in Cincinnati increased, and questions were raised about the legal
consequences of the payments. For example, in early 1997, Thomas requested that [the
Banadex lawyer] update and expand on his June 10, 1994 memo. In response, [the
Banadex lawyer] prepared a memorandum titled, “Crime of Extorsion and Kidnapping
in Colombia” (translated from Spanish), dated February 3, 1997, which he addressed to
Thomas. See Memorandum from [Banadex lawyer] to Robert Thomas (Feb. 3, 1997). As
with his 1994 memo, [the Banadex lawyer’s] memo stated that “no punishment will be
applied” when one makes ransom and extortion payments “in a state of necessity.” The
memo concluded that one who makes extortion payments cannot be punished under
Colombian law because “such payment takes place without free consent, and under
threat of immediate injury.” Id.
Finally, Thomas and Olson asked Hills to obtain another legal opinion on the
guerrilla payments because, according to Hills, [the Banadex lawyer’s] “credibility was
a bit shot” after an incident involving improper payments to renew a port license,
discussed further below,48 and Thomas and Olson wanted to confirm [the Banadex
lawyer’s] previous conclusions concerning the legality of these payments. Thus, Hills
asked Baker & McKenzie (“B&M”), an international law firm with which Banadex had
worked in the past, for an opinion from its lawyers based in Colombia who were
familiar with Colombian law.
On September 9, 1997, B&M sent a memorandum to Hills regarding the legality
of payments to guerrillas under Colombia law. In Hills’ view, this memo was an
“historical piece” because, from his perspective, the Company was, at this time, no
longer paying the guerrillas. In the memo, B&M concluded that payments to guerrilla
groups were not illegal if made to “defend the life and freedom of individuals.” Letter
48
[The Banadex lawyer] was found to have had some knowledge of two bribery payments made by
Banadex to customs officials in Colombia in 1996 and 1997 in connection with the renewal of a
port license. (See discussion infra Section IV.D.1.).
40
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from [Outside Counsel #1] to David Hills (Sept. 9, 1997). This was the third legal
opinion prepared or obtained by the Company that concluded that the payments to the
guerrilla groups were not illegal because the Company had been extorted.
In contrast to the reviews of Colombian law performed by the Company and its
outside counsel, the evidence shows that the only U.S. law considered in relation to the
payments was the FCPA. Thomas handled FCPA compliance issues at the Company
and was considered by his supervisor, Olson, as an expert in that area of the law.
Thomas determined that, because the guerrilla payments were not made to government
officials or entities, they did not violate the FCPA. Olson and Hills shared Thomas’s
assessment of this issue.
However, neither Thomas nor Olson made any further inquiry into the potential
legal consequences of making the payments under U.S. law. While this omission did
not result in any harm to the Company during the period when the Company made
payments to the FARC and the other guerrilla groups, because making the payments
was not against U.S. law, similar payments created an enormously important issue
when the Company later began to make payments to the AUC.
Thus, the legal opinions that in-house Company and outside counsel prepared
during this time universally concluded that the Company could invoke the defense of
justification under Colombian law to any claims that the payments were illegal and
that, therefore, it would not be penalized under Colombian law for making the
payments. No separate review was conducted under U.S. law, and none was thought
to be needed.
The FARC and ELN Are Designated as FTOs. On October 8, 1997, the U.S.
Department of State issued its first list of Foreign Terrorist Organizations (“FTOs”), and
the list included the FARC and ELN. As a result, it became a felony to knowingly
provide material support to either group.49 The SLC found no evidence that any
Chiquita executive, or any of the defendants, learned about the designation at the time
it occurred. Company personnel learned about the designation at varying times, mostly
49
18 U.S.C. § 2339B(a)(1), as amended in 2004, provides, in relevant part, as follows: “Unlawful
conduct – Whoever knowingly provides material support or resources to a foreign terrorist
organization, or attempts or conspires to do so, shall be fined under this title or imprisoned not
more than 15 years, or both, and, if the death of any person results, shall be imprisoned for any
term of years or for life. To violate this paragraph, a person must have knowledge that the
organization is a designated terrorist organization (as defined in subsection (g)(6)), that the
organization has engaged or engages in terrorist activity (as defined in section 212(a)(3)(B) of the
Immigration and Nationality Act), or that the organization has engaged or engages in terrorism
(as defined in section 140(d)(2) of the Foreign Relations Authorization Act, Fiscal Years 1988 and
1989).” When the FARC and ELN were designated FTOs, the statute provided for ten years
imprisonment. The term of imprisonment was increased to fifteen years on October 26, 2001.
41
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many years after it occurred and after the Company stopped making payments to those
groups.50 Only [Banadex Employee #2] said that he likely read contemporaneous
Colombian media reports discussing the designation, although he did not specifically
recall doing so, and did not recall reporting it to anyone in Cincinnati. In any event, as
discussed below, the SLC has found that the weight of the evidence does not support
that any regular payments were made to the guerrilla groups after the designation.51
5.
Management and Board Knowledge
of Guerrilla Payments
As discussed above, due to perceived security concerns, and the reluctance to
share information about something so sensitive, very few individuals at Banadex and at
Company headquarters in Cincinnati were aware of the payments to guerrilla groups.
As documented above, [Banadex Employee #1], [Banadex employee #3], [Chiquita
Employee #2], and Kistinger knew about the payments, in part because of their
involvement in the original decision to approve the payments or in making the
payments thereafter. The Legal and Internal Audit Departments knew about the
payments due to their roles in monitoring the FCPA reports. William Tsacalis, thenController and Chief Accounting Officer, also knew about the payments. 52 Tsacalis said
that he was generally aware of the guerrilla payments and was “under the impression
that if we didn’t make payments to guerrillas, people would get killed.” [Chiquita
Employee #3] was also aware of the guerrilla payments, which he learned about while
preparing to conduct the 1995 audit of Banadex. See Memorandum of KPMG Interview
of [Chiquita Employee #3] (Mar. 23 – 24, 2004).
50
David Hills did not know about the designation until after he left the Company in July 2001.
Robert Thomas did not know about the designation until after he left the Company in December
2000. [The Chiquita lawyer] did not know about the designation until after February 2003.
Robert Olson did not know about the designation until after February 2003. Robert Kistinger did
not know about the designation until his SLC interview. [Chiquita Employee #2] did not know
about the designation until 2002, when he first learned of the existence of a list of foreign terrorist
organizations, although he did not fully understand the significance of such a list. [Banadex
Employee #1] did not learn about the designation until after 2003.
51
As described in greater detail at Section IV.Y.5., a single ransom payment was made to FARC in
January 2004 in connection with the kidnapping of a Chiquita employee. At the time, DOJ was
already investigating the Company, was notified in advance of the Company’s intention to make
the ransom payment, and did not object.
52
William Tsacalis joined Chiquita in January 1980 and became Controller in 1984. At some point
in the late 1980s, he added the titles of Vice President and Chief Accounting Officer. In early
2005, Tsacalis became Vice President of Finance and Treasurer, and in November 2007, he became
Vice President of Finance and Enterprise Risk Management, a position he held until he left
Chiquita at the end of 2007.
42
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Other senior members of management told the SLC that they do not recall that
the Company was making payments to guerrilla groups during this period. Neither
Carl Lindner, then-Chairman and Chief Executive Officer, nor Keith Lindner, thenPresident and COO, recalled that the Company made payments to guerrilla groups in
Colombia.53 Steven Warshaw, 54 then-Chief Administrative Officer and Chief Financial
Officer, said that he did not “specifically recall the terminology ‘guerrilla,’” but did say
that he recalled that Chiquita had to make “protection payments” in Colombia and that
the FARC was threatening the lives of Company employees in Colombia.55
However, several witnesses, including their direct reports, said that they are
virtually certain that Keith Lindner and Warshaw were aware of the guerrilla payments
during the time that they were made, and they inferred that because Keith Lindner was
aware of the payments, Carl Lindner was aware of them as well. The SLC believes that
the evidence supports the conclusion that Keith Lindner and Warshaw knew the
payments were being made. The evidence that Carl Lindner knew of them is
suggestive but not compelling.
The SLC found conflicting evidence as to whether the Audit Committee was
informed about the guerrilla payments. Payments to guerrilla groups were not
included in the Company’s FCPA report summaries that were presented to the Audit
Committee, and Robert Thomas said that he did not make a separate presentation on
the “sensitive” payments listed on the FCPA reports and did not specifically recall ever
discussing guerrilla payments during an FCPA presentation. William Verity, who
joined the Board and Audit Committee in May 1994, recalled that the Company made
“security” payments in Colombia, but could not recall during exactly which years the
Company made payments to guerrilla groups without relying on information that he
53
Carl Lindner was Chiquita’s CEO and Chairman of the Board from 1984 until August 2001, when
he resigned as CEO. From August 2001 until March 2002, he continued to serve as Chairman.
He stepped down as Chairman in March 2002, but remained on the Board as a director until May
2002. Keith Lindner was Chiquita’s President and COO from 1989 to March 1997. In March 1997,
he became Vice Chairman and remained in that position until March 2002.
54
Steven Warshaw joined Chiquita in 1985 as Director of Corporate Planning. From at least as
early as 1990 until approximately 1997, he held the positions of Chief Administrative Officer
(“CAO”) and CFO concurrently. In March 1997, Warshaw became President and COO, as well as
a director of Chiquita, and served as the CEO from August 2001 until he left the Company in
March 2002.
55
Warren Ligan, who joined Chiquita in 1992 as the Assistant Vice President of Tax, and became
Vice President of Tax approximately nine months later, said that, prior to becoming Chiquita’s
CFO in 1998, in which capacity he served from approximately May 1998 until September 2000, he
“absolutely did not” know that the Company was making payments to guerrilla groups.
43
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became aware of in connection with the DOJ investigation. Thus, it is not clear if Verity
learned about the guerrilla payments at the time they were made.56
However, Olson said that when he was first told about the guerrilla payments
soon after joining the Company in 1995, he was led to believe that the Audit Committee
had been informed of the payments. He also said that this impression was confirmed
when the guerrilla payments were discussed at a 1997 Audit Committee meeting in
such a way that confirmed his impression that the Audit Committee had received
reports of the guerrilla payments at an earlier date. Further, Kistinger said that he
believed Jean Sisco, the long-time Chair of the Audit Committee, knew about the
guerrilla payments because either he or someone else told her about them. Other than
Verity, the SLC was unable to interview the Audit Committee members who served
during this period, Sisco and Oliver Waddell, which might have helped resolve the
issue. Waddell is seriously ill with a debilitating mental condition and Sisco passed
away in April 2000. See Am. Compl. ¶ 54.57
Although there is therefore evidence that the Audit Committee and individual
directors knew about the guerrilla payments, the SLC found no evidence that the
payments were discussed with the full Board.58 For example, Fred Runk, the
Company’s CFO from 1984 to 1989, who also served as a director from 1984 to March
2002, said that he did not recall the Company’s having made payments to guerrilla
groups in Colombia. This was consistent with the recollection of Robert Olson, who
regularly attended Board meetings and did not recall the guerrilla payments being
discussed at the Board level.
*
*
*
Based on its review of the evidence described above and the conduct of the
Company and its officers and directors during this period, the SLC reached several
conclusions. First, the payments to the guerrilla groups were made based on the good
56
William Verity served on the Chiquita Board from May 1994 until March 2002 and was a member
of the Audit Committee during that time.
57
Oliver Waddell joined the Chiquita Board in approximately May 1994 and was a member of the
Audit and Compensation Committees until March 2002. Jean Sisco joined the Chiquita Board in
1976, and was Chair of the Audit Committee from approximately the mid-1980s until early 2000,
when she retired due to illness. She also served on the Compensation Committee.
58
During this period, the Board was comprised of Carl Lindner, Keith Lindner, Craig Lindner
(another one of Carl Lindner’s sons), Fred Runk, William Verity, Oliver Waddell, Jean Sisco, and
Ronald Walker, who died in May 1997. The Audit Committee was comprised of directors Sisco,
Verity, and Waddell. Prior to approximately mid-1994, when Verity and Waddell joined the
Board and began serving on the Audit Committee, the Audit Committee was comprised of Sisco
and Hugh F. Culverhouse, who died in August 1994.
44
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faith, reasonable belief that, in their absence, Banadex employees would be harmed and
Company property and facilities destroyed. Second, at the time they were made, the
payments did not violate either Colombian or U.S. law. Third, Banadex established
accounting procedures regarding sensitive payments, which allowed it to adequately
monitor the payments. Fourth, the Company’s Legal and Internal Audit Departments
at Chiquita headquarters adequately monitored the payments. Fifth, there is some
evidence that the guerrilla payments were presented to the Audit Committee, but no
evidence that they were presented to the full Board.
C.
The Company’s Payments to Convivirs and the AUC
The deteriorating political and security situation in Colombia, caused largely by
the high level of left-wing guerrilla activity, produced a political and security response.
Starting as early as the late 1960s and 1970s, various right-wing “self-defense” groups
emerged in areas where the Colombian government was unable to provide protection
against left-wing guerrilla activity. Although the Colombian government outlawed
self-defense groups in 1987 due to their increasing involvement in criminal activity,
paramilitary groups continued to organize and expand in size and scope.59 In 1997, the
Autodefensas Unidas de Colombia, or the United Self-Defense Forces of Colombia,
known as the AUC, was formed as an umbrella organization to consolidate various
local paramilitary groups.60 By 2001, the AUC had an estimated 8,000 to 11,000
members. As of 2003, the AUC was considered Colombia’s largest paramilitary
organization and operated throughout Colombia, with its strength concentrated in the
north, where Banadex was based.61
Over time, paramilitary groups in Colombia earned a reputation – similar to that
of their guerrilla counterparts – for employing brutal tactics in massacring civilians and
intimidating survivors.62 For example, in January 1999, AUC members reportedly
swept through villages in six different areas of Colombia and killed 150 suspected
guerrilla sympathizers.63 In February 2000, according to reports, 300 paramilitaries
terrorized the town of El Salado, on the Caribbean coast, torturing and raping some of
the villagers and ultimately killing thirty-six people.64 On January 17, 2002, in another
59
See DeShazo, at 6; Rabasa & Chalk, at 53-54.
60
See Stephanie Hanson, Council on Foreign Relations (CFR), Backgrounder: Colombia’s Right-Wing
Paramilitaries and Splinter Groups (Jan. 11, 2008), available at
http://www.cfr.org/publication/15239/colombias.
61
See Livingston, at 194.
62
See Staying Alive, ECONOMIST, May 25, 2002, at 35-37.
63
See Rabasa & Chalk, at 56 n.9.
64
See Between Peace and Justice, ECONOMIST, July 23, 2005, at 33-34.
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reported incident, paramilitaries entered the village of Chengue and crushed the heads
of twenty-six villagers with a sledgehammer before burning the village.65
In the mid-1990s, paramilitaries gradually moved into the areas controlled by the
FARC, where Chiquita operated. See Memorandum of KPMG Interview of [Chiquita
Employee #3] (Mar. 23 – 24, 2004). At first, many viewed this as a positive
development, because the AUC was able to make significant progress in weakening the
power and influence of the guerrillas and “did what the [Colombian] government could
not do.” However, the AUC soon came to be viewed as little different from the
guerrillas in its willingness to threaten and murder civilians and damage property
throughout Colombia.
The SLC found ample evidence supporting the existence of a pervasive and everpresent threat of violence created by the paramilitaries, as well as instances of violence
against Banadex’s employees and infrastructure. For example, [Banadex Employee #1]
and [Chiquita Employee #2] recalled that several employees were killed by
paramilitaries, but said that they did not believe that these individuals were targeted
because of their employment with Chiquita. Other Banadex personnel interviewed by
the SLC described general knowledge of the AUC’s violence in Colombia, but not
against Banadex. [Banadex Employee #3] said that while he was not aware of specific
acts of violence perpetrated by the paramilitaries against the Company, it was well
known in Colombia that the paramilitaries were “powerful, criminal groups,” and that
massacres committed by the paramilitaries were widely reported in Colombia.
[Banadex Employee #5] said that, as the paramilitaries gained power in Santa Marta
and began to expel the guerrillas from the region, they began to come in contact with
Chiquita’s farms, and that employees working on the farms “were very scared.”66 He
also recalled that the paramilitaries would send armed, uniformed men to the farms,
and that in some instances, they burned the Company’s shipping containers.
Around the same time that paramilitaries were moving into the regions where
Chiquita had farms, “convivirs” started to form. Convivirs were created by a 1994
decree of the Colombian Ministry of Defense and were originally viewed as similar to
neighborhood watch organizations. They performed intelligence functions for
Colombian security forces and were strongly supported by Alvaro Uribe, then-governor
of Antioquia in the Urabá region, and now the President of Colombia.67 Numerous
witnesses told the SLC that banana growers at the time supported the formation of
convivirs, because their purpose was to provide security and surveillance services in the
65
See Jeremy McDermott, Colombia’s Self Defense Forces are the Country’s Fastest Growing Illegal Army,
TELEGRAPH, June 11, 2002.
66
[Biographical and professional information on Banadex Employee #5]
67
Rabasa & Chalk, at 54.
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Urabá region. Banadex employees generally believed that convivirs were legal,
government-sponsored entities. See, e.g., Memorandum of KPMG Interview of
[Banadex Employee #10] (Jan. 30, 2004).
As described below, the Company began making payments to the convivirs no
later than 1997, although the SLC reviewed documents and interviewed witnesses
suggesting that the convivir payments may well have started somewhat earlier. Like
the payments to the guerrillas, the payments to the convivirs were approved by
[Banadex Employee #1], who viewed the convivir payments as within the authority he
had been granted many years earlier to make payments necessary to preserve and
protect the Company’s personnel and property.
1.
Meeting with AUC Leader Carlos Castaño
The relationship between the convivirs and the AUC was far from simple, both
in reality and as perceived by Company personnel. As described above, convivirs were
legal, government-sponsored entities that provided security and surveillance services.
At some point, the convivirs became closely identified with the AUC and were viewed
almost interchangeably by Company personnel and others. However, that did not
happen right away, and the SLC was unable to pinpoint the precise time when it
occurred.
The necessity of making payments to the AUC, on the other hand, was
communicated in clear and dramatic fashion. According to [Banadex Employee #4], in
late 1996 or early 1997, he was approached by Irving Bernal, a prominent banana
producer in Colombia, who told him about “a very important meeting” regarding
security issues. Bernal encouraged [Banadex Employee #4] to attend the meeting along
with [Banadex Employee #1]. [The Banadex employees] met Bernal at Chiquita’s office
in Medellín, and then followed him in a separate car to a large house in Medellín, where
they met with Carlos Castaño, the well-known leader and public face of the AUC. Both
[Banadex employees] recognized Castaño.
During the meeting, Castaño described the origins and purpose of the AUC, and
said that the AUC had begun a sustained offensive to drive the guerrillas out of Urabá
because the Colombian army was ineffectual in controlling the guerrilla groups.
Castaño said that he knew that Banadex had been making payments to guerrilla groups,
but that he expected those payments to stop. According to both [Banadex employees],
Castaño did not mention convivirs during this meeting; instead, he demanded that the
Company pay the AUC. [The Banadex employees] both said that Castaño did not make
any direct threats at the meeting, but, according to [Banadex Employee #1], Castaño
said, “We are not demanding payments in the way the guerrillas demanded payments,
but if you don’t pay, no one will protect you.”
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[The Banadex employees] left the meeting believing that the AUC would soon be
making more specific demands. Indeed, the meeting was memorable for both of them,
and the SLC found their accounts of the meeting – neither of which included any
statement directly linking the AUC and the convivirs – to be credible. The evidence
establishes that Castaño issued a threat – whether implicit or explicit – at the meeting,
and that the Banadex personnel took that threat seriously.68
Shortly after the meeting with Castaño, [Banadex Employee #1] told [Banadex
Employee #3] that Banadex would have to begin making payments to the paramilitaries
in Urabá. At [Banadex Employee #1’s] direction, [Banadex Employee #3] then attended
a meeting with the paramilitaries at a gas station near the Company’s offices. At the
meeting, a man who called himself “Michael” and who identified himself as a
paramilitary commander, demanded that the Company pay his group 10 million pesos
per month. [Banadex Employee #3] discussed the demand with [Chiquita
Employee #1] and [Banadex Employee #1], and they authorized the payment. 69
According to [Banadex Employee #3], he left the first cash payment for Michael
with a guard outside Banadex’s facilities. Thereafter, Banadex made three additional
payments to the paramilitaries in cash through Michael. The cash payments to the AUC
stopped suddenly after the four payments; no further demands were made by
“Michael” or any other representative of the paramilitaries. The SLC found no evidence
that anyone at Chiquita’s headquarters in Cincinnati was told of these payments.
68
A slightly different version of this meeting, which directly linked the AUC and the convivirs, is
reflected in a memorandum written by Robert Thomas in September 2000 (the “Thomas Memo”),
which is described in more detail below (see infra Section IV.F.4.). In the memo, Thomas
summarized information about this and other events conveyed to him by [Chiquita Employee
#1], who had conducted interviews of Company personnel that summer. According to the
Thomas Memo, Castaño conveyed an even stronger message during the meeting: “Autodefensas
was already well established in Antioquia . . . and supported the establishment of a Convivir
organization in Urabá, Autodefensas expected Banadex to support Convivir, and if Banadex did
not, Autodefensas would attack Banadex’s people and property.” Memorandum from Robert
Thomas to File (Sept. 2000). As noted above, the description of the Castaño meeting in the
Thomas Memo was based on [Chiquita Employee #1’s] oral report to Thomas of his discussions
with [Banadex Employee #4] and others in Colombia. The memo states that [Chiquita Employee
#1] did not “keep any notes” of these discussions and the SLC is not aware of any such notes.
Neither [Banadex Employee #4] nor [Banadex Employee #1] recalls speaking with [Chiquita
Employee #1]. For these reasons, the SLC found that the description of the Castaño meeting set
forth in the Thomas Memo, which is based on what the witnesses told [Chiquita Employee #1]
and [Chiquita Employee #1] then told Thomas, is less reliable than the direct accounts provided
to the SLC in its interviews of [the Banadex employees], both of whom attended the meeting.
69
[Banadex Employee #1] did not specifically recall the initial cash payments to the AUC as
described by [Banadex Employee #3], but said that he had no reason to doubt [Banadex
Employee #3’s] account.
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Initial Payments to Convivirs
As noted above, the documentary evidence does not definitively establish when
the Company made its first payment to a convivir, but it suggests that Banadex was
making payments to a convivir entity prior to the meeting with Castaño in late 1996 or
early 1997.70 According to handwritten notes taken by Bud White at a May 7, 1997
meeting in Cincinnati, the Company paid $21,763 to convivirs in 1996. See Notes of Bud
White (May 7, 1997). But the SLC found no documentary evidence that supported or
explained the 1996 convivir payments.
The SLC believes that a June 23, 1997 memorandum from [Banadex Employee
#3] to [Banadex Employee #1], requesting that a payment be made to the Punte de
Piedra convivir, which was based in Turbo, is the first recorded payment request
memorandum for funds to pay a convivir. See Memorandum from [Banadex Employee
#3] to [Banadex Employee #1] (June 23, 1997); KPMG Sensitive Payments Schedule.71
The evidence is not clear when, in relation to the four cash payments that [Banadex
Employee #3] made to “Michael,” this payment to the Punte de Piedra convivir was
made. Nor, more importantly, is it clear how payments made directly to the AUC came
to be replaced by payments to the convivirs.72
[Banadex Employee #1] said he did not know when “the specific mechanism for
paying [the AUC] through the convivir was set up.” [Banadex Employee #4] said that
“it became difficult to pay the AUC” after they arrived in Turbo but recalled meeting
with other banana growers about making financial contributions to the convivir after
the meeting with Castaño. Though the process by which payments to the AUC came to
be funneled through the convivir remains unclear, by the end of 1997, Banadex was
making regular payments to the Punte de Piedra convivir and there were no further
demands directly from the AUC.
70
Contrary to the claims in the Amended Complaint (see Am. Compl. ¶¶ 14, 94), the SLC found no
evidence, documentary or testimonial, that Chiquita made payments to the convivir or AUC to
ensure continuing labor peace at its Colombian farms or to improve generally its position vis-àvis labor unions in Colombia. To the contrary, the evidence shows that the sole reason the
Company paid the convivir/AUC was to ensure that its employees were not killed.
71
In connection with the DOJ investigation, KPMG engaged in an extensive analysis and prepared
a spreadsheet summarizing all convivir and paramilitary payments from 1997 through 2004 (the
“KPMG Sensitive Payments Schedule”). According to the KPMG Sensitive Payments Schedule,
the first recorded payment to a convivir was made on June 23, 1997 to Punte de Piedra in the
amount of $32,124.
72
[Banadex Employee #3] said that he was not initially certain about the relationship, if any,
between the AUC and the convivir, an uncertainty shared by other witnesses interviewed by the
SLC.
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By late 1998, Banadex was no longer paying the Punte de Piedra convivir, but
was instead paying the La Tagua del Darién convivir, which was also located in Turbo.
The SLC was unable to determine the timing of the shift from one convivir to the other.
According to the Thomas Memo, written in 2000, an AUC representative contacted
[Banadex Employee #4] some months after the meeting with Castaño and demanded
that Banadex pay three cents per box of bananas to a new convivir, La Tagua del
Darién. Because it appears that the meeting with Castaño took place sometime between
September 1996 and March 1997, this demand would likely have been made in 1997.
See Memorandum from Robert Thomas to File (Sept. 2000). However, according to
KPMG’s forensic review, the first payment to La Tagua del Darién was made on
September 21, 1998.73 After that date, Banadex continued to make payments to La
Tagua del Darién, but not to the Punte de Piedra convivir. See KPMG Sensitive
Payments Schedule.
Finally, there also is uncertainty about the relationship between the two
convivirs. [Banadex Employee #4] said that he assumed the convivirs operated
independently, but that he was not certain. Other witnesses interviewed by the SLC
said that they did not understand the precise relationship between the two convivirs,
but that at some point, all the convivirs in the Urabá region merged. In short, the SLC
could not determine why the Company stopped making cash payments directly to the
AUC, why the Company stopped paying the Punte de Piedra convivir and started
paying the La Tagua del Darién convivir, nor the relationship between the two
convivirs.
3.
Overlap of Guerrilla and Convivir/AUC Payments
The evidence available to the SLC was not sufficient to determine with certainty
which groups – guerrilla and paramilitary – Banadex was making payments to
immediately before and immediately after the Castaño meeting. [Banadex
Employee #1] and [Banadex Employee #2] told the SLC that the Company made
payments to a convivir prior to the Castaño meeting, and that the Company made both
guerrilla and convivir payments in Urabá 1996 and 1997. [Banadex Employee #3] also
told the SLC that the payments to the guerrilla groups and convivirs overlapped. In
addition, [Banadex Employee #2] said that the Company may have made payments to
the AUC as early as 1995, while [Banadex Employee #1] said that he believed that the
73
It is unclear from the documentary evidence why the first recorded payment to the La Tagua del
Darién convivir was made as late as September 1998 if, according to the Thomas Memo, the
demand was made in 1997. The SLC was unable to conclude whether the Thomas Memo was
incorrect about the timing of some of these events, or whether the documentation for some of the
earlier payments to La Tagua del Darién did not clearly establish when payments to that convivir
began.
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Company continued to pay guerrillas in Santa Marta until approximately 1999, when
the “AUC-like” group achieved more power.
In contrast, [Chiquita Employee #2] and [Banadex Employee #4] said that
convivir payments began only after the Castaño meeting, and [Banadex Employee #4]
said that there was no overlap between the two payment streams. According to a
forensic analysis performed by KPMG, it could not confirm “whether Banadex made
any extortion payments to guerrilla groups after the first FTO designation in October
1997,” a fact that it attributed to the coding of these payments on 1016s to “protect
Company personnel from retribution, given the real risk of Company infiltration by
members of warring armed groups.” Supplemental Thompson Memorandum
Submission to the U.S. Dept. of Justice (Nov. 24, 2004) (hereinafter “Supplemental
Thompson Submission”).
Thus, while the SLC could not reach a definitive conclusion on when the
guerrilla payments ended, the weight of the evidence suggests that after a brief period
of overlap, Banadex paid the convivir exclusively and stopped paying the guerrillas.
4.
1997 Audit of Banadex and Meeting of Management
The convivir payments quickly came to the attention of the Legal and Internal
Audit Departments at Chiquita headquarters. In early 1997, Bud White, in cooperation
with Robert Thomas, conducted a review of General Manager’s fund expenses for the
Colombian operations to ensure that Banadex had maintained sufficient supporting
documentation for payments, including the payments to the guerrilla groups. During
the same time period as this review, Thomas saw the word “convivir” for the first time
on an FCPA report received from Colombia. This prompted him to make preliminary
inquiries into the nature of convivirs, which likely included discussing the issue with [a
Banadex lawyer].74
Both the documentation issue and questions about the convivir were discussed at
a May 7, 1997 meeting in Cincinnati, which Bud White, Robert Olson, Robert Kistinger,
Robert Thomas and, most likely, William Tsacalis attended.75 According to Thomas, the
74
Consistent with Thomas’s recollection, the first report of convivir payments on the Company’s
FCPA report summaries appears on the report for the second quarter of 1997. It shows payments
totaling $29,894 to a “convivir,” and describes the payments as “donation[s] to citizen
reconnaissance group made at request of Army.” FCPA Summary of Payments (Q1 and Q2
1997).
75
Tsacalis recalled being at a meeting where payments to guerrillas and convivirs were discussed,
but he did not believe it was this meeting because he did not recall a discussion at the level of
specificity memorialized in White’s notes. However, in his SEC testimony on December 2, 1999,
Tsacalis said that he recalled attending this meeting and that it was convened because White had
just uncovered guerrilla payments. Given that his SEC testimony was nine years before his SLC
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purpose of the meeting was to follow up on his and White’s efforts to obtain supporting
documentation for payments made by the Company in Colombia.
White’s handwritten notes of the meeting reflect a detailed discussion about the
guerrilla and convivir payments. In particular, the notes reflect a discussion concerning
(i) the amounts paid to guerrillas and convivirs in 1996, (ii) the amounts that were
budgeted for 1997, and (iii) the appropriate level of management approval for the
payments, including approval by [Chiquita Employee #2] and Kistinger, among others.
See Notes of Bud White (May 7, 1997). According to Olson, the group also discussed
whether the Audit Committee or the Board should be involved in the approval process
when the payments exceeded a certain amount.
In addition, the notes reflect a discussion about the legality of convivirs.
According to White’s notes, Thomas reported, “[a Banadex lawyer] indicates convivir is
legal.” Notes of Bud White (May 7, 1997). The notes also record the question, “who
else is funding paramilitary, what is our involvement in paramilitary.” Id. Although at
this point in time, as described more fully below, management in Cincinnati did not
understand the connection between the convivirs and the paramilitaries, during this
period they became aware of the issues relating to this new stream of payments.76
5.
David Hills’ Investigation Into the Convivir Payments
At or around the time of the May 7 meeting, Thomas asked David Hills to
undertake a more thorough inquiry into the convivir payments so that Thomas could
better understand them. Hills first consulted [a Banadex lawyer], who told him, like he
told Thomas, that convivirs were “well-recognized and legal in Colombia” and that
local government officials in Colombia encouraged making payments to convivirs.
Hills then requested that [the Banadex lawyer] prepare a written analysis of the
payments.
a.
Supporting Documentation from [Banadex Lawyer]
On May 19, 1997, [the Banadex lawyer] provided Hills with a memorandum
summarizing his legal advice concerning several issues, including payments to the
interview, the SLC believes that Tsacalis’s SEC testimony is more likely accurate on this point and
that he too participated in this meeting.
76
White failed to cooperate with the SLC’s investigation despite its – and the Company’s – repeated
efforts to obtain his assistance. As a result, the SLC was unable to obtain testimony from the
author of these notes, which no doubt would have deepened our understanding of some of their
more cryptic portions. The SLC used the notes to refresh the recollections of the witnesses –
including Olson, Kistinger, and Thomas – and was therefore able to obtain a coherent account of
what happened at this meeting. Nevertheless, we regret White’s unexplained decision not to
cooperate with this investigation.
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guerrilla groups and the fundamentals about convivirs. Thomas and Olson also
received copies of this memo. With respect to guerrilla payments, [the Banadex lawyer]
stated that one “cannot be punished” for making payments to guerrilla groups, which
he termed “montanistas,” if one acts “without freedom of consent.” With respect to
convivirs, [the Banadex lawyer] stated, “The so-called CONVIVIR are cooperatives
legally organized, with operating licenses granted by the government, designed to
defend private assets” and concluded that “payments made by private persons to
CONVIVIR are not against the law.” Memorandum from [Banadex lawyer] to David
Hills (May 19, 1997).
Around the same time, [the Banadex lawyer] sent Hills a packet of documents
containing four Spanish-language letters, dated between March and May 1997, all from
the Secretary of the Antioquia government in Colombia. The letters explain that
convivirs are legal entities that enhance the security and safety of the community. See
Compilation of Documents Provided by [Banadex lawyer] to David Hills (1997). Hills
said that he likely told Thomas that [the Banadex lawyer] had sent information
supporting the legality of convivirs, but did not share it with him, since the letters were
in Spanish, and Thomas did not speak Spanish.
According to [the Banadex lawyer], he received the packet of documents that he
sent to Hills after a meeting he attended with other banana producers and Alvaro
Uribe, who, at the time, was the governor of Antioquia. At this meeting, [the Banadex
lawyer] recalled that he voiced Chiquita’s concern about the legality of the convivirs
and about claims from certain non-governmental organizations (“NGOs”) that
convivirs had committed human rights abuses. As a result, Governor Uribe instructed
the Secretary of Antioquia, Pedro Moreno, to send [the Banadex lawyer] documentation
regarding convivirs that had been sent by the government of Antioquia to various
NGOs.
b.
August 1997 Hills Memorandum
In August and September of 1997, the Chiquita Legal Department continued its
review of the convivir payments. More than likely, the review of the convivir payments
was extended because they were to appear on an FCPA report summary presented to
the Audit Committee at a meeting scheduled for September 10, 1997. Because this was
the first time the convivir payments would appear on an FCPA report summary, Olson
and Thomas likely wanted to prepare for any questions that they would receive.
In August 1997, Hills made a routine trip to Colombia and, during the trip, spoke
to both [Banadex Employee #4] and [Banadex Employee #3] concerning the convivir
payments. On his return, Hills drafted a memorandum for Thomas, dated August 29,
1997, summarizing the information he had learned. In that memorandum, Hills wrote
that he had spoken with [Banadex Employee #4] and [Banadex Employee #3] in
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Colombia the previous week and that [Banadex Employee #3] informed him that
Banadex was paying $.03 per box to the “Puntepiedra” convivir. Hills also wrote that
he learned that convivirs were “pushed by the government as a means of combating
guerrilla terrorism” and “[were] not paramilitary groups.” Finally, Hills wrote that [a
Banadex lawyer] told him that convivirs “operate under full legal protection in
Colombia and that our participation is not illegal.” Memorandum from David Hills to
Robert Thomas (Aug. 29, 1997).
Hills told the SLC that his statement concerning legality was based on [the
Banadex lawyer’s] view of Colombian law and his own FCPA analysis of the payments
in light of the facts he had learned to date. Thomas said that he did not request this
memo from Hills, but that he was “happy to get it” because it confirmed what he had
been told previously about convivirs. It is unclear whether the memo was provided to
anyone else other than Thomas. Olson did not recall receiving the memo.
6.
Convivir Payments First Reported to the
Audit Committee – September 10, 1997
On September 10, 1997, the Audit Committee, then comprised of Jean Sisco,
William Verity and Oliver Waddell, held a regularly scheduled meeting. Steven
Warshaw, Olson, Tsacalis, White, Thomas, and representatives from E&Y also attended
the meeting. Thomas presented the FCPA report summaries for the first and second
quarters of 1997, covering January 1 to June 30, 1997. As noted above, the second
quarter summary is the first time that a convivir payment appears in an FCPA
summary. The report notes payments in Colombia totaling $29,894 to a “convivir,” and
describes the payments as a “donation to citizen reconnaissance group made at request
of Army.” Minutes of Chiquita Audit Comm. Meeting and FCPA Report Summaries
(Sept. 10, 1997).
Most of the attendees at the meeting could not recall whether this meeting was
the first time the Audit Committee discussed convivir payments. By contrast, Olson
was fairly certain that the first time “convivir” appears in an FCPA report would have
been the first time these payments were discussed at an Audit Committee meeting, and
that it “would be logical” that if Thomas gave an FCPA report at this September 1997
meeting, he would have mentioned convivir payments.
Thomas said that when the Audit Committee was first informed of the convivir
payments, the members were “accepting but concerned and a little skeptical.” Verity
said that he believed that the Audit Committee’s initial discussion about convivir
payments centered on what convivirs were, and the meaning of the description of the
payments in the FCPA report, which called them “donation[s] to citizen reconnaissance
group made at request of Army.”
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Thomas said that he never considered the convivir payments to be FCPA-type
payments because they were not payments to government officials, but he
recommended to the Audit Committee that they continue to be reported along with
actual FCPA payments so that the Company could “keep an eye on them.” Verity said
that based on the presentation, the Audit Committee understood that these were
security payments made to ensure the safety of Chiquita employees, and that they
“were legal and legitimate.”77 This was the context in which the payments were
presented to the Audit Committee and the description and explanation heard by the
Committee consistently until September 2000.
7.
March 4-5, 1998 Audit Committee Meeting
The Chiquita Legal Department continued to report to the Audit Committee on
the status of the convivir payments as part of its FCPA reporting. On March 4-5, 1998,
the Audit Committee held a regularly scheduled meeting, which was attended by Audit
Committee members Sisco, Verity, and Waddell, along with Warshaw, Tsacalis, Olson,
Thomas, and representatives from E&Y, among others.
At the meeting, Thomas presented the FCPA report summaries for the third and
fourth quarters of 1997. On the summaries, the convivir payments were again
characterized as a “donation to citizen reconnaissance group made at request of Army.”
The summaries show convivir payments totaling $18,635 and $83,945 for the third and
fourth quarters of 1997, respectively. Minutes of Chiquita Audit Comm. Meeting and
FCPA Report Summaries (Mar. 4, 1998). Most witnesses did not recall any specific
discussion about convivirs at this meeting, but according to the notes of the meeting
taken by Steven Tucker, the Vice President of Internal Audit and secretary of meetings,
the convivir was described as an entity that “monitor[s] guerrillas,” but that was “not
part of [the] army.” Notes of Chiquita Audit Comm. Meeting (Mar. 4, 1998).78 Tucker’s
notes also reflect the entry: “Jean – Do we ask in a general way about extortion?,” but
none of the participants recalled a discussion concerning extortion. Id. Thus, by the
spring of 1998, the Audit Committee and senior management had become substantially
informed about the payments to the convivir.
77
Tsacalis did not recall any discussion of convivir payments at this meeting. As noted above, the
SLC was unable to interview Waddell or Sisco, the other members of the Audit Committee
during this period.
78
Steven Tucker was Chiquita’s Vice President of Internal Audit from approximately 1998 until
June 2000.
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1998 – The SEC Investigation Begins
1.
Background
In conducting the 1997 audit of Banadex (see supra Section IV.C.4.), [Chiquita
Employee #2], Bud White and [Banadex Employee #1] noticed two unfamiliar
payments in the “sensitive payments” ledger totaling approximately $30,000, which
were made in September 1996 and March 1997. [Chiquita Employee #2] and White
then spoke with Banadex financial managers about the payments, but [Chiquita
Employee #2] was not satisfied with the explanation that he received. As a result,
[Chiquita Employee #2] asked [Banadex Employee #4] to explain the payments.
Ultimately, [Chiquita Employee #2] learned from [Banadex Employee #4] that the
payments were a bribe made to customs officials to renew Banadex’s port license in
Urabá.79 He reported this finding to Robert Thomas.80 Following an internal review,
the Chiquita Legal Department determined that [Banadex Employee #6], [Banadex
Employee #7], and [Banadex Employee #8]81 as well as [a Banadex lawyer], were
involved to some degree in making the payments.
At a September 8, 1997 meeting, which was attended by Kistinger, White,
Tsacalis, Thomas and Manuel Rodriguez,82 the decision was made to terminate
[Banadex Employee #6] and [Banadex Employee #7] and to discipline [Banadex
Employee #8] for their roles in making the payments. It was also decided that [a
Banadex lawyer] would be fired, but almost immediately he was re-hired as an outside
consultant to Banadex. See Notes of Bud White (Sept. 8, 1997). At the September 10,
1997 Audit Committee meeting, described above, Olson informed the Audit Committee
about the Company’s investigation into the customs payments and the disciplinary
actions that it planned to take. See Notes of Chiquita Audit Comm. Meeting (Sept. 10,
1997).
After consulting with outside counsel, the Company decided not to disclose the
payments to federal regulators. Nonetheless, the bribes became publicly known and the
79
The customs payments were requested and processed in such a way that they initially appeared
to be payments to guerrilla groups. According to [Chiquita Employee #2’s] SEC testimony,
[Banadex Employee #1] told him that he approved the customs payment because he “was
absolutely convinced that it was a payment to the guerrillas. . . .” Transcript of [Chiquita
Employee #2] Testimony, In the Matter of Chiquita Brands Int’l, Inc. (2000).
80
In contrast, Thomas said that management in Cincinnati came across the customs payments
because they were listed on an FCPA quarterly report. The SLC found no documentary evidence
to support Thomas’s view.
81
[Biographical and professional information on Banadex Employees #6, 7, and 8]
82
Manuel Rodriguez joined Chiquita in the 1980s as an in-house attorney and continues to work for
the Company in that capacity.
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focus of a multi-agency federal investigation. On May 3, 1998, the Cincinnati Enquirer
published the first in a series of articles entitled “Chiquita’s SECRETS Revealed,” which
contained a number of allegations concerning the Company’s business practices,
including that it had covered up the bribery payments in Colombia. See Mike Gallagher
and Cameron McWhirter, Power, Money & Control; Chiquita’s Secrets Revealed,
CINCINNATI ENQUIRER, May 3, 1998.83 These articles prompted the SEC, DOJ, and the
U.S. Attorney’s Office for the Southern District of New York (the “USAO SDNY”) to
open investigations into certain allegations contained in the articles. In the end, only
the SEC pursued an investigation of the Company, which ultimately focused on books
and records concerning the port payments, and not on the payments themselves. See
Supplemental Thompson Submission.
More relevant to the SLC’s investigation, and as described below, the SLC found
that, on several occasions during the course of the investigation, both during meetings
with government officials and in witness testimony, the Company disclosed the fact
that it had made payments to guerrilla groups and the convivir. Although these
payments were not the focus of the investigation, they were disclosed and discussed
because the customs payments had been drawn from the same accounts that Banadex
used to make payments to guerrilla groups.
2.
The SEC’s Investigation
In late April or early May of 1998, Chiquita received a subpoena from the SEC.
At that time, the Company retained Laurence Urgenson of K&E to represent it in
connection with the investigation.84 To understand the facts, K&E interviewed several
Chiquita employees and prepared memoranda summarizing the interviews. In
addition, at least seven Chiquita employees testified before the SEC, most of them in
1999.
Early in the investigation, on September 18, 1998, K&E lawyers met with
representatives of the SEC, DOJ, and the USAO SDNY. The main purpose of the
meeting was to provide the government with a chronology of the events relating to the
83
Two months later, on June 28, 1998, as part of a settlement with the Company, the Cincinnati
Enquirer published “An Apology to Chiquita,” in which the newspaper acknowledged that
Michael Gallagher, the lead reporter for the series, had illegally obtained transcripts of certain of
the Company’s voice-mails. The Cincinnati Enquirer also paid Chiquita $14 million in connection
with the settlement. See An Apology to Chiquita, CINCINNATI ENQUIRER, June 28, 1998 at A1.
84
K&E first became involved in the matter when, in or around August 1997, Robert Thomas
contacted Urgenson to seek advice regarding the implications of the customs payments under the
FCPA. K&E did not provide substantial legal advice on this issue; instead, it discussed potential
remedial steps the Company could take. Around the time that the Company retained K&E for
assistance in responding to the SEC subpoena, K&E attorneys were also working with the
Company in formulating a response to the Cincinnati Enquirer articles.
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customs payments made by Banadex, but the K&E lawyers also discussed in some
detail the guerrilla and convivir payments.
According to a memorandum summarizing the meeting, K&E told the
government that [Banadex Employee #3] handled “extortion payments to guerrillas.”
K&E also said that the Company had “a legal opinion stating that guerrilla payments
made to save or protect lives are legal in Colombia under the doctrine of ‘justification.’”
One of the SEC Enforcement Division attorneys asked how the Company recorded the
guerrilla payments, and K&E said that the recording of these payments was “sensitive
because BANADEX also pays the army (for security) and paramilitaries, such as the
Convivir.” K&E described the convivir as “a[n] entity that provides the Army
information concerning guerrilla movements” and said that the Company had a “local
opinion confirming that payments to Convivir are lawful.” Finally, K&E explained,
“The payments to guerrilla and anti-guerrilla groups involve sensitive issues. Either
group would retaliate against BANADEX for supporting the other.” During the
meeting, the government requested copies of the 1016s on which the Company
recorded the guerrilla payments. K&E Warehouse Presentation (Sept. 18, 1999). In
short, K&E described in considerable detail both the guerrilla payments and the
convivir payments to federal regulators and prosecutors.
On January 22, 1999, Urgenson and others gave another presentation to SEC and
DOJ representatives. The main purpose of this meeting was to provide the government
with additional information about the customs payments and documentation regarding
the Company’s books and records practices. See Supplemental Thompson Submission.
During the meeting, the Company’s payments to guerrilla groups were again discussed.
According to a memorandum summarizing the meeting, K&E discussed the amounts
paid to guerrillas and the convivir as well as the knowledge of the Company’s internal
accountants and outside auditors concerning the payments. Urgenson told the
government representatives that “you either deal with these groups by paying the
guerrillas or else by leaving the country.” K&E Presentation on Customs Payment (Jan.
22, 1999). According to the memo, a DOJ lawyer asked what the U.S. Department of
State had told Chiquita about making guerrilla payments. Urgenson said that he was
not aware of any such contact. See id.
The statements made by Chiquita’s counsel were confirmed during the SEC
testimony of Chiquita employees.
First, several Chiquita employees testified concerning the Company’s payments
to guerrilla groups. For example, Robert Kistinger testified that: Colombia is
“somewhat of a war zone. So we’re concerned that now we’re being approached and
effectively threatened that if we don’t go ahead and [make payments to the guerrillas]
we’re going to put our people at risk, and that we’re going to put our assets at risk. . . .
We’re being extorted.” William Tsacalis testified regarding the May 7, 1997 meeting
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with management, which addressed “the fact that guerrilla payments were being made,
and we had some specific questions with respect to the guerrilla payments, including
. . . who was authorized to make payments, are they approved. . . . Olson was going to
address the legality question. . . .”
Second, Chiquita employees testified concerning the payments to the convivir.
For example, [Chiquita Employee #2] testified that the Colombia personnel “would
have told me . . . we’re being asked to make a contribution to the Convivir. I would
have then asked questions like . . . tell me about the Convivir and who are they. Well, I
mean, are these horrible paramilitary? No, they’re not. Convivir . . . was founded and
pushed by the governor of Antiochia [sic] and it was blessed by legislation in
Colombia.” Transcript of [Chiquita Employee #2] Testimony, In the Matter of Chiquita
Brands Int’l, Inc. (1999). In a colloquy between Urgenson and an SEC staff attorney
during Kistinger’s testimony, Urgenson described the convivir as “a specific
organization which is sanctioned by the government” and “not a paramilitary
organization,” and also stated that Chiquita had not made payments to paramilitary
organizations. Transcript of Kistinger Testimony, In the Matter of Chiquita Brands Int’l,
Inc. (2000).
In short, even though the FARC and the ELN were designated as FTOs by the
U.S. Department of State on October 8, 1997, and historical payments to these guerrilla
groups were discussed during meetings with the SEC, DOJ and the USAO SDNY and in
testimony before the SEC, there is no evidence that any government or Chiquita lawyer
was aware that payments to the FARC and ELN might be prohibited under U.S. law –
and at no point during the SEC investigation did the government state that the guerrilla
payments violated U.S. criminal law. See Supplemental Thompson Submission. In fact,
neither DOJ nor the SEC questioned the legality of the payments to the FARC other
than as a potential violation of the FCPA.
After a three-year investigation, the Board approved a settlement with the SEC
on September 25, 2001, in which the Company neither admitted nor denied the SEC’s
allegations. 85 The Company consented to SEC findings that (i) in 1995, a Banadex
employee, without the knowledge or consent of any Chiquita employee outside of
Colombia, authorized the payment of approximately $30,000 to local customs officials to
secure the renewal of a port license and (ii) Banadex did not properly record the
payment in its books and records, resulting in a violation of the accounting provisions
of the Securities Exchange Act of 1934. The SEC also found that the Company’s internal
audit staff discovered the payment and that the Company took corrective action after an
85
The Audit Committee received regular briefings concerning the SEC investigation at meetings
held on May 12, 1998; March 10, 2000; September 12-13, 2000; March 7, 2001; May 8, 2001; and
September 25, 2001.
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internal investigation, including terminating the responsible employees and
strengthening internal controls at Banadex. See Minutes of Chiquita Board Meeting
(Sept. 25, 2001); Chiquita Brands International, Inc., Exchange Act Release No. 44,902
(Oct. 3, 2001).86
Robert Olson signed the consent decree on behalf of the Company on October 1,
2001, and the Company paid a civil penalty of $100,000. See SEC v. Chiquita Brands Int’l,
Inc., No. 1:01CV02079 (D.D.C. Oct. 3, 2001). The evidence suggests that, at least in part
as a response to the adverse publicity caused by the Cincinnati Enquirer articles, which
in turn triggered the SEC investigation, the Company launched a Corporate
Responsibility initiative dedicated to ensuring employees’ compliance with certain
ethical guidelines, as discussed in more detail below. See infra Section IV.G.; see also
Supplemental Thompson Submission.
In sum, the SLC attached substantial significance to the interactions between the
Company and the government during this investigation. The Company fully
cooperated with the investigation and disclosed a large quantity of information about
the guerrilla payments and convivir payments both in witness testimony and in
presentations made to the government. Despite these broad disclosures, no one from
the government ever suggested that the payments violated any provision of U.S. law,
and no one from the government identified the prohibition of making payments to an
organization on the FTO list, which included the FARC and ELN before the
investigation began. Accordingly, the SLC found that the Company, its Board, and its
officers remained unaware through the duration of the SEC investigation, which was
not settled until the fall of 2001, of the potential criminal liability for making payments
to entities on the FTO list.
E.
Santa Marta Convivir Payments
Until 1999, the Company had been making payments to the convivir in Turbo
(first to Punte de Piedra and then to La Tagua del Darién), but not in Santa Marta,
where it also had substantial banana growing operations. In 1999, [Banadex
Employee #3] was approached by a group of paramilitaries based in Santa Marta and
asked to attend a meeting in a hotel. 87 [Banadex Employee #3] advised [Banadex
86
The SEC Settlement Order noted: “Chiquita had strict policies prohibiting payments of the kind
made to the customs officials . . . . After conducting an internal investigation, Chiquita took
corrective action, which included terminating the responsible Banadex employees and
reinforcing its internal controls with respect to its Colombian operations.” Chiquita Brands
International, Inc., Exchange Act Release No. 44,902 (Oct. 3, 2001).
87
Other witnesses recalled that the approach was made indirectly, through Irving Bernal, the
banana producer who had originally brought [Banadex Employee #4] and [Banadex Employee
#1] to meet with Carlos Castaño several years earlier. See Memorandum from Robert Thomas to
File (Sept. 2000).
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Employee #1] and then attended the meeting. [Banadex Employee #3] recalled that
many men brandishing AK-47s attended the meeting, and said that he felt “very scared
and intimidated. ” [Banadex Employee #3] said that during the meeting, the
paramilitaries demanded payments from Banadex.
In response, [Banadex Employee #3] sought advice from a friend, who agreed to
act as an intermediary in delivering cash payments to the paramilitaries, playing a role
similar to that of [Banadex Contract Employee #2] (see supra note 40). The intermediary
eventually suggested that the Company make the payments through a convivir named
Inversiones Manglar, an entity created by the AUC to collect payments. On October 14,
1999, Banadex made its first payment to Inversiones Manglar. See KPMG Sensitive
Payments Schedule. Thus, as of October 1999, Chiquita was making payments to two
convivirs, La Tagua del Darién in Turbo and Inversiones Manglar in Santa Marta.
In November 1999, [Banadex Employee #5] took over for [Banadex Employee
#3].88 Prior to joining Banadex [Banadex Employee #5] was [ ] for 14 years. According
to [Banadex Employee #5], in reviewing the documentation relating to Inversiones
Manglar, he reached the conclusion that it did not appear to be a legitimate, properly
licensed convivir. As a result, [Banadex Employee #5] spoke with “Pedro,” a contact
whom [Banadex Employee #3] had introduced to him as the “person in charge of the
convivir” in Urabá, and told him that Banadex could not pay Inversiones Manglar
because it did not appear to be properly licensed.89 Pedro told [Banadex Employee #5]
that the convivir was in the process of obtaining a proper license, and that until it did,
Banadex should make the Santa Marta payments through the La Tagua del Darién
convivir in Turbo. See Memorandum from Robert Thomas to File (Sept. 2000).
On February 28, 2000, Banadex made payments to Inversiones Manglar and La
Tagua del Darién, but thereafter, payments were made solely to La Tagua del Darién in
Turbo, and a portion of those payments was routed to Santa Marta. See KPMG
Sensitive Payments Schedule.
88
[Banadex Employee #3] said that the security concerns associated with his position played a role
in his decision to leave the Company.
89
[Both Banadex employees] confirmed that “Pedro” was in fact Raul Hasbún, a commander in the
AUC. [Banadex Employee #3] said that he initially did not know that “Pedro” was a member of
the AUC, but that over time, he began to suspect that “Pedro” was connected in some way to the
AUC. [Banadex Employee #3] said that before he left the Company, he introduced [Banadex
Employee #5] to “Pedro,” and identified him as the individual responsible for the convivirs.
[Banadex Employee #3] said that he did not recall sharing his suspicions about “Pedro’s”
connection to the AUC with [Banadex Employee #5], and [Banadex Employee #5] recalled only
that “Pedro” was introduced as the individual responsible for the convivirs. [Banadex Employee
#5] said that he did not initially realize that “Pedro” was a member of the AUC, but, like
[Banadex Employee #3], he came to learn that “Pedro” was a member of the AUC.
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Robert Thomas’s Investigation into the Convivir Payments
1.
Background
The payments in Santa Marta were picked up by the Company’s FCPA reporting
process. In early 2000, Robert Thomas noticed a payment to Inversiones Manglar, a
group that he did not recognize, on an FCPA report from Colombia. On March 6, 2000,
he called [Chiquita Employee #3], and [Banadex Employee #4], to obtain information
about the payment. During the call, [Banadex Employee #4] explained that because the
Colombian government would not permit the formation of new convivirs, Inversiones
Manglar had been formed to perform the same function as a convivir but was
incorporated in Santa Marta in such a way as to disguise its true purpose, which was to
provide security. See Notes of Robert Thomas (Mar. 6, 2000).
Until this conversation, Thomas did not know that convivir payments were
being made in Santa Marta (these payments began in October 1999). During the call,
Thomas asked whether it was possible for Banadex to stop making the payments at this
time, and [Banadex Employee #4] and [Chiquita Employee #3] said that, according to
[Banadex Employee #5], the payments were necessary because Banadex needed the
security provided by Inversiones Manglar.90
Thomas said that this discussion made him suspect that the payments made by
Banadex were being routed to paramilitary organizations (indeed, his notes of the call
include the notation, “para-military”), but that he did not understand the specifics of
the transactions. See Notes of Robert Thomas (Mar. 6, 2000). Following the call,
Thomas reported to Olson that he had learned certain information that suggested that
convivirs were “not as legitimate” as they had originally thought and that “at least
some portion” of the money paid to convivirs was being routed to paramilitary
organizations. According to Olson, Thomas said that it was “crucial” that the Company
ensure that there was a real threat against it and that the payments were necessary to
diminish that threat, and suggested sending someone to Colombia to investigate these
issues. Olson said that, before Thomas began further work on the issue, he and Thomas
agreed that the payments could not continue unless there was a “real threat of physical
harm to employees” if the payments were not made.
90
Thomas said that, during the call, [Banadex Employee #4] and [Chiquita Employee #3] did not
explain whether Inversiones Manglar actually was providing security services to Banadex. The
SLC is aware of no evidence to suggest that it was.
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March 10, 2000 Audit Committee Meeting
During a regularly-scheduled Audit Committee meeting on March 10, 2000,
which was attended by directors Verity and Waddell,91 along with Olson, Tsacalis,
Thomas, Warren Ligan, Steven Kreps,92 and representatives from E&Y, the convivir
payments were again discussed. Even though the Company continued to make
payments to convivirs during this time, the FCPA report summaries for the third and
fourth quarters of 1999, which were presented during this meeting, do not reflect any
payments to convivirs. However, handwritten notes taken during the meeting by
Kreps, who replaced Steven Tucker as Vice President of Internal Audit and Secretary
for Audit Committee Meetings, reflect that convivirs were, in fact, discussed:
“Payments down 190k. Colombia down (34) convivir; Increased convivir in Q2 (double
up) . . . Rate driven by guerilla activity.” Notes of Chiquita Audit Comm. Meeting
(Mar. 10, 2000).93 None of the participants questioned by the SLC about this meeting
recalled the discussion, and Thomas did not recall mentioning the Inversiones Manglar
payment.94
E&Y, which continued to attend Audit Committee meetings as the Company
transitioned from paying guerrilla groups to paying paramilitary groups, and which
91
Jean Sisco was ill and did not attend this meeting.
92
Warren Ligan joined Chiquita in 1992 as the Assistant Vice-President of Tax, and became VicePresident of Tax nine months later. He then served as Chiquita’s CFO from approximately May
1998 until September 2000. Steven Kreps joined Chiquita in January 1991 as a Senior Audit
Supervisor, and seven months later he was promoted to Manager for Global Banana
Management Reporting, the position in which he served from mid-1991 until 1996. From 1996
until August 1999, he was the Director of Financial and Operational Controls, and from August
1999 until June 2000, he was Senior Internal Audit Director. In June 2000, Kreps was promoted to
Vice President of Internal Audit and remained in this position until August 2006, when he was
transferred to Singapore and became the Vice President of Finance for Asia-Pacific Operations.
He left Chiquita at the end of 2007.
93
Likewise, the FCPA report summaries for the first and second quarters of 1999, which were
presented to the Audit Committee at its September 14-15, 1999 meeting, do not reflect any
payments made to convivirs. When the SLC contacted Thomas to ask about the reason the
convivir payments were not mentioned in these FCPA reports, he advised, through counsel, that
his presentations on the payments were not based on the document he distributed to the Audit
Committee but instead based on notes he prepared. He advised that even if the convivir
payments were not included in some of the FCPA reports, he would have covered those
payments during his oral presentation.
94
Thomas said he recalled an e-mail from [Chiquita Employee #3] stating that the payment to
Inversiones Manglar should be excluded from the FCPA report. Thomas surmised that, because
a revised report from which this payment was omitted had been presented to the Audit
Committee, he would not have discussed the payment with the Audit Committee. See E-mail
from [Chiquita Employee #3] to Robert Thomas (Mar. 7, 2000).
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reviewed the FCPA report summaries generated by the Legal Department on which
payments to convivirs were typically recorded, was aware that the Company was
making payments to several “militant groups” in Colombia.95 Like the guerrilla
payments, E&Y personnel interviewed by the SLC stated that E&Y did not consider
these payments to be either quantitatively or qualitatively material.
3.
June 2000 [Banadex Lawyer] Legal Opinion
Following his discussion with Olson after the March 6 call, Thomas began a
review of the convivir payments, and spoke with [Chiquita Employee #2], [Chiquita
Employee #1], Jorge Solergibert,96 and David Hills. During these discussions, Thomas
became concerned that general descriptions and characterizations of the continuing
dangers in Colombia were “not enough” and that he needed to obtain “real facts.”
Apparently in response to Thomas’s concerns, [a Banadex lawyer] was asked to write a
memo about issues relating to the payments, although Thomas did not recall who made
the request.
In the memo, dated June 17, 2000, [the Banadex lawyer] explained the nature and
the history of the guerrilla groups, paramilitaries, and convivirs in Colombia. He
concluded that convivirs were legal “securing and monitoring” entities, but that the
paramilitary groups requesting payments in Santa Marta were not. In the memo, [the
Banadex lawyer] also stated that, like the guerrilla groups, the paramilitaries extorted
money from individuals and companies, demanding that they make payments or face
the “serious risk of being kidnapped or killed.” [The Banadex lawyer] wrote that, as a
result, in order to ensure that it was paying a legal entity, the Company should continue
to pay the convivir in Urabá, which would then pay the Santa Marta group. See
Memorandum from [Banadex lawyer] to Robert Thomas (June 17, 2000). [The Banadex
lawyer] told the SLC that the thrust of his advice was that Chiquita could not safely
operate in Santa Marta unless it made the payments.
The memo to Thomas was shared with Hills, but not Olson. According to Hills,
neither he nor Thomas gave the memo much weight. This was based on his belief that
the memo had been drafted by [the Banadex lawyer], but signed by [Outside Counsel
#2], who Hills thought was “too close to the Company” and “not independent enough.”
95
Like Chiquita management, the E&Y representatives interviewed by the SLC stated that they
were unaware of the true nature of the convivirs during this period and knew only that the term
“convivir” identified one of the Colombian groups that the Company was paying.
96
Jorge Solergibert joined Chiquita in 1990 as an in-house lawyer and currently serves as Assistant
General Counsel.
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[Chiquita Employee #1’s] Trip to Colombia
In an effort to obtain additional information about the convivirs, Thomas asked
[Chiquita Employee #1] to meet with Colombian personnel to learn about how the
payments were made to the convivirs in Turbo and Santa Marta.97 According to Olson,
he discussed the decision to send [Chiquita Employee #1] to Colombia with Robert
Kistinger, who, at the time, was President and COO of the Fresh Group, and Steven
Warshaw, who, at the time, was President and COO of the Company.98 It took several
months for [Chiquita Employee #1] to travel to Colombia to gather the information.
According to the Thomas Memo, which Thomas wrote following his discussions
with [Chiquita Employee #1], on July 21, 2000, [Chiquita Employee #1] met with
[Banadex Employees #5, #2, #4, #9,99 and #3].100 See Memorandum from Robert
Thomas to File (Sept. 2000). During these discussions, according to Thomas’s memo,
[Chiquita Employee #1] learned how Banadex was first contacted by the convivir, how
convivir payments were handled, why the payments remained necessary, and how the
payments began in Santa Marta. See id. [Chiquita Employee #1] returned to Cincinnati
and reported his findings orally to Thomas on August 1, 2000, and Thomas, as
discussed above, then summarized those findings in a memo.101 Thomas told the SLC
that his main conclusions from [Chiquita Employee #1’s] trip were: (i) that the convivir
in Urabá was linked to Carlos Castaño, who was a “very bad guy”; (ii) that payments
made in Santa Marta were going to paramilitaries; and (iii) that payments were being
routed to Santa Marta through the Urabá convivir.
As noted above, in his memo summarizing [Chiquita Employee #1’s] findings,
Thomas described the meeting that [Banadex employees] had with Carlos Castaño.
Thomas also described the 1999 meeting at which an AUC representative in Santa
Marta told [Banadex Employee #3] that “it was time for Banadex to start making
payments to Autodefensas.” In the memo, Thomas wrote that, at both meetings, there
were “unspoken threats” that if payments were not made, the AUC would “attack
97
[Chiquita Employee #1] became ill in the summer of 2008 and passed away on November 25,
2008. As a result, the SLC was unable to interview him.
98
Warshaw said that he has no recollection of Thomas’s investigation or [Chiquita Employee #1’s]
trip to Colombia.
99
[Biographical and professional information on Banadex Employee #9]
100
Curiously, [the Banadex employees] all told the SLC that they had no recollection of meeting
with [Chiquita Employee #1].
101
There are two drafts of Thomas’s memo, dated August and September 2000. There is no
substantive difference between the drafts. The SLC is not aware of any notes [Chiquita Employee
#1] took or memos he drafted based on his discussions in Colombia that formed the basis for
Thomas’s memo.
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Banadex’s people and property.” He also wrote that payments in Urabá were made
directly to the convivir La Tagua del Darién and payments intended for Santa Marta
were made to the same convivir, which forwarded the payments to Inversiones
Manglar. See Memorandum from Robert Thomas to File (Sept. 2000).
5.
Management’s Understanding of the
Connection between Convivirs and the AUC
Thomas orally briefed Olson on [Chiquita Employee #1’s] findings and then
provided him with the memo that he drafted, which Olson received on September 12,
2000. Olson discussed Thomas’s findings with Kistinger and Warshaw. Thomas said
that he briefed [Chiquita Employee #2], Kistinger, Tsacalis, Hills, and possibly
Warshaw on [Chiquita Employee #1’s] findings.
However, many of these individuals told the SLC that they were unaware of
Thomas’s investigation at the time it was conducted and the link that it established
between the convivir and the AUC.102 Warshaw said that he did not recall anyone at
the Company “ever” using the word “convivir.” He also said, however, “I was
perfectly aware that payments were made to prevent inappropriate conclusions to our
employees’ lives.” Kistinger said that, at the time, he was not familiar with the word
“convivir,” but instead understood that paramilitary groups, which he perceived as
having been sanctioned by the Colombian government, had been created to displace the
FARC. He did not remember the paramilitary groups initially being called the AUC,
but said that “later on” these groups were referred to as the AUC and that they began as
the “good guys” and later became the “bad guys.”103
Based on these facts, the SLC concluded that the Legal Department, and very
likely other members of senior Chiquita management in Cincinnati, were aware of the
connection between the convivirs and the AUC as of the fall of 2000. Although the
discovery of the relationship between the AUC and the convivirs was viewed by
Thomas, Olson and others as significant, the Legal Department, with the assistance of
102
Warshaw, [Chiquita Employee #2], and Tsacalis said that they were unaware of the Thomas
inquiry and [Chiquita Employee #1’s] trip to Colombia until their SLC interviews. David Hills
said that he did not learn about this investigation until he was preparing for his grand jury
testimony in 2004 or 2005. Kistinger said that he remembered Thomas’s memo, but could not
recall when he first saw it.
103
Warren Ligan, who was the Company’s CFO from May 1998 to September 2000, said that he did
not hear of the AUC during his tenure at Chiquita and that, at the time of his SLC interview, he
did not know what this group was. Ligan said that, during his tenure as CFO, he saw the term
“convivir” on FCPA payment schedules and understood it to be related to “local security” in
Colombia.
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outside counsel, concluded that the payments to the AUC (through the convivir) did
not violate Colombian law.
6.
August 2000 Legal Opinions
After Thomas wrote his memo, he asked Jorge Solergibert, a Company lawyer
based in Costa Rica, to provide a “civil law analysis” of the payments under Colombian
law. Thomas wanted “to see what such an opinion would look like.” Thomas said that
it did not occur to him to look into whether the payments violated U.S. law.
In a memorandum dated August 2000, Solergibert used as his factual predicate
the summary of facts contained in the Thomas Memo, stating that the Company’s
contacts with the paramilitaries and the paramilitaries’ notoriety “convinced Banadex
management that there was no choice but to make payments.” He concluded that,
under Colombian law, paramilitary groups in both Turbo and Santa Marta were
committing extortion against Banadex. See Memorandum from Jorge Solergibert to
Robert Thomas (Aug. 2000).104 It does not appear that Thomas shared Solergibert’s
memorandum with anyone else in the Company.
Around the same time, Thomas and Solergibert requested an opinion regarding
the legality of the payments under Colombian law from B&M. In order to facilitate the
B&M analysis, Thomas and Solergibert orally provided them with the factual
background, and Thomas believes that B&M was provided with his memo. Thomas
said that the main question he asked of B&M was whether the conduct Banadex was
engaged in was illegal in Colombia.
On August 30, 2000, B&M provided its opinion. The memo stated the factual
premise that “the Company” (which it did not identify) had been approached by
paramilitary groups and threatened with harm unless payments were made. As did the
Solergibert memo, the B&M memo concluded that paramilitary groups had committed
extortion against the Company and that employees who failed to report the extortion
would not be criminally liable, because reporting the extortion “would have created a
present or imminent danger to the Company and its officers.” Memorandum from
[Outside Counsel #3] and [Outside Counsel #4] to F. Miguel Noyola and Jonathan E.
Adams (Aug. 30, 2000).
104
Solergibert also stated that Banadex managers and employees who knew of the extortion were
committing a crime if they did not report the extortion, although he noted the potential for an
affirmative defense “akin to the one issued by the Supreme Court in the case of victims of
extortive kidnapping,” which appears to refer to the defense of necessity. Memorandum from
Jorge Solergibert to Robert Thomas (Aug. 2000).
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When he received the memo, Olson viewed it as establishing that nothing in the
legal analysis had changed with the shift from guerrilla payments to convivir/AUC
payments. Accordingly, he concluded that the Company was not violating Colombian
law by making payments to convivirs or the AUC.
7.
September 12-13, 2000 Audit Committee Meeting
The Audit Committee, then consisting only of directors Verity and Waddell, held
a regularly-scheduled meeting on September 12 and 13, 2000. The meeting was also
attended by Olson, Tsacalis, Kreps, Fred Runk, Jeffrey Zalla, Thomas, and
representatives from E&Y.105 During the meeting, Thomas presented the FCPA report
summaries for the first and second quarters of 2000, which showed payments to the
convivir, described as “[g]overnment sponsored citizen reconnaissance group,” in the
amount of $22,360 and $63,040, respectively. Minutes of Chiquita Audit Comm.
Meeting and FCPA Report Summaries (Sept. 12-13, 2000).
In addition, Thomas presented the results of his inquiry into the convivir
payments to the Audit Committee. Kreps’s handwritten notes of the meeting include
the following: “Not a voluntary decision (extortion) – [Chiquita Employee #1]
investigated – Baker + McKenzie hired to investigate – conclusion is that we are not
violating local laws.” The notes also reference Carlos Castaño as the “convivir leader.”
Notes of Chiquita Audit Comm. Meeting (Sept. 12-13, 2000).106
Even though Kreps’s notes reflect a discussion that included a specific reference
to Castaño at the meeting, participants in the meeting whom the SLC interviewed said
that they did not recall the details of Thomas’s presentation, or any discussion of the
connection between the convivirs and the AUC. Olson recalled Thomas’s presentation
about his inquiry as well as the legal conclusions from the August 30 B&M memo, but
said he did not specifically recall a discussion of Castaño at the meeting. The SLC
found no evidence that Thomas’s investigation was presented at a full Board meeting.107
105
Jeffrey Zalla began his employment with Chiquita in 1990 as a Supervisor of Treasury Analysis
and thereafter held various positions in the Treasury and Finance departments. In 2000, he
became Vice President and Corporate Responsibility Officer and, in 2003, Zalla became Treasurer
(maintaining his position as Corporate Responsibility Officer). In 2005, he became Senior Vice
President and CFO, which are the positions that he holds today.
106
Kreps did not recall anything specific about this meeting and said that he “would have just taken
notes from what was said.”
107
In addition to directors Verity, Waddell, and Runk, who attended this meeting, the remainder of
the Board was comprised of Carl Lindner, Keith Lindner, and Steven Warshaw.
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*
*
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*
As to this time period, the SLC reached the following conclusions. First, by
August 2000, senior Chiquita management knew or should have known of the link
between the convivir and the AUC. Second, the Legal Department concluded that
Banadex was not criminally liable under Colombian law because it was being extorted
and the payments were therefore legally justified. Third, the Company did no analysis,
either internally or through outside counsel, of potential U.S. legal implications of the
payments, except under the FCPA. Fourth, the Legal Department told management
and the Audit Committee that the payments to the convivir/AUC were legal under
Colombian law. Fifth, the Company’s Legal and Internal Audit Departments
adequately monitored the payments.
G.
Corporate Responsibility Initiative – 2000
As a result of the negative publicity associated with the Cincinnati Enquirer
articles and a desire to create a more open and transparent corporate culture, in 2000,
Chiquita President Steven Warshaw developed the idea of initiating a broad Corporate
Responsibility initiative, which was led by Jeffrey Zalla. At the time, Zalla was
promoted to Vice President and Corporate Responsibility Officer.
To aid Zalla in this effort, the Company engaged a consultant to work with him
and other members of senior management to develop a set of core values for the
Company. After meeting with this consultant to discuss ways in which the Company
could “make corporate responsibility a priority,” Zalla established a corporate
responsibility steering committee, which was comprised of employees from all areas of
Chiquita’s business. Over a period of several months, Zalla and the steering committee
examined comparable companies’ values, codes of conduct, and labor standards in
order to develop a set of values that the Company would emphasize. This process
involved significant time and effort, in large part because the steering committee was
committed to establishing core values that both management and non-management
employees “could stand behind.”
The Corporate Responsibility Initiative was not limited to establishing a set of
core values. Zalla also took steps to revise the Company’s code of conduct, establish
training programs for employees, and conduct a self-assessment of the Company’s
corporate responsibility efforts in all areas of its business. The initiative culminated in
the publication, in the fall of 2001, of Chiquita’s Corporate Responsibility Report.108 See
Chiquita Brands Int’l, Inc., Corporate Responsibility Report (2000). The Corporate
Responsibility Report contains the following statements, among others: (i) “Times have
108
A draft of the 2000 Corporate Responsibility Report was presented by Zalla at a May 8, 2001
Audit Committee meeting. See Minutes of Chiquita Audit. Comm. Meeting (May 8, 2001).
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changed. And so has our Company. . . . Three years ago, in the wake of particularly
damaging media coverage, we embarked on a disciplined path toward Corporate
Responsibility. . . . This was not to be a public relations exercise, but a management
discipline. . . .” (Am. Compl. ¶ 79); (ii) “We live by our core values. We communicate
in an open, honest and straightforward manner. We conduct business ethically and
lawfully.” (Id. ¶ 80); (iii) “For decades, Chiquita has had a Code of Conduct that dealt
with ethical and legal behavior and compliance with Company policies. . . . Our Code
of Conduct now embodies standards in the areas of . . . ethical behavior . . . and legal
compliance.” (Id. ¶ 81).
This marked the beginning of the Company’s formalized corporate responsibility
program. This program remains in place today, and the Company issues a new
Corporate Responsibility Report every other year.
H.
May 7, 2001 [Outside Law Firm] Legal Opinion
During late 2000 and early 2001, Chiquita continued to make payments to the
convivir, but the monitoring of those payments in Cincinnati changed. In December
2000, Robert Thomas, who had been responsible for FCPA reporting since the early
1990s, left Chiquita, in large part because of the Company’s mounting financial
difficulties. Olson selected David Hills to take over Thomas’s FCPA reporting
responsibilities.
Before his first FCPA report to the Audit Committee, which was scheduled to
hold its next meeting on May 8, 2001, Hills asked [a] Colombian law firm [ ], with which
he had a relationship, to prepare a memo on the legality of convivirs. At this point,
Hills was unaware of the inquiry conducted by Thomas in the summer of 2000 and had
neither received nor read the Thomas Memo. Thus, he was not aware of the clear link
between the convivir and the AUC that [Chiquita Employee #1’s] July 2000 trip to
Colombia and Thomas’s September 2000 memo had established. The [legal] memo,
dated May 7, 2001, states that convivirs are “expressly authorized under Colombian
law” and that payments to such entities are legal, provided that the convivirs have
“obtained and maintain appropriate licenses” from the Colombian government and the
funds are used for lawful purposes. Memorandum from [Outside Counsel #5] to David
Hills (May 7, 2001).
While Hills and Olson agreed in their SLC interviews on the timing of the receipt
of the memo, they disagreed as to who commissioned it. Hills said that Olson
requested this memo because he wanted an updated opinion on the legality of convivirs
under Colombian law prior to Hills’ first report on FCPA payments to the Audit
Committee. However, Olson did not recall requesting the memo, and was confused
about Hills’ reasons for obtaining [the law firm’s] opinion on this subject. When he
received the memo, he recalled “scratching his head” and telling Hills that the
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Company was “not relying on this argument anymore,” given Thomas’s findings
during his investigation that the convivirs were linked to the AUC.
I.
May 8, 2001 Audit Committee Meeting
The Audit Committee held a regularly-scheduled meeting on May 8, 2001. The
Audit Committee was now comprised of Gregory Thomas, Rohit Manocha, and
William Verity, who attended the meeting, along with, among others, James Riley (the
new CFO), Olson, Tsacalis, Kreps, Zalla, David Hills, and representatives from E&Y.
Directors Thomas and Manocha had replaced Jean Sisco and Oliver Waddell on the
Audit Committee. See Minutes of Chiquita Audit. Comm. Meeting (May 8, 2001).109
According to the minutes, the Audit Committee received an update on FCPA
compliance and was presented with the summaries of FCPA payments for the third and
fourth quarters of 2000, which listed quarterly payments to convivirs in the amount of
$76,079 and $94,594, respectively. See Minutes of Chiquita Audit Comm. Meeting and
FCPA Report Summaries (May 8, 2001). Given that they had only recently joined the
Board, this was the first time Audit Committee members Thomas and Manocha
received an FCPA briefing from the Legal Department.110
While the meeting minutes state that David Hills gave the FCPA report, Hills
recalled that Olson briefed the Audit Committee. Both Manocha and Thomas recalled
receiving this briefing and being told, consistent with prior FCPA reports to the Audit
Committee, that all of the payments listed on the FCPA report summary were legal.
Thomas recalled that Hills (and not Olson) gave a “full rundown” of the payments that
were reported for FCPA purposes and focused primarily on how the Company had
gathered relevant information for each country, rather than the details of the specific
entries. Thomas also recalled that he and other members of the Audit Committee had
noticed an increase in the total amount of the payments from the previous year and that
Hills had pointed out that the increase was due, in part, to security payments made to
109
This was the second Audit Committee meeting that Gregory Thomas and Rohit Manocha
attended. See Minutes of Chiquita Audit Comm. Meeting (Mar. 7, 2001); Notes of Chiquita Audit
Comm. Meeting (Mar. 7, 2001). Thomas joined the Chiquita Board in November 2000 and was
the Chair of the Audit Committee from February 2001 until March 2002. Manocha joined the
Chiquita Board in January 2001 and was a member of the Audit Committee from January 2001
until March 2002. James Riley, who also attended the May 8 meeting, was Chiquita’s Senior Vice
President and Chief Financial Officer from January 2001 until August 2004, and replaced Warren
Ligan.
110
Manocha said that he first learned about payments made by Chiquita’s overseas divisions at his
first Audit Committee meeting, which occurred on March 7, 2001. However, according to the
minutes of the March 7 meeting, no FCPA report was given. Thus, Manocha was likely mistaken
about the date on which he learned about the payments, and likely learned about these payments
at the May 8 Audit Committee meeting.
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an organization in Colombia. Manocha said that payments for “security services” were
“flagged and highlighted” so that the Audit Committee could consider, and if
necessary, discuss them.111 He said that he did not believe any payments on the FCPA
reports were payments to illegal entities.
From the SLC’s perspective, Thomas’s and Manocha’s recollections are consistent
with the view of the Legal Department presented in its FCPA reporting to the Audit
Committee: all of the payments listed on the reports were proper under the law.
J.
Arms and Drug Smuggling
For decades, the violence and turmoil in Colombia – and the climate of fear that
caused the country to be such a dangerous place to live and work – were fueled by the
pervasiveness of weapons and drugs. The guerrilla groups, paramilitaries, and drug
smugglers were well-armed and were continually in need of replacing and adding to
their stocks of weapons and ammunition. Because of that continuing need, companies
such as Chiquita that owned or had access to shipping facilities were at risk of having
those facilities used for smuggling arms and ammunition, as well as drugs.112
1.
2001 “Easter” Incident
In the early part of 2001, Chiquita management learned about the first of two
incidents in which arms were smuggled by third parties through Banadex’s port
operations in Colombia. In April of 2001, weapons were smuggled into Colombia
through Chiquita’s shipping facilities in Urabá. In May 2001, [Banadex Employee #4]
called David Hills, and told him that he had recently learned of the incident from [a
Banadex employee]. Hills asked [Banadex Employee #4] for more detail, and [Banadex
Employee #4] told him that a customs broker “known to be a front for right-wingers”
had filed false shipping and import documentation with respect to a shipment of
fertilizer, which, in fact, was a shipment of weapons. The broker told Banadex port
personnel when the ship would be arriving and that while Banadex employees were not
needed to unload the shipment, their “cooperation” was necessary. See Memorandum
of KPMG Interview of [Chiquita Employee #1] (Nov. 14, 2003); Memorandum of KPMG
Interview of [Banadex Employee #9] (Mar. 17, 2003).
[Banadex Employee #5] said that the instructions about the need to cooperate
came from “Pedro,” or Raul Hasbún. [Banadex Employee #5] said that this confirmed
his growing suspicions that there was a direct connection between the convivirs and the
111
Manocha recalled only broad discussions of security payments, and did not remember
discussions specifically focusing on payments in Colombia.
112
See Rabasa & Chalk, at 35-37.
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AUC.113 [Banadex Employee #5] said that Chiquita personnel did not actually unload
the cargo; instead, “Pedro” and his associates unloaded it. According to [Banadex
Employee #5], after the cargo was unloaded, Pedro then called him and demanded that
the security camera videotape that had apparently recorded the incident be turned over.
After [Banadex Employee #5] provided the tape to Pedro, Pedro destroyed it in
[Banadex Employee #5’s] presence.
Robert Olson, who was told about this incident (but not about the videotape) by
either Hills or Robert Kistinger, asked Hills to investigate the legal implications. Hills
again sought the advice of the [outside] law firm of [ ] (as he had in May 2001 with
respect to the convivir payments). On July 6, 2001, Hills and [Chiquita Employee #1]
met with the [outside] lawyers. The meeting took place in Miami because the
Colombian attorneys refused to discuss their legal opinions over the phone or deliver a
copy of their opinion in Colombia, as they felt that the subject was “too dangerous” for
them to create any evidence of their involvement.
In a July 11, 2001 memo summarizing this meeting, Hills wrote that the [outside]
attorneys advised him that while the Company could face civil liability for the criminal
acts of its employees, “they believed that pressure on [its] employees [and the Company
itself], in terms of personal threats and destruction of property, made this a viable
defense to any criminal allegation.” Memorandum from David Hills to Robert Olson
(July 11, 2001). In addition, the Colombian attorneys advised him that although
Chiquita might have a general obligation under Colombian law to report the incident to
the authorities, it should refrain from doing so, as this could lead to (i) retaliation from
“political extremists” and (ii) the possible targeting of Chiquita by Colombian
prosecutors. Id.
Hills reported the advice that he received from [the outside law firm] to Olson
both orally and by memo. It is unclear from the documents and interviews conducted
by the SLC whether Chiquita ever reported this incident to the Colombian authorities,
although Olson said that he “considered the matter closed” after receiving Hills’ report.
2.
November 2001 Otterloo Incident
In the fall of 2001, a second arms smuggling incident occurred at a Banadex port
facility in Urabá. In November, a ship called the Otterloo sailed from Nicaragua to the
Banadex port. The Colombian authorities subsequently determined that the Otterloo
contained guns and ammunition that had been hidden in boxes filled with plastic (or
rubber) balls. It was later determined that this arms shipment was delivered to the
AUC. Based on the understanding that its shipping facilities had been used, and that
113
This is the same individual with whom [Banadex Employee #5] spoke in or around late 1999
regarding the demand for payments to the Santa Marta convivir. (See supra Section IV.E.).
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the Otterloo’s illegal cargo had been stored in one of its bonded warehouses, Chiquita
conducted an internal investigation into the incident. [Banadex Employee #10] and
[Banadex Employee #5]114 conducted this investigation.115 [A Banadex lawyer]
reviewed the investigation findings and concluded that the Chiquita employees who
were allegedly involved in the incident were not guilty of wrongdoing. He relayed
these findings to the Colombian authorities and Interpol, both of whom had contacted
Chiquita about its knowledge of the incident, and with whom the Company was
cooperating.
In May 2002, the Foreign Affairs Ministers of Panama, Colombia, and Nicaragua
contacted the Organization of American States (“OAS”) and asked it to investigate the
incident. After a thorough review, the OAS concluded that several Colombian customs
officials likely aided the AUC in smuggling the arms shipment into Colombia, but did
not conclude that Chiquita was involved in any wrongdoing. See The General
Secretariat, Report of the General Secretariat of the Organization of American States on the
Diversion of Nicaraguan Arms to the United Defense Forces of Colombia, CP/Doc. 3687/03
(Jan. 29, 2003). Unfortunately, a Chiquita employee was imprisoned for one year in
connection with the incident, but was eventually exonerated and released. Aside from
this unjustified imprisonment, no other Chiquita employees were charged or criticized
by the Colombian authorities in connection with the investigation. Olson, who learned
of the incident from [a Chiquita lawyer], believed that he reported it to Steven
Warshaw.
3.
June 2002 Drug Smuggling Incident
Banadex continued to experience issues with its port in Urabá, as in June 2002,
3,000 kilograms of cocaine were smuggled to Europe aboard a Chiquita vessel. The
drugs belonged to a third-party shipper that had purchased cargo space on a Chiquita
vessel from Commercial Liner Services, a Chiquita subsidiary that was responsible for
coordinating the Company’s shipping business.
Before the vessel left Colombia, one of Chiquita’s security employees informed
[Banadex Employee #10] and [Banadex Employee #5] that he had been threatened and
told not to inspect a container belonging to this shipper, and had been given money to
ensure his silence. To prevent retaliation against the employee, [Banadex Employee
#10] and [Banadex Employee #5] did not contact Colombian authorities to seize the
shipment in Colombia. Rather, during a previously scheduled trip with [Banadex
Employee #5] to Antwerp, Belgium, the ship’s destination, [Banadex Employee #10]
114
[Biographical and professional information on Banadex Employee #10]
115
[Banadex Employee #10] said that Chiquita did not produce a written report in connection with
this investigation.
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reported the incident to local authorities, who inspected the ship upon its arrival and
seized the smuggled drugs.
[Banadex Employee #5] later arranged a meeting with the AUC, which he
believed to be responsible for the shipment, in order to return the money that the
security employee had been given. At the meeting, the AUC – which had publicly
declared that it was strongly opposed to drug smuggling – denied responsibility for the
incident. Following this incident, at [Banadex Employee #10’s] recommendation, the
Company stopped allowing third parties to purchase cargo space on its vessels. Cyrus
Freidheim, Chiquita’s CEO at the time, reported this incident to the Board during a
conference call shortly after the incident occurred. Moreover, the incident was later the
subject of the DOJ investigation, but no charges were brought.
K.
FTO Designation – September 10, 2001
On September 10, 2001, the U.S. Department of State announced its designation
of the AUC as an FTO. See Designation of Foreign Terrorist Organizations, 66 Fed. Reg.
47,054 (Sept. 10, 2001). This represented a seminal change in the legal landscape under
which the payments to the convivir were made, as it had now become a felony to
knowingly provide “material support or resources” to the AUC.116
Shortly after the designation was announced, the Washington Post, Wall Street
Journal, and Cincinnati Enquirer published articles in which the designation of the AUC
was mentioned. For example, on September 19, 2001, the Washington Post published a
story that highlighted some of the issues associated with the AUC, a group which,
according to the article, many diplomats believed was “destined to become a legitimate
116
As noted above, 18 U.S.C. § 2339B provides, in part, that “[w]hoever knowingly provides
material support or resources to a foreign terrorist organization, or attempts or conspires to do
so, shall be fined under this title or imprisoned not more than 15 years, or both, and, if the death
of any person results, shall be imprisoned for any term of years or for life.” The term “material
support or resources” is defined in U.S.C. § 2339A(b)(1) as “any property, tangible or intangible,
or service, including currency or monetary instruments or financial securities, financial services,
lodging, training, expert advice or assistance, safehouses, false documentation or identification,
communications equipment, facilities, weapons, lethal substances, explosives, personnel (1 or
more individuals who may be or include oneself), and transportation, except medicine or
religious materials.” Former U.S. Secretary of State Madeline Albright created the first list of
designated FTOs in October 1997. At the time, the list was comprised of 30 groups. Since then,
the U.S. Secretary of State, in consultation with the Attorney General and Secretary of the
Treasury, has periodically reassessed the FTO list, adding or dropping organizations from the list
in their discretion. Currently, the FTO list is comprised of 42 organizations, including the FARC,
the ELN, and the AUC. See U.S. Department of State, 2001 Report on Foreign Terrorist
Organizations (Oct. 5, 2001), http://www.state.gov/s/ct/rls/rpt/fto/2001/5258.htm (last
visited February 6, 2009); U.S. Department of State, Foreign Terrorist Organizations,
http://www.state.gov/s/ct/rls/fs/37191.htm (last visited February 6, 2009).
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party in the country’s peace process,” despite its history of violence. At the same time,
the article made specific mention of the AUC’s “massacres” in Urabá, “a region valued
for its vast banana orchards and strategic position near the Panamanian border.” Scott
Wilson, Paramilitary Army Seeks Political Role in Colombia; AUC Wants Recognition, Vows
'More Civilized' Fight, WASHINGTON POST, Sept. 19, 2001 at A28.
The Wall Street Journal also ran several articles during this period, including on
September 24 and 26, 2001, that described the recent FTO designation of groups based
in Colombia, including the AUC. See Neil King Jr. and Jim VanderHei, Aftermath of
Terror: Allies Hope Antiterror Effort Won't Ignore Local Fights --- Some Question Wisdom of
U.S. Focus on Groups with 'Global Reach,' WALL ST. J., Sept. 26, 2001, at A10; Matt Moffett,
Colombia’s Woes Are Highlighted by Attacks on U.S., WALL ST. J., Sept. 24, 2001, at A18.
Finally, the Cincinnati Enquirer, in an October 17, 2001 article, reported on AUC
violence and stated that the group had recently been placed on the FTO list. See Kevin
G. Hall, Colombia's Right Turns Violent to Gain Recognition: Group Admits Killing in
Marxist Land, CINCINNATI ENQUIRER, Oct. 17, 2001, at A6.
As described below, even though the State Department publicly announced the
FTO designation and there were multiple reports by major local and national media
outlets, the SLC has concluded that no one in Chiquita senior management or the Board
became aware of the designation until late February 2003, nearly 18 months later. At
first blush, this seems improbable, but the SLC did not find any evidence to the
contrary. The SLC’s finding that no one in Chiquita senior management or on the
Board learned of the designation until February 2003 is based on the fact that DOJ,
during an investigation that lasted more than three years, failed to develop any such
knowledge, as reflected in the record of that investigation and the public documents
filed in connection with Chiquita’s guilty plea and sentencing in 2007. More
importantly, the SLC’s own independent review of documents and its extensive witness
interviews led to the same conclusion.
The DOJ Grand Jury Investigation. DOJ fully and thoroughly investigated the
issue of whether any individual at Chiquita had knowledge of the FTO designation
prior to February 2003; it was a principal focus of the investigation of the Company.
Ultimately, DOJ found no evidence to establish any such knowledge by either senior
management or the Board prior to February 2003. The factual proffer filed by DOJ,
which accompanied the Company’s guilty plea, states, “On or about September 30,
2002, Individual H” ([Chiquita Employee #1]) accessed the “Colombia—Update page”
of an Internet subscription service (of which the Company was a member), which
mentioned the U.S. Department of State’s decision in 2001 “to include paramilitaries
[the AUC] in its annual list of foreign terrorist organization.” Def. Factual Proffer, U.S.
v. Chiquita Brands Int’l, Inc., No. 07-055 ¶ 28 (D.D.C. Mar. 19, 2007) (hereinafter “Factual
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Proffer”). It further states that, on or about February 20, 2003, “Individual I” ([Chiquita
lawyer]) discovered that the AUC had been designated an FTO. See id. ¶ 55.
During its investigation, DOJ was not able to establish that, as a result of
accessing the webpage on or about September 30, 2002, [Chiquita Employee #1] actually
read about the designation. The SLC learned that during [Chiquita Employee #1’s] two
interviews with federal prosecutors, which occurred on or around June 2 and June 7,
2004, he stated that he was not aware of the designation until he was informed about it
by [the Chiquita lawyer], who, as will be discussed in detail below, discovered the
designation on February 20, 2003. [Chiquita Employee #1] gave the same explanation
during his grand jury testimony on November 2, 2005.117 The SLC is not aware of any
evidence gathered by DOJ establishing that [Chiquita Employee #1] learned of the
designation prior to [the Chiquita lawyer’s] February 20 discovery.
The SLC Investigation. The SLC was aware at the outset of its work that DOJ,
over the course of its investigation from 2003 through 2006, was unable to establish any
pre-February 2003 knowledge of the AUC’s FTO designation by management in
Cincinnati or the Board. Even so, the SLC independently investigated the issue. The
SLC and its counsel reviewed all documents produced to DOJ, and questioned all the
witnesses it interviewed who served at the Company during the relevant period as to
when they became aware of the FTO designation. Despite its considerable efforts, the
SLC found no documentary or testimonial evidence that any member of senior
management or the Board knew of the FTO designation before February 20, 2003.
During their SLC interviews, all members of senior management (Warshaw,
Kistinger, Riley, Olson, and Tsacalis) and the Board (Carl Lindner, Keith Lindner, Greg
Thomas, Manocha, Runk, and Verity) denied learning of the designation at the time it
was announced.118 [Chiquita Employee #1] passed away before he could be
interviewed by the SLC; however, as noted above, during his DOJ interviews and
117
The SLC did not have access to the transcript of [Chiquita Employee #1’s] grand jury testimony
(or the grand jury testimony of any other witness), but instead had access to a memorandum
summarizing [Chiquita Employee #1’s] attorney’s account of his grand jury appearance.
118
Olson said that he recalled seeking guidance from an outside law firm after September 11, 2001
regarding whether legal changes enacted post-September 11 imposed new legal requirements on
the Company. Although there is some support for Olson’s claim in the outside law firm’s billing
records, the lawyer on Olson’s staff who dealt with the law firm recalled the request for such
guidance being limited to licensing issues. See McDermott, Will & Emery LLP Invoice (Jan. 10,
2002).
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testimony before the grand jury, he denied knowledge of the FTO designation prior to
February 2003.119
In Colombia, media outlets carried news of the FTO designation more widely
than in the U.S. While certain Banadex employees learned of the designation from the
Colombian press, none of these employees understood the implication of the
designation with regard to the payments that the Company was making, or recalled
talking to anyone in Cincinnati about the designation. [Chiquita Employee #2] said that
he became aware of the designation in 2002, when it was widely reported in the
Colombian press that the European Union had designated the AUC, but not the FARC,
as a terrorist organization, and the press in the same articles reported that the U.S.
included both groups on its list of FTOs. [Chiquita Employee #2] said that he did not
understand the significance of the U.S. designation, and believed only that it imposed
restrictions on the terrorist groups themselves.
Thus, in sum, on the issue of when senior management and the Board first
learned of the AUC’s FTO designation, the SLC found that the first knowledge of the
designation of the AUC as an FTO by the U.S. Department of State at the Company
occurred on or about February 20, 2003.
L.
The Company’s Bankruptcy Reorganization and the New Board
Beginning in the summer of 2001, the Company’s financial position was
deteriorating substantially, and the prospect of a Chapter 11 bankruptcy filing became
increasingly likely. According to the evidence developed by the SLC, there were three
reasons for the Company’s financial problems during this period: (i) the decline in the
Company’s earnings in the mid-1990s, related, in part, to the debt it incurred in
expanding its ownership of farms and investing substantially in enlarging its fleet of
ships; (ii) the substantial destruction of the Company’s Honduran division by
Hurricane Mitch in 1998 and the decision to rebuild in that location; and (iii) the
deteriorating value of the Euro as compared to the dollar, which, because Chiquita’s
costs were dollar-based, affected its operating cash flow and the ability to refinance its
debt.
The Company’s financial problems dominated Board discussions during the fall
of 2001, and were discussed at three formal meetings from September 25, 2001 to
November 27, 2001. Ultimately, the Company, with the assistance of financial and legal
advisors, entered into negotiations with its bondholders, and reached a preliminary
119
The SLC learned that [Chiquita Employee #1’s assistant] also had access to Control Risk, the
Internet subscription service that, according to the factual proffer, was accessed on or about
September 30, 2002. However, as noted above, [Chiquita Employee #1’s assistant] passed away
in April 2007.
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agreement on how to restructure its debt. As a result, on November 27, 2001, the Board
approved the filing of a “prepackaged” Chapter 11 bankruptcy petition. Following
approximately four months in bankruptcy, on March 19, 2002, the restructured
Company emerged from Chapter 11 protection. See Minutes of Chiquita Board Meeting
(Nov. 9, 2001); Minutes of Chiquita Board Meeting (Nov. 27, 2001); Minutes of Chiquita
Board Meeting (Mar. 19, 2002).
As part of its restructuring, Chiquita’s bondholders selected five new
independent members for the Board – Cyrus Freidheim, who had recently retired as
Vice Chairman of Booz Allen Hamilton (“Booz Allen”), the well-known management
consulting firm; Robert Fisher, formerly a senior executive at Dole (one of Chiquita’s
competitors) with substantial experience in the fresh fruit industry; Morten Arntzen, at
the time, the CEO of a boutique investment advisory firm specializing in the shipping
industry; Jeffrey Benjamin, a partner at Apollo Management, the private equity firm;
and Roderick Hills, a lawyer and former high-ranking government official, who, among
other things, was the former Chairman of the SEC and counsel to President Gerald
Ford.120 Prior to their first Board meeting on March 19, 2002, the new directors met with
members of management and were briefed on several issues, but not on the payments
in Colombia.121
As one of its first acts, on March 19, 2002, the new Board sought and received the
resignation of the Company’s CEO, Steven Warshaw, who had also remained on the
Board.122 See Minutes of Chiquita Board Meeting (Mar. 19, 2002). It was the Board’s
view that it was appropriate to replace the CEO that had guided the Company
immediately preceding its bankruptcy. In addition, in their introductory meetings, the
new directors did not find Warshaw to be sufficiently open and forthcoming in
discussing the Company’s operations.
At the same time as it removed Warshaw, the Board appointed Cyrus Freidheim
as CEO. See id. Olson said that in late March or early April of 2002, prior to briefing the
Audit Committee about the payments in Colombia, he “fully briefed” Freidheim about
the convivirs, the paramilitaries, and the AUC and that, in addition, he “probably” told
120
Freidheim served as a director until May 2004 and was CEO, Chairman, and Chair of the
Executive Committee until January 2004, when Fernando Aguirre became CEO. Arntzen served
as a director until May 2008. Stanbrook currently serves as a director and was Chair of the
Compensation Committee until approximately November 2008. Hills served as a director and
was Chair of the Audit Committee until May 2007 (although he recused himself from Colombia
matters in late January 2007). Fisher currently serves as a director.
121
Benjamin said that he did not recall being briefed by Chiquita’s management prior to joining the
Board.
122
Carl Lindner remained on the Board briefly, until May 2002.
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him about the demand for cash payments in Santa Marta (discussed below). He
explained to Freidheim that the payments were a “fact of life” in Colombia. According
to Olson, Freidheim was “not happy” about this information, but he believed that the
Company’s course of action was “correct under the circumstances” and that the “most
important objective was to protect lives.” Olson said that Freidheim “always had
questions,” but could not recall him asking any specific questions during this briefing.
Freidheim recalled that Olson described the history of the payments and told
him that the payments raised no legal issues because the Company was being extorted.
Freidheim also recalled that Olson told him that the payments did not violate the FCPA,
the one U.S. law that Olson said could apply, because they were not payments to a
government entity.
M.
The New Audit Committee Learns of the Payments
1.
Demand for Cash Payments
During the spring of 2002, Banadex employees received a demand from the AUC
that ultimately led the Company to alter the procedures that it had used to make
payments to the AUC in Santa Marta. Originally, the Company made all AUC
payments (by check) to a convivir in Turbo,123 which then disbursed a portion of that
amount to the Santa Marta group. However, around this time, an AUC representative
informed [Banadex Employee #5] that the Santa Marta group was no longer receiving
its full share of funds from the Turbo convivir, and demanded that all future payments
intended for Santa Marta be made directly and in cash. See Memorandum of KPMG
Interview of [Banadex Employee #10] (Jan. 30, 2004).
[Banadex Employee #10] informed [Chiquita Employee #2] and [a Chiquita
lawyer] about the demand, and they, in turn, informed Olson and Tsacalis. As a result,
in March 2002, Tsacalis and [Chiquita Employee #2] designed, and Olson reviewed, a
set of procedures for making cash payments to the AUC in Santa Marta. These
payments were to be drawn from a “Gastos de Gerente”124 account used by Banadex’s
General Manager for travel and entertainment expenses, and would be subject to
accounting safeguards that went beyond those that were required for payments by
check. See Notes of [Chiquita Employee #2] (Mar. 28, 2002). Olson asked [a Chiquita
lawyer] to consult with [a Banadex lawyer] to ensure that this procedure was legal and
appropriate, and [the Chiquita lawyer] did so.
123
Documentary evidence shows that the Company made payments to La Tagua del Darién until
September 2001, at which point it began making payments to Asociación Papagayo, another
convivir in Turbo. Witnesses told the SLC that these two convivirs, and perhaps others in Turbo,
eventually merged.
124
Translated literally, “Gastos de Gerente” means “Manager’s Expenses.”
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In May 2002, [Chiquita Employee #2] approved the new procedure. In June,
[Banadex Employee #10] began to use funds from the Gastos de Gerente account, into
which a portion of his salary had been paid, in order to pay the AUC. His salary was
then “grossed up” to compensate for what would otherwise have been a shortfall in his
income. See KPMG Sensitive Payments Schedule; Supplemental Thompson Submission.
2.
The Audit Committee Learns of the Payments
and the New Payment Procedures
At an April 23, 2002 meeting of the Audit Committee, which was now comprised
of Roderick Hills, Morten Arntzen, and Jeffrey Benjamin, Olson discussed the payments
in Colombia for the first time. E&Y was also present at this meeting. While none of the
committee members specifically recalled the discussion, it appears that, during the
course of Olson’s FCPA report, the directors were told about the Santa Marta group’s
demand for cash payments and the new procedures that would be used to make the
payments. See Minutes of Chiquita Audit Comm. Meeting (April 23, 2002); Notes of
Steven Kreps (April 23, 2002); Factual Proffer ¶ 26.
According to Olson, he advised the committee that the payments to
paramilitaries were legal under both the FCPA and Colombian law. Olson also
discussed convivirs, and told the directors that the Company originally believed them
to be government-sponsored organizations hired to help protect Chiquita personnel
against violence in Colombia, but subsequently learned they were being used to
support paramilitaries. None of the committee members recalled being particularly
alarmed by Olson’s report at this meeting. The Audit Committee continued to be
apprised of the convivir payments through Olson’s regular FCPA reports at Audit
Committee meetings going forward.
N.
Acquisition of Atlanta AG
One of the first issues the new Board focused on in the spring of 2002 was the
Company’s interest in Atlanta AG, its largest distributor in Europe, which was based in
Germany. Prior to its 2003 acquisition, Chiquita effectively owned substantially all of
the economic interest in Atlanta through a five percent limited partnership interest in
Scipio, the parent of Atlanta, and loans secured by substantially all of the other limited
partnership interests in Scipio. The borrowers had used the proceeds of these loans
from Chiquita to purchase their limited partnership interests in Scipio in the late 1980s
and early 1990s. Scipio and Atlanta were controlled by an official of Atlanta by virtue
of his ownership of the general partnership interest in Scipio. Until mid-2002, Chiquita
kept its ownership interest in Atlanta confidential because the Company did not want
to damage Atlanta’s relationship as a distributor with its other customers, who were
also Chiquita’s competitors.
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Upon joining the Board, Hills became concerned about whether Chiquita had
sufficiently disclosed its relationship with Atlanta, which, as an accounting matter, had
been blessed by the Company’s outside auditors, E&Y. In addition, by 2002, Atlanta
had run into financial difficulty, and management became concerned that Chiquita’s
investment was at risk.
In a series of Board and Audit Committee meetings, from late May 2002 through
early September, Chiquita’s directors conducted a review of Chiquita’s accounting and
disclosures regarding its investment in Atlanta and debated whether to acquire Atlanta.
As a result of this review, the Board and Audit Committee determined that the
accounting was proper, but that Chiquita’s interest in Atlanta should be fully disclosed
in the footnotes to Chiquita’s financial statements, which was done in an SEC filing on
August 14, 2002. See Minutes of Chiquita Board Meeting (May 23, 2002); Minutes of
Chiquita Board Meeting (July 3, 2002); Minutes of Chiquita Board Meeting (Sept. 4,
2002); Chiquita Brands Int’l, Inc., Quarterly Report (Form 10-Q) (Aug. 14, 2002).
The Company retained the consulting firm Booz Allen to advise the Board with
respect to its options for Atlanta, which included selling its interest in Atlanta,
acquiring control of Atlanta, or walking away from its investment in Atlanta. Booz
Allen presented its advice to the Board at meetings in July and September. See Minutes
of Chiquita Board Meeting (July 3, 2002); PowerPoint Presentation, Booz, Allen &
Hamilton (July 3, 2002); Minutes of Chiquita Board Meeting (Sept. 4, 2002); PowerPoint
Presentation, Booz, Allen & Hamilton (Sept. 4, 2002). Prompted by Hills’ concerns
regarding the sufficiency of the Company’s disclosure and management’s concerns
about Atlanta’s continuing viability, and based on advice from Booz Allen, the Board
determined that the Company should acquire control of Atlanta by acquiring all the
partnership interests in its parent, Scipio.
At a September 4, 2002 Board meeting, the Board approved Chiquita’s
acquisition of 100% of the equity in Scipio. See Minutes of Chiquita Board Meeting
(Sept. 4, 2002). This transaction, completed in March 2003, was accomplished by
exchanging Chiquita’s loans for the underlying Scipio limited partnership interests and
purchasing the Scipio general partnership, at a total cash cost of approximately $1
million. After the sale was complete, Chiquita also paid off Atlanta’s $65 million in
outstanding debt. See Chiquita Brands Int’l, Inc., Quarterly Report (Form 10-Q) (Aug.
14, 2002); Chiquita Brands Int’l, Inc., Annual Report (Form 10-K) (Mar. 31, 2003).
O.
Discovery of the FTO Designation
In early 2003, about six months after the Company began making cash payments
to the AUC in Santa Marta, [Banadex Employee #10] became increasingly
uncomfortable with the payment method that grossed up his salary, and his concerns
were communicated to management in Cincinnati, including Olson, Riley, Kreps [and a
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Chiquita lawyer]. [Banadex Employee #10] felt that internal and government records
showing the amounts of money flowing to him, including for salary and the AUC
payments, exposed him to increased risk of kidnapping or other harm. See
Memorandum of KPMG Interview of [Banadex Employee #10] (Jan. 30, 2004).
In response to these concerns, [a Chiquita lawyer], and other personnel in
Cincinnati, began exploring various other options for making the payments, including
the possibility of bringing cash into Colombia. See Notes of [Chiquita lawyer] (Jan. 30
and Feb. 3, 2003). At this time, [the Chiquita lawyer] asked B&M to update and clarify
its prior memo regarding extortion payments, which it did. See Memorandum from F.
Miguel Noyola to [Outside Counsel #3] (Feb. 4, 2003). While reviewing payment
options, [the Chiquita lawyer] ran Internet searches for information on paramilitaries in
Colombia. Late in the day on February 20, 2003, during one of these searches, [the
Chiquita lawyer] came across a reference to the AUC’s FTO designation. [The Chiquita
lawyer] said he had not previously known about the FTO list generally, much less
about the specific designation of the AUC.
The next morning, [the Chiquita lawyer], reported his discovery to Olson, who
directed him to contact K&E. As noted above, prior to this conversation, Olson, like
[the Chiquita lawyer], had not been aware that the State Department kept a list of
designated FTOs, or that the AUC was on such a list. Olson was upset and concerned
about the discovery.
Later that same day, [the Chiquita lawyer] spoke with Laurence Urgenson of
K&E, who represented Chiquita in the SEC investigation that was settled in October
2001. Although Urgenson was not familiar with either the legal framework of the FTO
statute, 18 U.S.C. § 2339B, or the AUC, based on what [the Chiquita lawyer] told him
about the statute, Urgenson advised [the Chiquita lawyer] that the Company should
presume that it was violating the law by making the payments. See Notes of [Chiquita
lawyer] (Feb. 21, 2003). Following the call, Urgenson instructed his associate, Audrey
Harris, to conduct research to learn more about § 2339B.
On February 25, Harris provided the preliminary results of her research to [the
Chiquita lawyer] (Urgenson was traveling at the time). Harris’s talking points for the
call, which she prepared after consulting Urgenson, state: “Bottom Line: CANNOT
MAKE THE PAYMENT.”125 Memorandum from Audrey Harris to File (Feb. 26, 2003);
see also Notes of [Chiquita lawyer] (Feb. 25, 2003). According to Harris, this was the
main point she made to [the Chiquita lawyer] during the call. During this call, [the
Chiquita lawyer] and Harris also discussed the relationship between the AUC and
125
Harris told the SLC that she prepared her talking points prior to the call as an outline for her
discussion with [the Chiquita lawyer]. The document was then revised after the call to include
the substance of their discussion.
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convivirs. Harris advised [the Chiquita lawyer] that the Company could not make the
payments through convivirs, because the law did not allow the Company to do
indirectly what it could not do directly. See Memorandum from Audrey Harris to File
(Feb. 26, 2003); Notes of [Chiquita lawyer] (Feb. 25, 2003). Harris’s talking points were
featured prominently in the factual proffer that accompanied Chiquita’s guilty plea. See
Factual Proffer ¶ 56.
Immediately upon being told by [the Chiquita lawyer] that the AUC was on the
FTO list, Olson suspended all payments to “paramilitaries.” But he did not expressly
order that the payments to the convivir stop, because, he said, he failed to recall the
connection between the Turbo convivir and the AUC that had been explained to him in
the Thomas Memo in September 2000. Because Olson did not specify that the payments
to the convivir must stop, local management interpreted his order to suspend payments
to paramilitaries as applying only to the direct AUC payments in Santa Marta.
Accordingly, only payments to the AUC group in Santa Marta were suspended during
this time,126 and on February 25, the same day as [the Chiquita lawyer’s] discussion
with Harris, the Company made a $17,541 payment to the convivir Asociacion
Papagayo. See KPMG Sensitive Payments Schedule.
Another payment was made to Asociacion Papagayo on March 10. See id. Olson
said that a short time later, as a result of conversations with [Chiquita Employee #1], he
was reminded that the convivir payments, or at least some portion of them, were going
to the AUC. Olson then expressly suspended payments to the convivir. Thus, two
payments were made to the convivir after Olson had learned of the FTO designation.
In the weeks that followed, Chiquita and K&E had frequent, and at times tense,
discussions concerning the appropriate response to the FTO discovery. They covered a
variety of topics during these discussions, including (i) potential legal defenses, and in
particular a duress defense, (ii) exit strategies and business alternatives for the
Company to consider in Colombia, (iii) issues relating to the disclosure of the FTO
designation to the Board, (iv) how to deal with the issue of whether to continue making
the payments, and (v) whether DOJ had a policy for dealing with companies that were
being extorted. See Notes of Audrey Harris (Apr. 4, 2003); Memorandum from Audrey
Harris to File (Mar. 27, 2003); Notes of [Chiquita lawyer] (Mar. 26, 2003); Memorandum
from Audrey Harris to File (Mar. 11, 2003).
By all accounts, Olson was extremely concerned about the potential lethal
consequences of stopping the payments. He believed, as he had for many years, that
126
As a result of Olson’s directive, [Banadex Employee #5] met with AUC representatives and told
them that Banadex was having legal problems and the payments would be delayed as a result.
The AUC representatives told [Banadex Employee #5] that Banadex would have to find a way to
continue to make the payments.
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stopping the payments would put the Company’s Colombian employees at risk, and
pressed Urgenson on his advice that the Company could not continue to make the
payments. Urgenson explained to Olson and [the Chiquita lawyer] that, in his
judgment, the Company had two options: (i) stop the payments, or (ii) approach the
government and obtain clearance from DOJ to make the payments. See Notes of
[Chiquita Lawyer] (Feb. 27, 2003); Memorandum from Audrey Harris to File (Mar. 27,
2003); Memorandum from Audrey Harris to File (Mar. 11, 2003).127 Urgenson, Harris,
Olson, and [the Chiquita lawyer] had numerous discussions about the best way to
approach the government and disclose the payments, and the Company ultimately
decided that, in the first instance, it would approach the DOJ on an anonymous basis.
See Memorandum from Audrey Harris to File (Mar. 27, 2003); Notes of [Chiquita
lawyer] (Mar. 5, 2003).
While these discussions were continuing, approximately three weeks after [the
Chiquita lawyer’s] discovery, on March 13, Olson, for the first time, briefed Freidheim
on the payments and the discovery of the FTO designation. According to Freidheim, he
asked Olson what the designation meant for Chiquita, and Olson advised him that the
designation meant that “the law would prohibit the payments the Company had been
making.” Freidheim told Olson that he should inform the Audit Committee of the FTO
designation, and Olson told him that he already planned to do so. See E-mail from
Audrey Harris to Laurence Urgenson (Mar. 13, 2003).
1.
Disclosure to the Audit Committee
Approximately five weeks after the FTO designation was discovered, in early
April, Olson informed Audit Committee Chair Roderick Hills that the Company had
discovered that it had been making payments to an FTO. At the time, Hills incorrectly
assumed that the discovery of the FTO designation had been made a very short time
before Olson had told him about it, and not more than a month earlier.
Olson explained that he delayed informing Hills about the FTO designation
because it was his practice to collect as much information on an issue as he could before
presenting the issue to the Audit Committee. Olson explained that he wanted to be
prepared to answer questions from the committee and recommend a course of action,
127
The Amended Complaint alleges that “Chiquita’s outside counsel Laurence Urgenson of K&E in
Washington, D.C. told the Chiquita Defendants on at least five occasions in February and March
of 2003 that Chiquita’s payments to the AUC were illegal and had to stop!” Am. Compl. ¶ 9
(emphasis in original). This is not accurate. Rather, as reflected in the contemporaneous
documentary evidence and confirmed by Urgenson to the SLC, he advised the Company that it
either had to stop making the payments or approach the DOJ, which the Company did. For
example, [a Chiquita lawyer’s] notes of a call with Urgenson in late February reflect the
following: “LU: Two approaches: 1. Stop conduct, make record of stopping it. 2. Continue, but
get ruling from gov’t.” Notes of [Chiquita lawyer] (Feb. 27, 2003).
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rather than just presenting an issue without a solution.128 Olson said that as long as the
Company took steps to ensure that no further payments were made during this time,
the Company would not be prejudiced by the delay, and said he thought that he was
proceeding in a rational and methodical way that would lead to an appropriate
disclosure to the Board. At various times before Olson finally notified Hills and the
Audit Committee, Urgenson urged Olson to do so promptly and briefly considered
whether, under the Sarbanes-Oxley Act, he might have an independent obligation to do
so if Olson did not. See Memorandum from Audrey Harris to File (Mar. 27, 2003).
After being briefed by Olson, Hills contacted Audit Committee members
Arntzen and Benjamin to brief them on the issue. According to Arntzen and Benjamin,
Hills told them that the Company had discovered that payments being made in
Colombia were being made to an organization that had been designated as a terrorist
organization, and that it was very clear that the payments were illegal and could no
longer be made.
2.
Anonymous Disclosure to DOJ
On April 2, 2003, Urgenson and Harris met with Michael Taxay, a line prosecutor
in the Counter-terrorism Section of DOJ’s Criminal Division. See Memorandum from
Audrey Harris to File (Apr. 2, 2003). When speaking with Olson, Hills had argued
against this course of action because he was concerned that contacting DOJ on an
anonymous basis – as the Company planned to do – would make it appear that the
Company was attempting to avoid disclosure entirely. Hills’ view was that the
Company was going to make full disclosure in any event, so that nothing was gained by
proceeding on an anonymous basis at the outset.
During the April 2 meeting, Urgenson provided Taxay with a brief overview of
the Company’s situation, without any identifying information about the Company or
specifying the country involved. See id. In response, Taxay said that DOJ’s likely view
would be that the payments were, at a minimum, a “technical violation” of § 2339B. Id.
Taxay also stated, however, that whether DOJ would prosecute was a matter that
would have to be discussed with more senior DOJ officials. Urgenson left the meeting
with the understanding that DOJ was open to the possibility that there were
circumstances under which, pursuant to the exercise of prosecutorial discretion, it
would not prosecute a violation of the statute. After the meeting, Taxay called
Urgenson to follow up: he said that DOJ would be hesitant to give a company a
complete “pass” given the purpose of § 2339B. See id.; Notes of Audrey Harris (Apr. 4,
2003).
128
Olson told the SLC that his predecessor as General Counsel had been criticized by the Board for
raising issues without having answers.
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Disclosure to the Board
On April 3, 2003, the Audit Committee held a regularly scheduled meeting.
Because of the importance of the Colombia issue, the meeting, although nominally an
Audit Committee meeting, was attended by the full Board.129 See Minutes of Chiquita
Audit Comm. Meeting (Apr. 3, 2003). In addition to the five directors who joined the
Board upon the Company’s exit from bankruptcy (Morten Arntzen, Jeffrey Benjamin,
Cyrus Freidheim, Robert Fisher, and Roderick Hills), the Board now included Durk
Jager, the former CEO of Procter & Gamble, Jaime Serra, Chairman of SAI Consulting, a
law and economics consulting firm, and Principal of the NAFTA Fund, a private
investment fund,130 and Steven Stanbrook, a senior executive with S.C. Johnson & Son, a
consumer goods company.
Olson provided the Board with a briefing of the Colombia situation, focusing on
the discovery of the FTO designation and its implications for the Company. Olson’s
briefing was based on a detailed set of talking points that he had prepared in advance of
the meeting. See Robert Olson Talking Points (Apr. 3, 2003). During his presentation,
Olson addressed various issues relating to the payments and the specific problems
created by the discovery of the FTO designation. Olson described the history of the
payments, including the reasons why the Company believed they were necessary and
appropriate; he told the Board about the Company’s legal analysis that established that
the payments were not illegal under Colombian law; he advised the Board of the recent
discovery of the AUC’s FTO designation; he reported on the April 2 meeting with
Taxay; and, at least according to his talking points, he told the Board about the current
status – that the payments had been delayed while the Company determined the
appropriate course of action. See id.
The Board members who attended the meeting confirmed that Olson generally
covered the various issues raised by the talking points, although their collective
recollection was that his presentation was not as detailed as suggested by the talking
points. At the conclusion of the presentation, both Olson and Hills recommended that
the Company disclose the fact of the payments to DOJ. The Board discussed the issue,
and left the meeting with the understanding that the Company would approach DOJ to
make a full and voluntary disclosure of the Company’s predicament in Colombia and
seek guidance on how to proceed.
129
Olson told the SLC that it was typical for Board members to attend the Audit Committee
meetings when, as here, there was a Board meeting on the same day.
130
Serra was also formerly a senior-level Mexican government official. He became Mexico’s
Undersecretary of Finance in 1986. He was appointed Minister of Trade and Industry in 1988,
and held this position until 1994, when he became Minister of Finance, a position he only held
briefly due to a financial crisis in Mexico. As Minister of Trade, Serra helped implement the
recently-passed North American Free Trade Agreement of 1992.
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The evidence is mixed as to what Hills and Olson told the Board regarding
whether the payments were continuing. Pursuant to Olson’s direction, the payments
had stopped, and although his talking points cover that point, it is not clear what he
said about it to the Board. Directors had varying recollections on this important point.
For example, Arntzen said that Hills clearly stated that Chiquita could not continue to
make payments because doing so was illegal; as a result, he assumed that the payments
had stopped. Stanbrook said that, while he did not recall a specific discussion
regarding whether payments could continue, he similarly assumed that they had
stopped because they were illegal.131 In contrast, given the reason stated for the
payments, Benjamin assumed that they were continuing.
4.
Continuing Communications Regarding the Payments
Following the April 3 Board meeting, Chiquita executives and K&E continued to
discuss how to go about disclosing the matter to the government and what it should do
about making further payments. Although the Company’s legal posture had changed
once the FTO designation had been discovered, conditions on the ground had not.
Pressure to resume making the payments continued, with concerns being expressed by
Banadex personnel in Colombia that further delays in making the payments posed
grave threats to the Company’s personnel.
During an April 4 call, Olson told the K&E lawyers about the different aspects of
the problem and the pressures that he was feeling. See Notes of Audrey Harris (Apr. 4,
2003). Olson told Urgenson and Harris that Hills believed that he could approach the
State Department on an anonymous basis to get its reaction to Chiquita’s situation,
which might be helpful in dealing with DOJ. Olson also said that, as a result of
discussions with [Chiquita Employee #1], he had been reminded that the convivir to
which the Company had been making payments in Urabá was closely linked to the
AUC; as a result, the Company had the same problem in Urabá as it had in Santa Marta
– it was making payments to an organization on the FTO list. Finally, Olson discussed
the intense pressures he was feeling to approve a payment that personnel in Colombia
were advising needed to be made by the end of the following week. See id.
Olson and Urgenson discussed whether the Company should make this
payment. Olson, by all accounts genuinely and profoundly concerned about the safety
131
Stanbrook offered somewhat conflicting testimony on this point. In his first SLC interview,
Stanbrook said that there was no discussion of whether or not the payments were continuing;
rather, “this was left unsaid.” In his second interview, Stanbrook said that Olson’s discussion of
whether Chiquita continued to make payments after its self-disclosure “was very opaque.”
Stanbrook said that he believed that the payments had stopped, but that this was “just an
impression,” and he could not point to a specific discussion that led him to think that Chiquita
was no longer making payments.
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of the Company’s employees in Colombia, suggested that various changes in payment
procedures might allow the Company to make an additional payment; Urgenson
advised that the problem was the payment itself, not the procedures used to make it,
and firmly opposed making another payment. See id.
Olson told Urgenson and Harris that he, Hills, and Freidheim all believed that
the Company should make the payment, even if there was a risk that DOJ would later
decide to prosecute the Company.132 See id. However, neither Freidheim nor Hills
recalled expressing this view to Olson. Olson recalled expressing the view that he did
not believe that making another payment would tip the balance in favor of prosecution,
and thought that if it did, the Company would be prepared to defend its decision to
make the payment. The call became so heated that Urgenson and Harris recalled that,
out of frustration, Olson hung up on them; although Olson acknowledged that he
became very upset during the call, he said he did not recall hanging up.
On April 8, 2003, Kistinger, Olson, [the Chiquita lawyer], and [Chiquita
Employee #1] met in Cincinnati with [Banadex Employee #5] and [Banadex Employee
#10], who had flown up from Colombia to discuss the impact of the FTO designation on
Banadex’s ability to continue to make the payments. See Memorandum from [Banadex
Employee #10] to File (Apr. 9, 2003). The purpose of the meeting was for [the Banadex
employees] to explain why the payments were necessary, and to confirm the continuing
threat to Chiquita employees if payments stopped. According to [Banadex
Employee #10’s] memo of the meeting, the group discussed (i) the organization of the
AUC, (ii) the Company’s review of the legality of the payments, (iii) possible
alternatives for making the payments, and (iv) issues related to the continuation of the
payments. See id. Olson reported that he came away from the meeting with the belief
that the threat of harm continued to be real and that the payments were necessary.
[Banadex Employee #10] said that he came to the meeting with the pressing need
to obtain clear guidance about whether the payments, which had been suspended,
could be resumed. He said that at the end of the meeting, he specifically sought that
guidance, and that he and [Banadex Employee #5] were told by either Olson or
Kistinger that the payments could be continued, which is what his memo of the meeting
reports. See id. Multiple witnesses said that they believed that [Banadex Employee #10]
belatedly produced this memo just prior to his interview with DOJ and not during the
132
Indeed, Harris’s notes of the call state: “BO thinks it will be impossible to clear this before making
next payment. His and Rod’s opinion is just let them sue us, come after us. This is also CEO’s
opinion.” Notes of Audrey Harris (Apr. 4, 2003). This statement was cited by DOJ in the factual
proffer without any context. See Factual Proffer ¶ 60. As Olson explained to the SLC, and as
discussed above, this note is a truncated version of what was actually a much more nuanced
conversation. However, in contrast to Olson, both Urgenson and Harris recalled that Olson said,
“let them sue us” on the call.
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Company’s initial document collection efforts, implying that [Banadex Employee #10]
created this memo after the fact to protect himself, and that he falsified the portion of
the memo that suggested that Kistinger or Olson approved resuming or continuing the
payments at that time.133 Kistinger and Olson stated unequivocally that they did not
authorize continuing the payments at the April 8 meeting, and neither [Banadex
Employee #5] nor [the Chiquita lawyer] recalled that they did so. In any event, the
payments were not resumed until early May, after the Company met with DOJ, as
described below.
P.
Disclosure to DOJ
1.
April 24, 2003 Meeting with Michael Chertoff
On April 24, representatives from Chiquita met with Assistant Attorney General
(“AAG”) Michael Chertoff, the head of DOJ’s Criminal Division. Hills, who had known
Chertoff for approximately 25 years (they had worked together at the same law firm at
one time), arranged the meeting to inform DOJ that Chiquita had made payments to the
AUC, an FTO, and to seek DOJ’s guidance on how to proceed. See Memorandum from
Audrey Harris to Robert Olson and [Chiquita lawyer] (May 20, 2003).
Hills said that he thought disclosure at the level of AAG Chertoff was
appropriate not because of their past relationship but because Chertoff was positioned
high enough in the DOJ hierarchy to address the broader policy implications of the
Company’s predicament in Colombia. Hills, Olson, Urgenson, and Harris attended the
meeting on behalf of the Company. In addition to Chertoff, Deputy Assistant Attorney
General Alice Fisher, Barry Sabin, Chief of DOJ’s Counterterrorism Section, David
Nahmias, Counsel to the Assistant Attorney General, and Michael Taxay attended the
meeting on behalf of DOJ. See id.
The SLC interviewed Olson, Hills, Urgenson, and Harris in detail about the
meeting, almost certainly the most significant single event the SLC examined during
this investigation, and had access to Harris’s detailed memo summarizing it.134 The
recollection of these four witnesses was generally quite consistent, with only relatively
133
There is no evidence that the payments were resumed until a full month later, and neither Olson
nor Kistinger disputed the fact that the resumption of the payments, when it occurred in early
May, was fully understood and anticipated.
134
Harris prepared a memo of this meeting from her handwritten notes taken during the meeting,
which she then discarded. The memo was not finalized until May 20, 2003, one month after the
meeting occurred. Harris’s memo erroneously described Nahmias as “an unidentified FBI
agent.” She later discovered Nahmias’s true identity, which she shared during her SLC
interview.
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minor differences and discrepancies.135 Providing an overview, Olson described the
meeting as having three distinct parts: (i) a beginning, during which DOJ officials
reacted in a hostile manner; (ii) a middle, during which Olson and Hills were able to
explain Chiquita’s situation and DOJ officials appeared to “soften;” and (iii) an end,
during which Chertoff acknowledged that the situation was “complicated” and agreed
to get back to the Company regarding the policy issues it had raised.
At the outset of the meeting, Hills and Olson explained the history and
mechanics of Chiquita’s payments to the AUC (including its payments to convivirs).
Olson described incidents of paramilitary intimidation and harassment of Banadex
employees. See id. As Hills and Olson moved through their presentation, they
responded to various questions and points made by the government representatives.
For example, Nahmias asked what the AUC’s reaction would have been if Chiquita had
been forced to stop payments immediately because of a criminal prosecution. Hills said
that “the AUC would kill the people — someone would get shot.” Id. Chertoff
commented that he did not see Chiquita’s case as one of true duress, because the
Company had a legal option — to withdraw from Colombia. Hills said that Chiquita
was prepared to sell its Colombian operations if “it came to that,” but asked that, given
the foreign policy implications of a withdrawal of a significant U.S.-based multinational
corporation from Colombia, Chertoff first discuss this issue with other agencies of the
government concerned with foreign policy and national security matters, including the
National Security Council (“NSC”). Hills offered to contact the NSC himself, but
Chertoff said, “No, let us take it up to them.” Id.
With respect to continuing payments, Olson told the DOJ officials that he did not
see how the statute could force an American company to stop making the payments
when the result of doing so would be that employees would be killed. Chertoff
responded that the payments were “a crime” and that he “just wanted Chiquita to be
alert to the fact that DOJ would probably not be able to okay the payments going
forward.” Id. Hills responded that if DOJ sought to enforce a “black and white rule”
against making payments to the AUC or another FTO in Colombia, the result would be
a “mass exodus” of U.S. companies from Colombia. Id. Chertoff responded, “You’re
quite right, this is a much heavier meeting than I thought,” and acknowledged that
future payments were a “complicated issue.” Id.
Urgenson suggested that Chiquita could envision assisting the government in
“some kind of undercover scenario,” although it would obviously have concerns about
135
Indeed, initially the SLC felt that it would be important to obtain testimony from the government
officials who attended this meeting and sought to do so through the Touhy process, as described
above. However, the need to speak with the government representatives was substantially
reduced once the SLC determined that there was no material dispute about what occurred or was
said at the meeting.
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the safety of its employees in any such operation. Id. Urgenson argued that Chiquita’s
willingness to cooperate, together with the duress under which payments had been
made, should cause DOJ to understand the full complexity of the situation. Urgenson
also told the DOJ officials about the legislative testimony of Occidental Petroleum, an
oil company operating in Colombia. Urgenson said that Occidental had addressed a
similar extortion problem by making payments through its employees and contractors,
and Hills suggested that Chiquita could do the same thing. Chertoff interrupted by
saying, “It’s illegal, it’s an illegal act.” Id. Chertoff then “[gave] an indication” that this
statement did not mean that DOJ would seek enforcement for historic payments, but
added that he “could not say to Chiquita to go ahead and make the payments going
forward.” Id.
At the end of the meeting, Chertoff thanked the Chiquita representatives for
coming, and said that he would get back to them. The DOJ officials requested that the
Company provide them with the legislative testimony that Urgenson referenced and
“anything about the other ways other companies in Colombia work out this type of
situation.”136 Id. After the meeting, Taxay followed up with K&E regarding this
request. Taxay indicated in a later phone call to K&E that he had drafted a memo
regarding the meeting and “the issue was now at a policy level above his involvement.”
Id.
2.
Reactions to the Chertoff Meeting
The meeting at DOJ – and the interpretation of its meaning by Hills, Olson, and
Urgenson – had an enormous influence on the Company’s actions in the months that
followed, and ultimately became a source of fierce controversy between DOJ and the
Company. Olson and Hills were encouraged by the government’s reaction to the
Company’s plight, especially by AAG Chertoff’s acknowledgement, implicit in his
agreement to speak with the NSC, that the matter raised foreign policy issues, not
simply criminal enforcement issues. Olson and Hills were both very pleased, in
general, with how the meeting went, and where it ended, with Chertoff seeming to
recognize the moral complexity of the situation faced by the Company. In addition,
they both felt that the Company had, at a minimum, deferred the day when the decision
to leave Colombia had to be made until the Company heard back from DOJ.
Hills recalled that he clearly and firmly said at this meeting that as long as
Chiquita was in Colombia, it would have to continue making the payments; he said that
it was inconceivable that DOJ did not understand that payments would have to
136
According to a letter sent the following day from Urgenson to Taxay, in response to DOJ’s
request for additional information about Occidental, the federal government had, according to
news reports, appropriated $93 million to protect Occidental’s pipeline. See Letter from Larry
Urgenson to Michael Taxay (Apr. 25, 2003).
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continue. He recalled that Chertoff said that he could not condone the payments, but he
would consider exercising prosecutorial discretion in the Company’s favor and not
charging the Company with violating the statute. Hills said that he did not specifically
ask Chertoff whether payments could continue because he knew that DOJ could not
explicitly authorize conduct that constituted a crime, and he did not want to ask a
question that would back the government into a corner and force it to provide a
negative response. Hills stated that Chertoff’s parting words were that this was a
problem that he needed to discuss outside of DOJ, and that he would get back to
Chiquita. See Letter from Roderick Hills to Laurence Urgenson, Elliott Leary, and
Ronald Goldstock (Jan. 7, 2004).
Olson said that, although Chertoff said that the payments to the AUC were a
crime, and that he was not sure that he could authorize payments going forward, he did
not take this as a prohibition against future payments. Instead, Olson took it as a soft
restatement of the proposition that the government could not explicitly authorize illegal
conduct. Olson said that while he did not expect the government to explicitly authorize
payments going forward, and acknowledged that the government in fact did not do
this, he believed the government understood that, while Chiquita was waiting for an
answer, it would have to continue the payments. He believed that the government was,
in effect, condoning the payments until they finished reviewing the issue with other
agencies in the government.
Urgenson’s general view was that the government’s reaction was more
understanding and sympathetic than it might have been. Urgenson said that both
Chertoff and Taxay (i) stated that the Company’s conduct was a “technical violation” of
§ 2339B, (ii) suggested by words and demeanor that enforcement against historic
payments was unlikely, but (iii) suggested that toleration of payments going forward
was also unlikely. Urgenson also said that Chertoff acknowledged that the situation
was “complicated” and implicated policy concerns that should be vetted with other
agencies in the government. See K&E Talking Points (Sept. 2003).
In Urgenson’s view, Chertoff did not foreclose the possibility that Chiquita
would be allowed to make payments in the future. Like Hills and Olson, Urgenson left
the meeting feeling optimistic that, while the government had not authorized
continuing the payments, it had reacted more positively than it might have. Urgenson
believed that, in light of how the meeting ended – with Chertoff agreeing to make
contact within the government on the policy implications of forcing the Company to
leave Colombia – Chiquita would in the very near future have another meeting with the
government. The SLC found no evidence that there were any discussions among Olson,
Hills, Urgenson, or anyone else in the Company about whether the payments could
continue while the Company waited to hear back from the government.
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Report to the Audit Committee
Olson updated members of the Audit Committee on the meeting with Chertoff
during an April 30, 2003 Audit Committee meeting. Audit Committee members
Arntzen, Benjamin, Hills, and Stanbrook attended. Freidheim, Riley, Olson, Tsacalis,
and Kreps also attended the meeting, along with representatives from E&Y.137 See
Minutes of Chiquita Audit Comm. Meeting (Apr. 30, 2003).
Kreps’s notes of the meeting reflect that Olson told the directors that his
conclusion after the Chertoff meeting was that Chiquita would have “no liability for
past conduct.” Notes of Audit Comm. Meeting (Apr. 30, 2003). However, Olson later
said that he did not say – and did not mean to suggest – that DOJ had provided
assurances that there would be no prosecution for the past payments; instead, he
believes he said that past payments were a technical violation, but that, based on the
statements by the government representatives at the meeting, he felt hopeful that the
Company was unlikely to be charged for the past payments and that DOJ was focusing
on what to do about the continuing payments. None of the Committee members
recalled Olson stating definitively that the Company would not be held liable for past
payments, and Hills said that, if Olson had made such a statement, he would have
corrected him. However, the Committee members recalled that they had the
impression that the Company was handling the situation correctly and that prosecution
for past payments was unlikely.
There were significant differences among the Audit Committee members and
management personnel who attended the meeting regarding what the Committee was
told about whether the payments would resume while the Company waited for a
response from the government. Kreps’s notes state that the directors were told that,
during the Chertoff meeting, there was “no conclusion on continuing the payments.”
137
Then-senior E&Y auditor Christopher Reid said that E&Y first learned that payments to the AUC
were illegal under U.S. law at an Audit Committee meeting in April or May 2003. The April 30
meeting, which is the first Audit Committee meeting attended by E&Y at which the illegality of
the payments was discussed, is most likely the meeting where E&Y learned that the payments to
the AUC were illegal. Once E&Y learned that payments to the AUC were illegal, according to
Reid, it considered them to be qualitatively material. The fact that the payments were
qualitatively material meant that E&Y was obligated to investigate, among other things, (i) what
steps the Company had taken to fix any internal control problems that had allowed it to make
illegal payments, (ii) what steps it was generally taking to address the situation, and (iii) the
“financial statement ramifications” of any potential fines and penalties that might result from the
illegal conduct. Reid said that E&Y believed that the Company was taking adequate steps to
review its internal controls and otherwise address the problem, including hiring KPMG to
perform a thorough forensic review of its control procedures and disclosing the payments to the
DOJ. E&Y did not believe that the payments were material from a financial-reporting
perspective, even though they were illegal.
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Id. However, Olson did not recall a discussion at this meeting about resuming the
payments. Hills said he did recall such a conversation, and said that, while there was
no official discussion or decision made at any Board or Audit Committee meeting that
specifically authorized the Company to resume payments, the Committee knew, given
the security situation, that the payments had to continue and was allowing them to be
made. Hills said that he did not view continued payments as a problem at this point
because the Company had fully disclosed the facts and the issues to DOJ and was
awaiting its response.
Arntzen and Benjamin recalled being told that DOJ had not given Chiquita a
final opinion on whether it would be able to continue making payments. As noted
above, Benjamin was under the impression that the payments were continuing at this
time, but Arntzen said he believed that the payments had stopped. Arntzen did not
explain how he believed the payments could be suspended indefinitely given the
pressures he had previously been told existed in Colombia to make the payments or
risk damage to life and property. Stanbrook did not recall the discussion at the
meeting.
In addition, several directors also recalled a discussion at this meeting regarding
a possible sale of Banadex. The notes of the meeting reflect that Hills stated: “Worst
case get out of Colombia.” Notes of Audit Comm. Meeting (Apr. 30, 2003). In some
directors’ view, because of the size and scope of Chiquita’s operations in Colombia, it
would be irresponsible to attempt to sell Banadex before the Company had all the facts
regarding the payments and before it had heard back from DOJ.
Q.
Payments in Colombia Resume
In early May 2003, [Banadex Employee #10] traveled to San Jose, Costa Rica on
business. According to a memo to file by [Banadex Employee #10], during an
impromptu meeting with [Chiquita Employee #2] on May 5, he and [Chiquita
Employee #2] called [a Chiquita lawyer] in Cincinnati to ask what to do about
continuing the payments, which had been suspended for close to two months.
According to [Banadex Employee #10], [the Chiquita lawyer] told him to resume
making the payments. See Memorandum from [Banadex Employee #10] to File (May
10, 2003). [Chiquita Employee #2] also recalled this meeting, and said that it was his
impression that [Banadex Employee #10] had already been given authorization to make
another payment, but wanted confirmation from [the Chiquita lawyer]. The records of
the Company reflect that, on May 8, 2003, the payments to the convivir in Turbo and to
the AUC in Santa Marta resumed. See KPMG Sensitive Payments Schedule.
Notwithstanding the importance of the issue, the SLC was unable to determine
who authorized the resumption of the payments. [Banadex Employee #10] said that he
assumed that [the Chiquita lawyer] would not have given him that directive without
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authorization from Olson, but did not know, in fact, whether Olson had given such
authorization. [The Chiquita lawyer] did not recall the conversation with [Chiquita
Employee #2] and [Banadex Employee #10], and did not recall ever giving anyone
“advice” on whether to stop or continue the payments. [The Chiquita lawyer]
confirmed that, if he had given such advice, he would have first consulted his superiors,
such as Olson. Olson said that while he did not believe that the Colombian employees
would have resumed making payments without authorization, he did not recall
authorizing them to do so. Olson said that the payments would not have resumed
without authorization from Freidheim, Hills, and probably Kistinger as well.
Freidheim said that he did not recall authorizing the resumption of the
payments, was not aware who did so, and was not aware who relayed the word to
Colombia that it was permissible to resume the payments. Freidheim said that, at that
point, the Audit Committee was directing the Company’s actions with respect to the
payments. Likewise, Kistinger said that he did not recall authorizing the resumption of
the payments, was not aware who did so, and was not aware who relayed the word to
Colombia that it was permissible to resume the payments. Hills said he did not
specifically authorize the resumption of the payments, assumed that someone in
management had done so, but did not know who and never inquired further about who
authorized the resumption of the payments; he considered the resumption of the
payments as correct and uncontroversial and therefore viewed the process by which the
payments were resumed as an administrative detail, not an Audit Committee or Board
matter.
In short, based on the interviews of all the key participants, and a review of all
relevant documents, the SLC was unable to resolve the important factual issue of who
authorized the resumption of the payments.
R.
Additional Public Disclosures Regarding Colombia
The Audit Committee met on May 12, 2003 to review the Company’s Form 10-Q
filing for the first quarter of 2003. Directors Arntzen, Benjamin, Hills, and Freidheim
attended. Riley, Olson, Tsacalis, and Kreps also attended, along with representatives
from E&Y. See Minutes of Chiquita Audit Comm. Meeting (May 12, 2003).
The Audit Committee focused on specific language, which was to be added to
the risks and assumptions section of the 10-Q, to more accurately reflect the risks that
the Company faced in various parts of the world, including most specifically Colombia.
See id. To the list of factors previously listed, the Company proposed adding the
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following: “the potential impact of political instability and terrorist activities.”138 Id.
Olson recalled that Peter Atkins at Skadden, Arps, Slate, Meagher & Flom LLP
(“Skadden”), Chiquita’s disclosure counsel, drafted the proposed language and did not
recall any debate or discussion among the Audit Committee members about the
proposed language. However, Hills recalled that he continued to be “uncomfortable”
with this disclosure because it did not provide “enough information.” Hills said that he
discussed the language “at great length” with Atkins, and gained comfort that the
disclosure was legally sufficient. Neither Benjamin nor Arntzen had a specific
recollection of this meeting, but recalled generally that the Company was continuously
updating its disclosures as new, material risks arose.
As a result of the meeting, the proposed language was added to the 10-Q, which
was filed with the SEC on May 15, 2003. As discussed further below, this language was
expanded upon in later disclosures throughout 2003 and 2004.
S.
Further Contact with the Government
1.
Call from Chertoff
During June, July, and August 2003, the Company had a series of contacts with
senior officials at DOJ, each of which gave the Company reason to believe that its
situation was being considered at the highest levels of DOJ.
138
In its entirety, with the new language, the disclosure would read:
This quarterly report contains certain statements that are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are subject to a number of assumptions, risks and
uncertainties, many of which are beyond the control of Chiquita, including: the
impact of changes in the European Union banana import regime expected to
occur in connection with the anticipated enlargement of the E.U. in 2004 and the
anticipated conversion to a tariff-only regime in 2006; prices for Chiquita
products; availability and costs of products and raw materials; currency
exchange rate fluctuations; natural disasters and unusual weather conditions;
operating efficiencies; labor relations; the continuing availability of financing; the
Company’s ability to realize its announced cost-reduction goals; actions of U.S.
and foreign governmental bodies including in relation to, and the potential impact
of political instability and terrorist activities on, the Company where it has
international operations; and other market and competitive conditions. The
forward-looking statements speak as of the date made and are not guarantees of
future performance. Actual results or developments may differ materially from
the expectations expressed or implied in the forward-looking statements, and the
Company undertakes no obligation to update any such statements.
Chiquita Brands Int’l, Inc., Quarterly Report (Form 10-Q) (May 15, 2003)
(emphasis added).
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In early June 2003, Hills received a phone call from Chertoff, who had been, or
was about to be, confirmed to a seat on the U.S. Court of Appeals for the Third
Circuit.139 Chertoff told Hills that he had briefed Deputy Attorney General Larry
Thompson, the second-most senior official at DOJ, on Chiquita’s situation, and advised
Hills to contact Thompson if he felt “uncomfortable” about the status of the matter.
Hills said that he asked Chertoff if there was any reason why he should feel
uncomfortable, and Chertoff told him that there was not, that Chiquita had “done the
right thing,” and that DOJ was still consulting and considering the issue. Hills reported
the substance of this conversation to Olson and to the Audit Committee. Although
there is no written record of this call, Olson and Urgenson recalled hearing about the
substance of the conversation from Hills.
According to Hills, a few weeks after this call, he saw Chertoff at a dinner party
to celebrate his appointment to the bench. Hills said that Chertoff initiated a
conversation with him about Chiquita, and that Chertoff reiterated that he should feel
free to speak with Thompson. Hills said that, at the dinner, he also mentioned
Chiquita’s situation to Attorney General John Ashcroft, who, according to Hills,
thanked the Company for its cooperation. Hills told the SLC that he was not sure if
Ashcroft was “just being polite or if he really remembered Chiquita’s case.” Hills said
that he reported this to the Board and to Olson as well. Again, although there is no
record of this contact, Olson recalls hearing about it from Hills.
2.
Call from Alice Fisher
On July 2, 2003, Urgenson called Alice Fisher to check on the status of DOJ’s
review and spoke to Fisher briefly. Fisher let him know that Larry Thompson had been
briefed on the situation; that Chertoff’s replacement as head of the Criminal Division,
Christopher Wray, would likewise be briefed; and that she would call shortly to set up a
meeting to “work this out.” Notes of K&E (July 2, 2003); see also Notes of Audrey Harris
(Aug. 4, 2003). Fisher also indicated that DOJ “intended to cooperate with Chiquita to
find a satisfactory solution.” Notes of K&E (July 2, 2003). Urgenson described Fisher’s
tone as friendly and conciliatory. See Notes of Audrey Harris (Aug. 4, 2003). According
to Urgenson, Fisher never followed up to schedule a meeting.
Urgenson briefed Olson on this call, informing him that DOJ was focused on
Wray’s confirmation hearing, but had passed the Chiquita file on to Thompson. Olson
said his understanding was that the call was “friendly” and consistent with the tone at
the end of the Chertoff meeting.140
139
The Senate confirmed Chertoff on June 9, 2003.
140
Hills said he was not informed about this phone call prior to his meeting with Thompson on
August 26, 2003, discussed below. Both Urgenson and Olson recall that Urgenson’s call to Fisher
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By this time, more than two months had passed since the April 24 meeting with
Chertoff and the payments were continuing, but no one at the Company was concerned
or alarmed because they had made a full voluntary disclosure to the government, and
based on their contacts with senior DOJ officials, the Company knew that the matter
was still under review by the government and did not believe that the additional
payments were creating additional risks for the Company.
3.
July 8, 2003 Audit Committee Meeting
The Audit Committee was briefed again on the situation when it met next on
July 8, 2003. Audit Committee members Arntzen, Hills, and Stanbrook attended this
meeting, as did Riley, Olson, Tsacalis, and Kreps, along with representatives from E&Y.
According to the minutes, Olson provided an update on the Colombia situation and
presented the FCPA payment summaries for the third and fourth quarters of 2002 and
the first quarter of 2003. See Minutes of Chiquita Audit Comm. Meeting (July 8, 2003).
Investigation Update. According to Kreps’s notes, Olson reported that the DOJ
officials that the Company had been in touch with were “in transition,” and that the
Company was in the process of arranging a meeting with Larry Thompson. See Notes
of Chiquita Audit Comm. Meeting (July 8, 2003). The Audit Committee raised several
questions, including whether (i) there was a chance the AUC would be removed from
the FTO list, (ii) the Company should evaluate withdrawing from Colombia, and (iii)
the Company’s disclosures regarding the investigation were adequate. See id. In
response, according to Kreps’s notes, Olson and Hills reported that (i) there was no
possibility the AUC would be removed from the FTO list, (ii) the Company had been
approached by C.I. Banacol S.A. (“Banacol”), a Colombia-based banana producer,
regarding a sale and the Company was exploring this option, and (iii) the Company had
made “opaque” disclosures regarding the situation, a reference to the expansion of the
risks section in its most recent 10-Q to include the general reference to political
instability and terrorist activities. See id.
Withdrawing from Colombia. Audit Committee meeting attendees recalled that
directors Stanbrook and Serra raised the idea of exiting Colombia more than once,
although they could not recall specifically at which meetings they raised the issue.
Arntzen believed that Stanbrook and Serra were very uncomfortable during the period
when the Company was waiting to hear back from DOJ, while other directors, such as
was prompted by discussions that they had with Hills. This is confirmed by K&E billing records
and contemporaneous notes from a July 1, 2003 call between Urgenson and Hills. See Notes of
K&E (July 2, 2003). Urgenson told the SLC that he conveyed the substance of the call to the
Company immediately, and the implications of the call were discussed at length on an August 4
conference call with Olson, [a Chiquita lawyer], and attorneys from Skadden. See Notes of
Audrey Harris (Aug. 4, 2003).
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he and Hills, wanted to obtain all the facts, including a response from DOJ, prior to
taking action.
“Opaque Disclosures.” Neither Olson nor Hills recalled using the word
“opaque” to describe the Company’s disclosures, and both said that they do not believe
they would have used that word. In addition, none of the directors questioned about
this meeting recalled the word “opaque,” or anything to that effect, being used at this
meeting or ever, to describe the Company’s disclosures. To the contrary, the directors’
general sense was that the Company was trying to be as transparent as possible, and
that any “opacity” in the disclosures arose from the Company’s concerns about its
employees’ safety.
FCPA Report. The FCPA Summary of Payments provided to the Audit
Committee and reviewed at this meeting lists payments to the “Papagayo Association, a
‘convivir’” in the amount of $25,688 for the third quarter of 2002 and $108,125 for the
fourth quarter of 2002, periods that pre-dated the Company’s discovery of the AUC’s
FTO designation. FCPA Summary of Payments (Q3 and Q4 2002). The convivir is
described as a “government licensed security provider.”141 Id. Olson could not recall
why the convivir was described this way in the report, and the committee members did
not recall a discussion of the convivir payments at this meeting.
T.
Initial Banacol Proposal
As the Audit Committee was told at the July 8 meeting, the Company had
already begun a dialogue with Banacol about a potential transaction involving Banadex.
1.
Initiation of Negotiations
In September 2002, Banacol had approached Chiquita, through director Robert
Fisher, to express their interest in acquiring Banadex, but, other than an introductory
meeting, the parties did not pursue discussions at that time. During a June 5, 2003
conference call, Kistinger and Olson, for the first time, informed [Chiquita Employee
#2] and [Banadex Employee #1] about the DOJ investigation. Kistinger informed
[Chiquita Employee #2] that the Company might have to sell Banadex, and asked him
to begin assessing potential buyers. See Banacol Deal Chronology (May 10, 2004).
[Chiquita Employee #2] said that he believed that in April 2003 he had asked Banacol to
submit a written proposal to the Company based on Banacol’s unsolicited approach in
2002. On June 11, 2003, Banacol sent Chiquita a document entitled “General
Negotiation Frame and Issues to be Defined.” This was a “conceptual document”
outlining issues to be addressed during negotiations for a possible sale of Banadex,
141
[A Chiquita lawyer] and Kreps were now responsible for compiling this report based on
information supplied by the Company’s Colombian employees.
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rather than a formal proposal. See Memorandum from Banacol to Chiquita (June 11,
2003).
2.
Concerns Raised by Colombian Employees
According to a memo to file prepared by [Banadex Employee #10], on August 13,
2003, he met with Kistinger, Freidheim, Manuel Rodriquez, and Jorge Solergibert in
Panama and discussed the risks associated with any decision to stop the payments to
the AUC pending a sale to Banacol. See Memorandum from [Banadex Employee #10] to
File (Aug. 16, 2003). [Banadex Employee #10] clarified during his SLC interview that
this was not an official “meeting,” but that it took place “at a bar” following meetings
regarding other business. During the conversation, prompted by a question from
Kistinger, [Banadex Employee #10] expressed his concern that a sale would not reduce
the risk to the people on the ground in Colombia, and that paramilitaries might decide
to extort Chiquita while they still had the chance; alternatively, they might “turn
around” and extort Banacol for the money Chiquita had not paid. Id. [Banadex
Employee #10] testified before the grand jury in the DOJ investigation that he said
during this conversation that he might be able to delay payments to the AUC during the
transition period following the sale of Banadex, but that he did not mean to convey that
it was safe to stop making the payments at that time.
[Banadex Employee #10’s] memo also stated that Freidheim expressed the view
during this informal conversation that it was unlikely that the government would
pursue Chiquita for continuing to make the payments. However, Freidheim said he did
not recall this conversation or making any such comments. Kistinger recalled that
Freidheim was, in general, concerned during this discussion.
According to [Banadex Employee #10’s] memo, Rodriguez offered to contact
Chris Arcos, a former U.S. ambassador to Honduras who was working in the U.S.
Department of Homeland Security, to obtain the views of someone outside DOJ who
was familiar with Latin American issues regarding the risk that Chiquita would be
“pursued” for making the payments. Freidheim asked Rodriguez to do so as soon as
possible. See id. According to Kistinger, after the meeting, he and Rodriguez contacted
Arcos. However, the SLC found no evidence that Chiquita received any guidance or
counsel from Arcos.
3.
Initial Proposal From Banacol
On August 23, 2003, Banacol sent Chiquita a detailed, formal proposal for the
purchase of Banadex, and the parties spent the next several months negotiating the
terms of a potential deal. In its initial proposal, Banacol offered to purchase Banadex’s
farms for $76 million in total consideration (comprised of $54 million in cash and $21.61
million in preferential discounts on the purchases of Banacol pineapples), and to enter
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into an eight-year fruit purchase agreement whereby, following the sale, Banacol would
supply Chiquita with bananas at a premium, above-market price. See Banacol Proposal
(Aug. 23, 2003).
The Company’s Banacol “deal team” was comprised of [Chiquita Employee #2],
[Banadex Employee #1], John Byerly, Jimmy Medrano, and [a Banadex employee]. See
E-mail from John Byerly to Robert Kistinger, et al. (Sept. 5, 2003).142 On September 5,
2003, Byerly circulated an analysis of the deal, prepared by the team, to senior
management, including Olson, Kistinger, and Freidheim. See id. Kistinger believed that
Banacol’s proposal was a reasonable and serious first offer. [Chiquita Employee #2],
who was not initially an advocate of the sale, said that, at the outset, he thought that
Banacol would try to “steal” Banadex, but that his concern “dissipated somewhat” as he
came to understand that Banacol was a serious purchaser.
[Chiquita Employee #2] was largely responsible for negotiating the terms of the
sale. He discussed the progress of the sale with Kistinger and other members of
Chiquita management, but was given a great deal of autonomy. All of the directors
interviewed by the SLC stated their belief that the Company vigorously and responsibly
negotiated the sale of Banadex. During 2003 and early 2004, the Company did not share
with Banacol that its interest in selling Banadex was substantially greater because of the
pressure imposed by the Company’s discovery of the FTO designation and its
disclosure to DOJ. Thus, at the outset, the DOJ investigation did not play a role in the
negotiation.
Over time, several key issues needed to be negotiated, including, among many
others, (i) the amount of the up-front payment from Banacol to Chiquita, (ii) the
contract purchase price for bananas and pineapples,143 and (iii) several joint venture
issues.144 In particular, the amount of the up-front payment was aggressively
negotiated, with Chiquita pushing for a higher up-front payment, and offering in
exchange to pay a greater premium price on the bananas to be purchased under the
supply contract in the future. Kistinger and Freidheim advocated for a higher up-front
payment/high purchase price, believing that this would provide better long-term value
to Chiquita. Kistinger believed that a higher up-front payment was highly preferable
142
John Byerly was a financial analyst in Chiquita’s Treasury Department. Jimmy Medrano was a
financial analyst in Costa Rica. [Banadex Employee] was the [ ].
143
As part of the deal, Banacol also agreed to supply Chiquita with MD2 pineapples (a new, sweeter
variety of pineapple that at the time was relatively scarce) at a discount. This discount added
significant value to the deal for Chiquita.
144
The ultimate disposition of these joint ventures was “critical” to the sale price because they
collectively produced a significant amount of bananas. Chiquita was ultimately able to resolve
joint venture ownership issues to Banacol’s satisfaction.
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because he thought it unlikely that Banacol would be able to deliver all of the boxes it
had promised over the life of the purchase contract due to uncontrollable factors such as
weather and labor disruptions; and, as a result, the overall amount paid by Chiquita
under the supply contract would be reduced. The terms of the deal would continue to
be negotiated over the coming months.
U.
Additional Public Disclosure
1.
August 4, 2003 Call between Olson, K&E, and Skadden
During the summer of 2003, to raise capital, Chiquita considered a convertible
bond offering because of favorable rates on the bond markets. Though quite separate
from the issues relating to Colombia, the potential bond offering again raised the issue
of what disclosures were necessary and appropriate regarding the situation in
Colombia.
On August 4, 2003, Olson, [the Chiquita lawyer], Urgenson, and Harris
participated on a conference call with Peter Atkins and David Friedman of Skadden,
Chiquita’s disclosure counsel, to discuss the potential bond offering. Urgenson said
that this was a narrowly focused call to determine whether Chiquita needed to make
any new disclosures regarding the DOJ investigation before proceeding with the
offering. According to notes of the call, Urgenson told Olson and the Skadden
attorneys that (i) he had not heard anything in his discussions with DOJ that would lead
him to believe that DOJ intended to prosecute Chiquita, and (ii) that in the event of a
prosecution, Chiquita had good, but untested, duress arguments. However, Urgenson
cautioned the participants that it would be prudent to get clarity from DOJ before going
forward with the bond offering. See Notes of [Chiquita lawyer] (Aug. 4, 2003); Notes of
Audrey Harris (Aug. 4, 2003). Chiquita ultimately abandoned the bond offering for
market reasons.
2.
August 12, 2003 Audit Committee Meeting
On August 12, 2003, the Audit Committee met, with members Arntzen,
Benjamin, Hills, and Stanbrook attending. Also present were Riley, Olson, Tsacalis, and
Kreps, along with representatives from E&Y. The purpose of this meeting was to
review proposed revised disclosures for Chiquita’s Form 10-Q for the second quarter of
2003, which was to be filed that day. See Minutes of Chiquita Audit Comm. Meeting
(Aug. 12, 2003). According to Olson, the bond offering and advice from Skadden and
Urgenson, as discussed on the August 4 conference call, prompted this discussion.
After repeating the risk factors that since May had included the references to
instability and terrorism, the additional draft disclosure language reviewed by the
Audit Committee stated: “The Company is currently dealing with one such issue,
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which it has brought to the attention of the appropriate U.S. authorities. Management
does not currently believe that this matter will have a material effect on the Company.”
Id. 145 According to Kreps’s notes, Olson stated: “Added ‘currently’ to disclosure to
inform that this is a ‘changing’ event.” Notes of Chiquita Audit Comm. Meeting (Aug.
12, 2003). Olson said that a more accurate recording of what he said with respect to the
disclosure would have been that the situation could change, not that it was changing.
According to the notes, Hills said that he “believes this is a proper disclosure.”
Id. Hills said that as the disclosures evolved and grew more specific over time, he felt
increasingly comfortable with them. At all times, he felt comfortable that the Company
was consulting with well-qualified lawyers who were experienced in the disclosure
area. Arntzen, Benjamin, and Stanbrook did not have a specific recollection of this
meeting, but generally recalled that the Company’s disclosures were discussed.
In addition, Olson also gave another update on the DOJ investigation. He
expressed concern about the turnover at DOJ because it impaired the Company’s ability
to continue its discussion. According to Kreps’s notes, Olson noted that the Company
needed “more input from DOJ indicating their probable stance.” Id.
V.
Further Communication with the Government
1.
Call from Taxay
On August 18, 2003, Michael Taxay of DOJ called Urgenson and told him that he
had met with Christopher Wray about the Chiquita matter. Taxay invited Urgenson to
participate in what he characterized as “working-level discussions.” Notes of [Chiquita
lawyer] (Aug. 18, 2003). On this call, Urgenson asked Taxay if he knew the status of the
145
The full text of the disclosure states:
The Company has international operations in many foreign countries, including
those in Central and South America, the Philippines and the Ivory Coast. These
activities are subject to risks inherent in operating in these countries, including
government regulation, currency restrictions and other restraints, burdensome
taxes, risks of expropriation, threats to employees, political instability and
terrorist activities, including extortion, and risks of action by U.S. and foreign
governmental entities in relation to the Company. Should such circumstances
occur, the Company might need to curtail, cease or alter its activities in a
particular region or country. Chiquita’s ability to deal with these issues may be
affected by applicable U.S. laws. The Company is currently dealing with one such
issue, which it has brought to the attention of the appropriate U.S. authorities.
Management does not currently believe that this matter will have a material effect on the
Company.
Chiquita Brands Int’l, Inc., Quarterly Report (Form 10-Q) (August 12, 2003)
(emphasis added).
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meeting that Fisher had promised to arrange on a call a month earlier. Taxay said that
although he was unaware of Fisher’s July call with Urgenson, Taxay wanted to meet
with Urgenson to continue discussions between DOJ and the Company. See id.
2.
August 26, 2003 Meeting with Larry Thompson
Interested in continuing discussions at higher levels of DOJ on the policy issues
the Company had initially raised in April, following the August 12 Audit Committee
meeting, Hills contacted DOJ to set up a meeting with Deputy Attorney General Larry
Thompson. On August 26, 2003, Hills and Olson met with Thompson and his Chief of
Staff, Stuart Levy. The main purpose of the meeting was to confirm that DOJ was
continuing to explore the policy issues raised by Chiquita at the April meeting with
AAG Chertoff. See Roderick Hills Talking Points (Aug. 26, 2003).
Based on his talking points, at the outset of the meeting with Thompson, Hills
described the Company’s disclosure to Chertoff, including that Chertoff’s preliminary
view was that “the Department is unlikely to prosecute us for the past; it is possible that
Chiquita would be asked to depart the country; and the Department will appreciate our
assistance in future investigations.” Id. Hills said that he might have told Thompson
that his understanding was that prosecution for past payments was unlikely in an effort
to “smoke him out” to see if he would say that DOJ was, in fact, not considering a case
against the Company.146
Hills discussed the policy issues raised by Chiquita’s situation – specifically, the
concern that if Chiquita were forced to leave Colombia, it “would likely cause an
exodus from the country of US based companies.” Id. In response, Thompson told
Hills and Olson that DOJ was considering Chiquita’s policy arguments, but that DOJ
could not simply accept Chiquita’s assertions and make a decision on how to dispose of
the matter without doing fact-finding of its own. According to the notes taken at the
meeting by Olson, Thompson went on to say that the “Criminal Division needs to do its
job – need to verify facts.” Notes of Robert Olson (Aug. 26, 2003).
Significantly, Thompson then added that Chiquita “did [the] right thing” and
was “not [a] subject or target” of a DOJ investigation at the time. Id.147 Given that the
146
Hills told the SLC that the description of the Chertoff meeting in his talking points was an
accurate statement of what he said about that meeting to Thompson. Olson did not recall that
Hills described the Chertoff meeting as aggressively as he had described it in his talking points.
147
The United States Attorneys’ Manual (“USAM”) defines a target as “a person as to whom the
prosecutor or the grand jury has substantial evidence linking him/her to the commission of a
crime and who, in the judgment of the prosecutor, is a putative defendant.” The USAM defines a
subject of an investigation as “a person whose conduct is within the scope of the grand jury’s
investigation.” USAM, Title 9, Section 11.151. Generally, lawyers representing companies and
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Company had previously admitted to violations of law in making payments to the
AUC, this was an extraordinarily encouraging statement for the Deputy Attorney
General to make. Not surprisingly, Olson said that he came away from this meeting
“feeling good” because Thompson had (i) complimented the Company for doing the
right thing and voluntarily disclosing the payments, (ii) allayed his concerns about a
potential investigation, (iii) said that the matter was “still active at the highest levels” of
DOJ, and (iv) said that the Company was, at least at that time, neither a subject nor a
target.
Olson and Hills did not recall Thompson specifically asking if the payments were
continuing, but both told the SLC that there was no doubt in their minds, based on the
timing and context of the meeting, that Thompson knew that they were. Hills and
Olson drew comfort from the fact that Thompson did not say either that the payments
must stop or that the Company would be prosecuted if the payments continued. The
SLC has no basis, one way or the other, to judge the reasonableness of this view.
Urgenson, who originally expected to go to the meeting, said that Olson had told
him about the substance of the meeting and that he understood that the “upshot” was
that Chiquita learned it was not a subject or a target. Urgenson recalled that he felt
“fairly optimistic” after receiving Olson’s report of the meeting.
In yet another departure of a senior DOJ official that appeared somewhat
sympathetic to Chiquita, Thompson left his position as Deputy Attorney General just a
few days after the meeting took place, at the end of August.148
3.
September 4, 2003 Meeting with Taxay and Beasley
Following their August 18 call, on September 4, 2003, Urgenson and Harris of
K&E met with Taxay, Assistant U.S. Attorney (“AUSA”) John Beasley of the U.S.
Attorney’s Office for the District of Columbia, Transnational/Major Crimes Section, and
Kevin Currier of the Federal Bureau of Investigation (“FBI”). The purpose of this
meeting was to discuss the factual investigation that DOJ planned to conduct, consistent
with Larry Thompson’s suggestion that DOJ had to engage in fact-finding of its own to
test the representations the Company had made to DOJ. See Memorandum from K&E
to Robert Olson and [a Chiquita lawyer] (Sept. 8, 2003).
individuals attach great significance to these categories, and being advised that one’s client is
neither a subject nor a target is the comfort that criminal defense lawyers seek.
148
By the end of August, the three most senior officials with whom the Company had dealt –
Thompson, Chertoff, and Fisher – had left DOJ. Chertoff left in June, Fisher left at the end of July,
and Thompson left at the end of August. Thompson then served as a senior fellow at the
Brookings Institute for a year, where Cyrus Freidheim served as a director, and then joined
Pepsico, Inc. as General Counsel.
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At the meeting, Taxay told Urgenson that he wanted the facts “soup to nuts,”
which Urgenson interpreted to mean that DOJ wanted all relevant facts so that it could
evaluate Chiquita’s duress claims. Id. Urgenson understood that the investigation
would be a significant effort, and that although DOJ wanted to take the lead on the
investigation generally, Chiquita would be an active, rather than a passive, participant.
Prior to the meeting, Urgenson had anticipated that the status of the payments
would be discussed at the meeting and asked Olson whether the payments were
continuing, and Olson told him that they were.149 During the meeting, Taxay asked
about the payments and Urgenson confirmed that they were continuing. However,
Urgenson added that if Taxay gave the Company a directive with respect to the
payments, he would relay this directive to his client. Taxay declined to do so. Instead,
he merely repeated the guidance provided by Chertoff at the April 24 meeting, that
continuing to pay the AUC constituted a violation of the law. Taxay added that, at that
time, he could not say that the Company would be able to continue making the
payments. See id. Urgenson was frustrated with what he viewed as DOJ’s refusal to
provide Chiquita with any real guidance with respect to continuing the payments, and
felt that this was a “key development” to relate to Chiquita. Urgenson said that he left
this meeting with the sense that, if Chiquita continued to make payments, it
“proceed[ed] at [its] own risk.” Id. On the other hand, Taxay had specifically declined
to tell Urgenson that the payments must stop.
Olson’s principal reaction to Urgenson’s report of the meeting was concern over
the amount of work that would be involved in the DOJ investigation. Olson was
comforted, however, by Urgenson’s characterization of the DOJ officials as
“sympathetic.” With respect to continuing the payments, Olson believed that Taxay’s
statements – parroting what Chertoff had said more than four months earlier but going
no further – were designed to preserve DOJ’s options. Olson believed that DOJ could,
at any time, have told the Company to stop making the payments, but did not do so.
W.
September 2003: Retention of K&E and KPMG By the Audit Committee
1.
September 8, 2003 Letter from Hills to Freidheim
In a letter dated September 8, 2003, Hills told Freidheim that he had asked Olson
to allow the Audit Committee to conduct an investigation into the payments “to
provide independent confirmation of the facts.” See Letter from Roderick Hills to Cyrus
149
Urgenson said that, before the meeting, Olson had cautioned him not to mention this fact unless
Taxay asked about it, but Urgenson planned to disclose the fact that payments were continuing
even if Taxay did not ask. In contrast, Olson said that, in a conversation prior to this meeting, he
and Urgenson discussed that it would be “useful” at this meeting to “confirm the government’s
understanding” that payments were continuing.
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Freidheim (Sept. 8, 2003). Hills made it clear that the Audit Committee, and not
management, should conduct the investigation. Hills explained to the SLC that he
wanted the Audit Committee to conduct the investigation because management, apart
from Freidheim, was “compromised” by its involvement in making the payments that
DOJ was beginning to investigate; by contrast the Audit Committee was independent
from management and had no such involvement. Freidheim had no objection to that
arrangement.
2.
September 17, 2003 Audit Committee Meeting
On September 17, 2003, the Audit Committee held a regularly scheduled meeting
with directors Hills, Arntzen, Benjamin, and Stanbrook present, along with Freidheim,
Riley, Olson, Tsacalis, Kreps, and representatives from E&Y. According to the minutes,
Olson introduced Urgenson to the Audit Committee “and [Olson and Urgenson] gave
an update on a situation involving the Company’s Colombian subsidiary, Banadex.”
Minutes of Chiquita Audit Comm. Meeting (Sept. 17, 2003). This was the first Audit
Committee meeting attended by Urgenson.
At the meeting, the Audit Committee approved retaining K&E to “represent the
Company, under the direction of the Committee,” with respect to issues that had arisen
in Colombia. Id. 150 The Audit Committee met with Urgenson in executive session prior
to the meeting to discuss the Committee’s concerns, felt most acutely by Hills, that
K&E’s prior relationship with management, particularly with Olson, might impair its
ability to work directly with the Audit Committee. Urgenson said he was
“comfortable” that he could independently represent the Company, and believed that
the reporting structure established – whereby he represented the Company, but
reported to the Audit Committee – was appropriate under circumstances where it was
possible that senior members of management might have engaged in improper conduct.
Urgenson said he had the sense that the Audit Committee understood the nature and
severity of the issues involved, and felt that the group as a whole was well-informed.
Urgenson then reported on his September 4 meeting with DOJ.151 Kreps’s notes
of the meeting state: “9/4 meeting at DOJ – counterterrorism division; need to embark
150
Hills signed K&E’s engagement letter the same day. The letter described the scope of K&E’s
representation as follows: “We have agreed to represent Chiquita in connection with the
investigation and review of various compliance issues related to Banadex’s operations in
Colombia. This representation may include conducting an internal investigation at the direction
of the Audit Committee and in coordination with Robert Olson, General Counsel; reporting the
findings of such investigation to the Audit Committee and Chiquita management; providing
confidential legal advice to Chiquita; and representing Chiquita in presentations before various
federal agencies.” Letter from Laurence Urgenson to Roderick Hills (Sept. 17, 2003).
151
Urgenson explained that his talking points for the meeting were a cheat sheet to be used in the
event that he was asked to address certain issues at the meeting, but that he had not been told
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on fact-finding mission; will be given credit for cooperation; a policy issue not an
investigation.” Notes of Chiquita Audit Comm. Meeting (Sept. 17, 2003).152 Hills
reported that Chiquita would cooperate with the government, conduct an investigation,
and report its findings to DOJ. See id. Urgenson discussed the investigatory steps,
including employee interviews and document collection, which the Company would
likely have to undertake, though at this point it remained unclear whether DOJ would
permit the Company to conduct its own investigation.153 See id.
The Committee then discussed various issues relating to Colombia, including
what DOJ had said about the continuing payments. Kreps’s notes reflect that Arntzen
asked, “Must we cease & desist?” and that Urgenson replied, “DOJ didn’t approve –
didn’t take a strong stand.” Id. Both Urgenson and Arntzen recalled that the thrust of
Arntzen’s question was, “Did the government say cease and desist,” not whether the
Company had to stop making payments. Arntzen did not believe that he would have
asked if the Company could continue to make the payments, because, in his view, he
had been told that the payments were illegal and therefore had stopped.154 Arntzen
explained that he took Urgenson’s reply, reflected in the notes, to mean that DOJ could
not condone the payments, but that the issue was complicated and it would get back to
the Company. He believed that the Company might ultimately be able to resume the
payments based upon DOJ’s guidance.
Urgenson did not advise the Audit Committee with respect to whether the
Company should continue the payments at this meeting – he was not asked about the
propriety of continuing the payments and he did not offer his own views. Stanbrook
said that during this period the Board was seeking clarity regarding whether DOJ had
given the “green light” and that Urgenson did not give clear guidance on this issue;
according to Stanbrook, Urgenson “sat on the fence.” Stanbrook explained that
Urgenson told the Board that the government had not told Chiquita to stop, but had
also refused to tell Chiquita that they could continue. Moreover, Stanbrook said that
ahead of time by Olson to make a presentation. When Urgenson arrived in Cincinnati, Olson
took him aside and gave him “general guidance” regarding what was expected of him at the
meeting. Urgenson explained that Olson told him that the Audit Committee was well informed,
and that Urgenson should briefly present the issues.
152
Urgenson told the SLC that, in his opinion, Kreps frequently failed to accurately report what was
said at the meetings. Urgenson also said that he believed that there were many instances where
Kreps failed to capture everything being said about an issue. In contrast, Kreps told the SLC that
his tendency would have been to err on the side of putting “too much” detail in his notes.
153
Ultimately, the government instructed Chiquita not to conduct an internal investigation. Instead,
the government sought information from Chiquita to assist in its investigation. See
Memorandum from K&E to Robert Olson and [Chiquita lawyer] (Sept. 8, 2003).
154
The differences in recollections among the directors concerning whether the payments had
stopped or were continuing is discussed at length above.
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Urgenson never told the Board that the payments had to stop. Stanbrook explained that
this lack of clarity was one of the reasons that he believed that Chiquita needed to exit
Colombia. Freidheim said that Urgenson’s report at this meeting further confirmed his
view that Chiquita needed to exit Colombia, because it was clear that DOJ was never
going to tell Chiquita that it was “okay” to make the payments, and therefore the risks
to the Company would not disappear.
At this meeting, given the lack of response from Urgenson or DOJ, Stanbrook
also raised the issue of whether it was time for Chiquita to review the economic benefit
of doing business in Colombia. See Notes of Chiquita Audit Comm. Meeting (Sept. 17,
2003). Stanbrook said that this idea was met with some resistance, particularly from
Kistinger, which Stanbrook believed was explained by a desire “to exit in an orderly
way and not to conduct a fire sale.” Hills pointed out that the payment issue would not
automatically disappear if Banadex were sold. In response, Olson said that Chiquita
would ensure that a sale would resolve the issue or the Company would not make the
sale. See id.
3.
September 18, 2003 Board Meeting
At the September 18 Board meeting, Kistinger gave a presentation regarding
“Chiquita’s banana sourcing strategies, including the pros and cons of pursuing
potential opportunities to sell owned production and replace it with purchased fruit
agreements.” Minutes of Chiquita Board Meeting (Sept. 18, 2003). The possible sale of
Banadex was discussed, but it was part of a far broader and ongoing series of
discussions regarding the merits of owned versus purchased fruit operations. This was
a topic that the Board had begun to discuss following the Company’s emergence from
bankruptcy in March 2002.
4.
Engagement of KPMG
In addition to retaining K&E, Hills felt that the Audit Committee needed its own
independent team in connection with the investigation. As a result, KPMG began doing
forensic accounting work for the Audit Committee in approximately mid-September
2003, even though the firm was not formally engaged until November 14, 2003.
Hills made the initial contact with Elliott Leary, a twenty-year veteran of the FBI
and certified public accountant, whom he knew from a Transparency International
function. According to Leary, who led the team, KPMG’s mission was to act as an
independent fact finder and track the history of payments made to the paramilitaries.
Urgenson described KPMG’s assignment as tracing and mapping the payments, so that
the Company would be able to report this information to DOJ in a form that DOJ could
rely on and use in its investigation.
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KPMG drafted a preliminary work plan based on standard protocols used by
KPMG, which included a document review protocol, as well as a list of potential
witnesses to be interviewed. See KPMG Workplan (undated). As part of its work,
KPMG reviewed all of the documents the Company produced to the government that
were relevant to the payments, and traveled to Colombia to collect and preserve
documents that were maintained locally. Apart from mapping the payments, KPMG
viewed its role as supporting K&E and, for the most part, KPMG took its lead from
K&E.
X.
Document Collection and the Concerns
Raised by Colombian Employees
On October 30, 2003, after a lengthy process of drafting and revising, including
obtaining approval from DOJ, Olson issued a document retention and collection
memorandum to several Chiquita and Banadex employees asking them to preserve and
collect documents relating to the Company’s payments. The request sought all
documents concerning payments made directly to the AUC, through a convivir, any
subgroup of a convivir, and payments to the FARC and ELN. See, e.g., Memorandum
from Robert Olson to [Chiquita lawyer] (Oct. 30, 2003). Although such a document
retention and collection memo is standard protocol in government and internal
investigations, Hills took a dim view of the memo and, as is discussed further below, at
a meeting with the government on December 1, offered his view that the memo was an
invitation for employees to destroy relevant documents. See Memorandum from
Audrey Harris to Roderick Hills, et al. (Dec. 1, 2003).
The document collection memo sent a ripple of concern through senior Banadex
personnel. On November 6, 2003, [the Chiquita lawyer] and Olson spoke with
Urgenson about concerns raised by employees in Colombia following their receipt of
the document collection memo. See Memorandum from Ben Gipson to Laurence
Urgenson and Audrey Harris (Nov. 7, 2003); Notes of Audrey Harris (Nov. 6, 2003).
During this same call, Olson also mentioned that Freidheim had recently run into Larry
Thompson at a Brookings Institute board meeting. See Notes of Audrey Harris (Nov. 6,
2003). According to Freidheim, he asked Thompson for his view of Chiquita’s situation,
and Thompson responded that, in his view, DOJ had “no basis” for prosecuting
Chiquita. Thompson also told Freidheim that Chiquita handled the situation exactly as
it should have and Thompson saw no fault with Chiquita’s actions.155
155
In addition to sharing this information, Thompson also told Freidheim that he understood that
the government had failed to live up to its pledge to get back to the Company on the issue it had
raised. Freidheim said he was not sure whether Thompson shared both sets of comments in the
same discussion or in two separate discussions. Freidheim attended a meeting with Larry
Thompson around May 2007 and mentioned Chiquita’s then-recent guilty plea. According to
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At the request of four of the senior Company employees in Colombia, on
November 10, 2003, those employees – [Banadex Employee #10], [Banadex Employee
#5], [Banadex Employee #2], and [Banadex Employee #11] – met in Cincinnati with
Olson, Kreps, [Chiquita Employee #1], Kistinger, and [the Chiquita lawyer] to discuss
their concerns about the DOJ investigation. See Memorandum of KPMG Interview of
Robert Olson (Nov. 14, 2003). The Colombian employees’ main concern was the
possibility that their cooperation in an investigation of the AUC would be publicized in
Colombia, or that the information provided to DOJ would be provided to the
Colombian government, which would put them in danger of retribution by the AUC.
They were also concerned about their potential legal liability. For these reasons, the
employees were also concerned about certain specific information becoming public: (i)
information regarding the Otterloo incident from November 2001, which, at the time,
was being investigated by a local Colombian prosecutor; (ii) the June 2002 drug
smuggling incident; and (iii) the payments to the customs officials that gave rise to the
SEC investigation in the late 1990s. The employees also wanted a commitment from the
Company to protect them. Id.
Olson and Kistinger took the lead in addressing these concerns. Olson said that
the Company was taking every precaution to ensure that DOJ understood that there
was real risk to the people in Colombia. Kistinger explained that the Company was in
active negotiations with Banacol at the time and that they were hopeful that the
situation would soon be resolved. At the end of the meeting, the employees provided a
disk containing the information the Company had requested in its October 30 document
request.
This meeting did not sit well with Hills, who was angry that the Audit
Committee had not been told of the meeting in advance. As a result, Hills instructed
KPMG to determine what had happened at the meeting and report its findings to the
Audit Committee. On November 14, Elliott Leary and other KPMG representatives
traveled to Cincinnati and interviewed Olson, Kreps, [Chiquita Employee #1],
Kistinger, and [the Chiquita lawyer] regarding the November 10 meeting. See, e.g.,
Memorandum of KPMG Interview of Robert Olson (Nov. 14, 2003). Olson recalled that
Hills was upset that he had not “taken the opportunity to interrogate” the Colombian
employees, but Olson said that he failed to understand why Hills was so upset about
the meeting and was unclear about the topics Hills wanted the Colombian employees to
be questioned about.
Freidheim, Thompson said that he did not understand how everything had unfolded but that he
never thought that Chiquita would be prosecuted.
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November 2003 – January 2004: Growing
Concerns About the Investigation
By November 2003, the Company and its counsel were no longer communicating
with senior DOJ officials. Instead, all of their interactions were at the line prosecutor
level and typically concerned the details of Chiquita’s cooperation in the ongoing DOJ
investigation.
1.
Communications with Taxay
On November 17, 2003, Hills called Taxay to ask if he was receiving everything
that he needed from the Company. See Memorandum from K&E to Roderick Hills
(Nov. 19, 2003). Taxay said that he was, and that he felt that things were progressing
well. See id. Hills also told Taxay that the Audit Committee had retained KPMG to help
with the forensic accounting issues relating to the payments, and that KPMG would be
assisting with the document collection as well. Taxay raised no objections to this. See
id. Finally, Hills also informed Taxay about two anonymous whistleblower e-mails that
the Company had recently received. See id. Among other things, the whistleblower emails claimed that certain Chiquita employees were affiliated with terrorist groups and
that [Banadex Employee #5] was involved in facilitating arms and drug shipments to
the AUC.156 Hills thought it more appropriate that the communication about the
whistleblower e-mails – and the monitoring of the Company’s cooperation with DOJ –
come from the Audit Committee than from management.
The next day, on November 18, Urgenson and Taxay spoke about Taxay’s
discussion the previous day with Hills, as well as the status of Chiquita’s document
collection efforts. Taxay expressed his appreciation for the “huge amount of work” the
Company was doing to respond to DOJ’s document request, and suggested ways in
which he could assist the Company in developing search criteria for additional
documents. See Memorandum from K&E to Roderick Hills (Nov. 19, 2003). Based on
both Hills’ and Urgenson’s discussions with Taxay, DOJ appeared quite satisfied with
the Company’s efforts.
2.
November 20 and 21, 2003 Board Meeting
During a Board meeting that took place on November 20 and 21, 2003, the Board
met with Olson in executive session to discuss matters relating to Colombia. The
156
DOJ stated it would investigate those allegations and directed the Company not to conduct its
own investigation. DOJ never disclosed the outcome of that investigation to the Company, but
acknowledged in its Sentencing Memorandum filed with the court that it did not believe that
Chiquita was complicit with the AUC. See Memorandum of Sentencing, U.S. v. Chiquita Brands
Int’l, Inc., No. 07-055 (Sept. 17, 2007).
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minutes refer generally to “a situation related to the Company’s Colombian
operations,” and reflect that the Board “agreed that a more extensive review would be
undertaken at the December 4 Audit Committee meeting and that all directors would
be invited to attend.” Minutes of Chiquita Board Meeting (Nov. 20 – 21, 2003).
According to Hills, at this meeting, the Board was informed of the recently-received
whistleblower e-mails and about the drug and arms incidents, including the Otterloo
incident and the June 2002 drug incident, and that the matters would be discussed more
fully at the December 4 meeting.
3.
December 1, 2003 Meeting between
Hills, Harris, and DOJ Officials
On December 1, 2003, Hills and Harris met with Taxay and Beasley to share with
DOJ the details of the whistleblower e-mails that the Company received in November
and disclosed to Taxay at that time. This meeting went badly according to K&E and
strained the Company’s relationship with DOJ.
At the meeting, Hills showed Taxay a copy of the whistleblower e-mails and told
him that the e-mails “call into question” Hills’ belief that the Colombian employees face
threats to their safety, presumably because the e-mails alleged that at least some of
those employees, most notably [Banadex Employee #5], were affiliated with the AUC.
See Memorandum from Audrey Harris to Roderick Hills, et al. (Dec. 1, 2003). Hills also
told Taxay about the November 10 meeting in Cincinnati with Colombian employees
and, according to Harris, made pejorative comments about those employees that
suggested doubts about their integrity and of the sincerity of their professed concerns
about their safety. Further, Hills expressed the view that the document collection
memo that was distributed to Colombian employees was an “invitation for employees
to destroy documents.” Id. Hills and Taxay also discussed the payment process, the
status of negotiations to sell Banadex, and the details of the drug and arms incidents
that had recently come to Hills’ attention. See id. According to Harris, this meeting
went extremely badly, with Hills gratuitously criticizing the Company and its
personnel and sowing doubt about the good faith and integrity of some of its personnel.
Following the meeting, on December 3, 2003, Urgenson and Harris called Taxay,
who expressed his discomfort in dealing directly with Hills. See Memorandum from
Audrey Harris to File (Dec. 3, 2003). In particular, Taxay focused on statements Hills
allegedly made to the effect that he did not believe that the Company had violated the
law. 157 In addition, Taxay told Urgenson that, in light of Hills’ comments casting doubt
on aspects of the Company’s document collection efforts, Taxay was now concerned
that the sale of Banadex was a pretext to hide relevant documents from DOJ. See id.
157
Hills did not recall making such a statement and did not believe that he would have made this
statement.
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These interactions prompted serious concern over Hills’ management of the
Company’s relationship with the government. As a result, Olson, Freidheim, and
Urgenson believed that Hills should not continue to have direct dealings with line
prosecutors. Although it was presented to Hills as being more appropriate for him to
pursue Chiquita’s policy-level arguments at higher levels within DOJ, in fact Olson and
Urgenson were concerned that Hills’ continued dealings with the line prosecutors
would not advance the Company’s interests. In addition, Taxay made clear in his
discussions with Urgenson that DOJ would not accept the results of an Audit
Committee-led investigation; indeed, Taxay said his discussion with Hills made him
suspicious that Hills and the Company were trying to slow down DOJ’s
investigation.158
4.
December 4, 2003 Audit Committee Meeting
For various reasons, the December 4 Audit Committee meeting was recalled by
many of the participants as being of central significance. During the first part of the
meeting, which was attended only by Audit Committee members, Olson presented the
FCPA payment summaries for the first three quarters of 2003, which included payments
to the convivir. See Minutes of Chiquita Audit Comm. Meeting (Dec. 4, 2003); Notes of
Chiquita Audit Comm. Meeting (Dec. 4, 2004).
The full Board joined the second half of the meeting, as did Kistinger, [Chiquita
Employee #1], Urgenson, Leary, and Hammond.159 Hills, Olson, and Urgenson briefed
the Board on the status of the Company’s discussions with DOJ. See Minutes of
Chiquita Audit Comm. Meeting (Dec. 4, 2003). In this report, Urgenson told the Board
that no policy decision would be forthcoming from DOJ until it finished verifying the
facts. Olson described the November 10, 2003 meeting with Banadex employees,
provided additional information about investigations in Colombia into arms and drug
smuggling incidents, and explained the specific allegations contained in the
whistleblower e-mails. See Robert Olson Talking Points (Dec. 4, 2003). Hills described
his recent contacts with Taxay and Beasley, stating that DOJ was apparently not
satisfied with Chiquita’s level of cooperation and arguing that the Company needed to
158
Olson prepared talking points at the request of Freidheim for Freidheim to use when discussing
the meeting with other directors, but he said that the version of his talking points shown to him
during his SLC interview was not the final version. According to Olson, in the final version, the
final bullet point, which says that Hills will help at a policy level, was deleted at Freidheim’s
request, and a bullet point was added describing how Taxay called Urgenson after the meeting to
say that DOJ would not accept an Audit Committee investigation in lieu of its own investigation
and that he believed Hills was trying to slow down DOJ’s investigation. It is unclear if Olson was
referring to the December 3 call discussed above, or another call from Taxay.
159
It does not appear that Kreps took notes of the portion of the meeting where the Board discussed
Colombia. See Notes of Chiquita Audit Comm. Meeting (Dec. 4, 2004).
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address these concerns promptly.160 Following the update, [Chiquita Employee #1]
described in some detail the various attempts by third parties to use the Company’s
facilities to smuggle drugs and arms that the Company had dealt with over the prior
years, described in detail above, and more generally about the continuing security
challenges faced by the Company in Colombia.161 See Minutes of Chiquita Audit
Comm. Meeting (Dec. 4, 2003).
According to some of the Board members, all of whom had been on the Board
eighteen months or less, this was the first time they were learning the full extent of the
drug, arms, and security issues in Colombia, and they were very concerned about what
they heard. It caused many of them to realize the enormous risks and dangers inherent
in continuing to do business in Colombia and caused at least one of the directors, Jaime
Serra, who was formerly a senior member of the Mexican government, to advocate
strongly for leaving Colombia as soon as possible. Serra said that Chiquita should sell
Banadex, that such a sale would create long-term value for shareholders, and that if
Chiquita bought bananas from Colombia after the sale, it needed to make sure it would
in no way be responsible for payments made to the AUC by the companies from which
it purchased bananas. Serra added that the incoming CEO should be informed about
the Colombia situation before accepting the job.162 Most directors recalled Serra’s
impassioned advocacy, including his statement that he would leave the Board if
Banadex was not sold.
The Board discussed in some detail the potential sale of Banadex as a way of
eliminating the dangers and difficulties – both legal and operational – it continued to
face in Colombia. By the time this meeting concluded, the Board unanimously believed
that a sale was Chiquita’s best course of action. Olson told the Board that the Company
was in the final stages of negotiations with Banacol and addressed some specific
questions relating to a sale, including whether the process should be opened up to other
bidders, and whether Chiquita should retain an investment bank. See Robert Olson
Talking Points (Dec. 4, 2003).
160
This issue became increasingly important to Hills throughout the rest of December; he believed
that the Company had relatively little to fear from DOJ as long as it fully cooperated. When he
heard concerns from Taxay and Beasley that the Company was not fully and promptly
cooperating, he thought this substantially raised the risks of DOJ action against the Company.
161
Christopher Reid of E&Y told the SLC that, shortly after this meeting, he received a memo,
drafted by Jim Havel (another E&Y partner) following a conversation with Olson, that discussed
arms and drug smuggling incidents in 2001 and 2002, respectively. Reid said that because no
Chiquita employee was involved in any wrongdoing, and because he understood the Company
had cooperated with the relevant authorities, these incidents were not material from an audit
perspective.
162
At this time, the Company was in the final stages of recruiting a new CEO, Fernando Aguirre,
who assumed the CEO position on January 12, 2004.
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Finally, it is unclear whether the Board discussed the status of the payments.
Olson’s meeting talking points state: “Stop payments – risk to personnel,” (id.), but
according to participants at the meeting, there was no directive by the Board that the
payments should stop.163 No Board member recalled being asked to make this
decision.164
In response to questions that arose during the Audit Committee meeting,
Kistinger e-mailed the Board later that same day offering to meet with each director
individually to review the status of the Banacol deal. Kistinger stated that he did “not
want anyone to be in a position to feel as though they were asked to make a decision
without knowing all the financial details and strategic implications.” E-mails between
Audit Committee (Dec. 4, 2003). Serra responded by e-mail that he had already “made
up [his] mind on this issue” and asked that Kistinger forward any additional materials
he had regarding the proposed deal. Id.
5.
Additional Disclosure Issues
The security situation highlighted at the December 4 meeting rapidly came into
focus. On December 11, 2003, Olson informed Audit Committee members that the
financial manager of the Banadex port loading operation had been kidnapped by the
FARC. See E-mail from Robert Olson to the Board and Senior Management (Dec. 11,
2003). After an e-mail discussion, management determined that the Company would
seek permission from DOJ to pay the ransom. The Company informed DOJ of the
kidnapping and its intention to pay a ransom payment and DOJ did not object. The
payment was made and the employee was released in late January 2004. See E-mail
from Robert Olson to Laurence Urgenson and Audrey Harris (Jan. 25, 2004).
Hills, concerned about the kidnapping, e-mailed Olson that he was “greatly
concerned about our failure to clarify our problems in Colombia, in the Company’s
disclosures.” E-mail from Roderick Hills to Robert Olson (Dec. 11, 2003). Although
Hills felt more comfortable with the disclosures that had been made in August than
those made in May, the kidnapping apparently rekindled his concern that the
disclosure should be even more detailed and specific.
163
According to Arntzen, during his first SLC interview, he believed that he first learned that
payments were continuing during the December 4, 2003 Audit Committee Meeting. During his
second SLC interview, Arntzen could not say definitively when he learned the payments were
continuing.
164
The Board issued no directive on the payments until March 30, 2004, two months after the last
payment was made, in January 2004. At that time, the Board directed that the payments should
not be resumed. See Section IV.AA.9. infra.
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On December 12, 2003, the Audit Committee met to consider additional
disclosures regarding the Colombia situation. The Audit Committee, all of whose
members attended the meeting, decided that additional information should be included
in a press release reporting on the Company’s Investor Day meeting, which was to be
held on December 16, 2003. See Minutes of Chiquita Audit Comm. Meeting (Dec. 12,
2003); Notes of Chiquita Audit Comm. Meeting (Dec. 12, 2003). The final press release
approved by the Audit Committee was far more specific than the previous disclosures –
for the first time, Colombia was specifically identified. After reciting the list of risk
factors, the release stated: “The company must continually evaluate the risks in these
countries, including Colombia, where an unstable environment has made it increasingly
difficult to do business.” Press Release, Chiquita Brands Int’l, Inc., Chiquita Brands
International Presents “Turnaround and Transformation” to Investors and Analysts
(Dec. 16, 2003).
Coincidentally, the SEC focused on the Company’s disclosures at this time. On
December 19, 2003, the SEC sent Freidheim a letter regarding the Company’s October
disclosure, which had not mentioned Colombia. In the letter, the SEC asked the
Company to explain the “one such issue” it mentioned in its “Risks of International
Operations” in its 10-Q for the period ending September 30, 2003165 and advised the
Company “to avoid vague references to risks in the future.” Letter from the SEC to
Cyrus Freidheim (Dec. 19, 2003). By the time the Company received the letter from the
SEC, the disclosure had already been made more specific in the December 16 Investor’s
Day press release.
In late January 2004, Olson, along with representatives from Skadden (on behalf
of the Company) and Baker Botts (on behalf of the Audit Committee) met with the SEC
to address the agency’s concerns and disclose the DOJ investigation.166 Following this
meeting, the SEC withdrew its comment.
165
The Company’s 10-Q for the period ended September 2003 stated, in relevant part: “The
Company is currently dealing with one such issue, which it has brought to the attention of the
appropriate U.S. authorities. Management does not currently believe that this matter will have a
material effect on the Company, although there can be no assurance in this regard.” Chiquita
Brands Int’l, Inc., Quarterly Report (Form 10-Q) (Nov. 13, 2003).
166
Earlier that month, Hills hired the law firm of Baker Botts to work with the Audit Committee
regarding the Company’s disclosures as an added protection. Hills wanted the SEC to know that
the Audit Committee had separate disclosure counsel because he feared that the SEC might think
that Peter Atkins of Skadden was no longer independent after working with the Company for so
many years. See E-mail from David Powers to James Doty, et al. (Jan. 5, 2004).
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Continuing Concerns About Continuing
the Payments and Chiquita’s Cooperation
1.
Hills’ Call with Beasley
At some point after Hills’ December 1 meeting with DOJ, but before a Chiquita
document production to DOJ on December 8, Hills spoke with AUSA John Beasley (it is
unclear who called whom), during which, according to Hills, Beasley complained about
the Company’s lack of cooperation. See E-mail from Roderick Hills to the Audit Comm.
(Dec. 22, 2003). Specifically, Beasley complained about (i) the pace of the Company’s
document production, and (ii) that the Company had indicated, through Olson and
Urgenson, that it was no longer interested in participating in an undercover operation.
Hills was particularly troubled by Beasley’s comments concerning the undercover
operation, because, aside from the overall policy issue that the Company had raised, the
possibility of an undercover operation provided an alternative basis for the Company to
stay in Colombia and continue the payments. According to Hills, he assured Beasley
that the Company would still be open to pursuing an undercover operation.
During this conversation, Beasley apparently made a comment regarding the
status of the payments. In a January 7, 2004 letter to Leary, Urgenson, and Ronald
Goldstock, who, as discussed below, was also retained by the Audit Committee to help
remedy DOJ’s concerns about Chiquita’s cooperation, Hills wrote that Beasley had told
him that the payments needed to stop. Specifically, the letter states:
A few days before documents were provided to Justice, an
Assistant U.S. Attorney, John Beasley, who is working with
Taxay, told me that the Department is extremely unhappy
with Chiquita’s attitude, that he did not consider us to be
cooperative. He complained about waiting 7 months for
documents and threatened a subpoena. He also stated that
the payments must stop and noted that other US companies
in Columbia have worked out solutions. I asked him for
assistance in working out a solution for Chiquita.
Five more payments were made by Chiquita after this conversation.
The SLC was troubled by Hills’ description of Beasley’s statement in the letter
that the payments must stop, because that statement appeared to be the very guidance
that the Company had been seeking since the Chertoff meeting in April 2003. As a
result, the SLC sought to obtain a detailed understanding of this statement and how the
Company reacted, which included re-interviewing all of the key participants on this
issue.
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Hills explained to the SLC that this portion of the letter, which was drafted by
K&E but reviewed, edited, and approved by Hills, was not an accurate description of
Beasley’s remarks. According to Hills, Beasley did not give a directive that the
payments had to stop. Rather, in connection with the discussion about whether the
Company would participate in an undercover operation, Beasley made a statement to
the effect of: the Company cannot keep making the payments forever. This was not a
surprise to Hills, who said that he always knew that, absent participation in an
undercover operation, or a favorable policy determination, the payments would have to
stop and Chiquita would have to exit Colombia. Hills did not understand anything
Beasley said to be a directive, or a meaningful shift in the government’s position on the
payments.
Olson’s recollection of what Hills told him is consistent with Hills’ explanation.
According to Olson, shortly after the call, Hills reported that Beasley had told him that
the Company could not continue making payments indefinitely, and that Chiquita had
to find a solution that would allow it to stop the payments. Hills explained to Olson
that Beasley’s comment was made in the context of his statement that other companies
had found ways to stop payments in Colombia and his question as to why Chiquita had
not been able to do the same.167
The evidence reviewed by the SLC supports Hills’ and Olson’s claim that the
statement in the January 7 letter is not an accurate reflection of what Beasley actually
conveyed to Hills. A review of the drafting history of the January 7 letter showed that
after Hills completed the initial draft, it was Audrey Harris who added the sentence
regarding the Beasley call to the letter. Harris wrote: “During my telephone
conversations with Beasley, he indicated that Banadex cannot continue making these
payments.” Thus, the sentence was added by someone with no direct knowledge of
what was said. Harris learned of the Beasley call sometime in late December or early
January 2004, several weeks after the call took place. It is unclear how Harris learned
about the call, but it is likely that she heard about it second-hand from either Olson or
Urgenson. According to Harris, she learned that Hills had reported “some indication”
by Beasley that the payments had to stop, or “something to that effect,” and the
statement she added to the letter was meant to reflect that information. Although she
had no first-hand knowledge of the call, Harris assumed that if the sentence was not
accurate, Olson, Urgenson, or Hills would correct it.
Indeed, Hills acknowledged reviewing Harris’s additions to the letter, and in
fact, revising the language Harris added, but could not explain why he did not remove
167
Due to the discrepancy between the letter and the recollections of Hills and Olson, the SLC
directed counsel to re-interview Hills and Olson on this issue in mid-January 2009. In addition to
Hills and Olson, SLC Counsel re-interviewed Harris and Audit Committee members Arntzen
and Benjamin.
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the sentence from the letter. He maintained, however, that Beasley did not give him a
directive that the payments needed to stop at that time.
Significantly, following the call, Hills did not report to anyone that Beasley had
issued a directive to stop the payments. Rather, Hills called Urgenson and Olson to
question them on why they told DOJ that the Company was no longer interested in
participating in an undercover operation. Olson and Urgenson explained that they had
not told DOJ that the Company would not participate in an undercover operation, but
instead expressed concern about the danger to Chiquita’s employees that would be
involved in any such operation. A few days after learning about the call from Hills,
Urgenson called Beasley to discuss the ways in which other companies in Colombia
dealt with the payment issue. According to Olson, the message conveyed by Beasley
was (i) that the Company needed to start cooperating and (ii) that DOJ was not
interested in helping Chiquita solve the payment problem. Beasley did not say
anything about the need to stop the payments. Urgenson had several other
conversations with the government during the December 2003 time period during
which the government could have reiterated a directive to the Company, if there had
been such a directive, and did not.
Thus, after reviewing all of the evidence, the SLC concluded that Hills and the
Company did not, in fact, receive a directive from the government to stop the payments
which it intentionally or recklessly ignored in making the remaining payments through
January 2004.
2.
Indirect Communications from DOJ
Hills did, however, hear from Joseph Bianco of Debevoise & Plimpton, counsel
for [Banadex Employee #5], that DOJ had told him that the Company should stop
making the payments in Colombia in late December 2003. Urgenson recalled that the
fact that people were hearing that the government wanted the payments to stop was a
“new and important development” even though it was somewhat odd for the
communication with the Company on this important issue to be indirect. Hills said that
he did not recall when he heard that the government had told Bianco the payments
must stop, but that he did not recall thinking it was a “definitive” directive. Instead,
Hills continued to focus on the resolution of the Company’s cooperation issues.
3.
Retention of Ronald Goldstock
On December 22, 2003, Hills e-mailed the Audit Committee to express his
growing concern about Chiquita’s cooperation with DOJ. Hills reported that both
Beasley and Taxay believed that Chiquita was not being cooperative. See E-mail from
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Roderick Hills to the Audit Comm. (Dec. 22, 2003). To address his concerns, as
discussed above, Hills proposed retaining Ronald Goldstock, a law professor and the
former Director of the New York State Organized Crime Task Force, to assist Leary and
Urgenson with the investigation and, more specifically, to ensure that the Company
was cooperating with DOJ in a satisfactory way.169 See id. While Hills had information
from Beasley and Taxay suggesting that DOJ believed that the Company was not being
sufficiently cooperative, Urgenson said he had a very different impression based on his
own continuing interactions with the government lawyers.
In response to Hills’ proposal to hire Goldstock, Morton Arntzen, who was
becoming concerned about the mounting costs associated with the investigation,
questioned whether the Audit Committee was trespassing on an area that was properly
management’s responsibility. In a response featured prominently in the factual proffer,
Hills responded bluntly: “Let me say very simply. This is not a management
investigation. It is an Audit Committee investigation because we appear to [be]
committing a felony.” Id. Ultimately, Hills explained more fully that he wanted to hire
Goldstock to get to the root of the government’s complaints about the Company’s
cooperation. The Audit Committee agreed to retain him.
In late December 2003, Hills contacted Goldstock and explained the situation.
Hills told Goldstock that he was very concerned because, based on his discussions with
Taxay and Beasley, it was his impression that the government viewed Chiquita as
uncooperative. Goldstock said that Hills asked him to provide advice to the Audit
Committee regarding the ongoing DOJ investigation and communicate with his DOJ
contacts in order to “tell Chiquita’s story.” Goldstock agreed to come on board.
AA.
Winter 2004: Aguirre Becomes CEO, End of Payments,
Continued Investigation into Banacol Deal
1.
Hills’ Continuing Concerns About Cooperation
As discussed at length above, on January 7, 2004, Hills sent a lengthy letter to
Urgenson, Leary, and Goldstock in which he set the framework for trying to address the
cooperation issue. The letter summarized in detail the path of the investigation and the
Company’s document production efforts to date, expressed concerns about the progress
of the investigation and Chiquita’s cooperation, and asked Urgenson, Leary, and
169
Hills knew Goldstock from the CSIS Hills Program on Governance, which Hills and his wife
established to promote corporate integrity, particularly in developing countries. This program
had two “boards,” an Advisory Board and an Academic Council. Hills asked Goldstock to serve
on the Academic Council (at the time, Goldstock was teaching corruption and control at New
York University) and to attend one of its meetings, which was being held at Harvard University’s
Kennedy School of Government. Goldstock said that he attended several other meetings as well.
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Goldstock to meet to resolve the issues raised in the letter. Among other things, Hills
wrote that AUSA Beasley told him that DOJ was “extremely unhappy with Chiquita’s
attitude.” Letter from Roderick Hills to Laurence Urgenson, Elliott Leary, and Ronald
Goldstock (Jan. 7, 2003). Hills requested advice on how to proceed in the DOJ
investigation and whether the sale of Banadex would “solve our legal problems with
Justice.” Id. According to Hills, the letter was an attempt to summarize open issues and
to educate Goldstock on the chronology of the investigation. Hills thought it was
important for the Audit Committee’s advisors to be working on a shared set of
assumptions and accurate facts.
Urgenson, Harris, Leary, and Goldstock met on January 8, 2004 for several hours
to address Hills’ concerns. Following the meeting, the group drafted a memo
summarizing the conclusions it reached. The memo concluded that DOJ’s concerns
about the Company’s cooperation were largely the product of DOJ’s failure to
understand fully the Company’s genuine concerns about the safety of its employees,
and recommended several ways in which the Company could resolve the perceived
cooperation issue. See Memorandum from K&E, KPMG, and Ronald Goldstock to
Roderick Hills (Jan. 13, 2004).
One of the recommendations contained in the memo stated “the payments have
to stop, unless they are undertaken as part of an authorized undercover operation.” Id.
In connection with stopping the payments, the memo recommended that the Company
work with DOJ on the terms and conditions of a sale of Banadex and/or reiterate the
Company’s willingness to engage in an undercover operation. See id.
Urgenson said that he believed that it was important in this memo to “say
directly that the payments have to stop.” However, according to Goldstock, the
consensus at the meeting was that Chiquita “could not simply stop the payments,
because the risk of harm to its employees was too great.” Goldstock, who was newest
to the situation and had an outsider’s perspective, came away from the meeting
concluding that: (i) the Company “had a clear duress defense” with respect to its
payments to the AUC, (ii) Hills “did the right thing” by disclosing the payments to DOJ,
and (iii) while DOJ could not say directly that Chiquita should continue paying the
AUC, it nevertheless could not have wanted Chiquita to discontinue the payments and
be responsible for the resulting bloodshed. Leary had only a vague recollection of this
meeting. Following this meeting, the Company worked to implement the
recommendations contained in the memo, including, as discussed below, working with
DOJ towards completing the sale of Banadex.
2.
Aguirre Joins Chiquita
That same day, at a January 8, 2004 meeting, the Board elected Fernando Aguirre
as CEO, effective January 12, 2004. See Minutes of Chiquita Board Meeting (Jan. 8,
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2004). Freidheim had served as a bridge for the Company following the bankruptcy,
and the Board wanted a CEO that could move the Company away from its
commodities-based banana production model. Aguirre had been a longtime employee
and senior executive with Cincinnati-based Procter & Gamble, and was attractive to the
Company because, among other things, he had extensive experience in the consumer
goods industry, had substantial experience in Mexico, Central America and South
America, and spoke fluent Spanish. Aguirre said that prior to his official start date, he
met with Olson and Kistinger, who informed him that the Company had “an issue” in
Colombia regarding the sale of its farms, but that Freidheim was managing it. Aguirre
further said that after he had started at Chiquita, Olson gave him an overview of the
Company’s payments to the AUC. Aguirre has stated that he did not fully understand
the severity of the Company’s situation in Colombia prior to joining Chiquita.170
3.
January 20, 2004 Meeting with DOJ
On January 20, 2004, Olson, Urgenson, and Harris met with Taxay. See
Memorandum from Audrey Harris to File (Mar. 27, 2004). The purpose of the meeting
was for Chiquita to provide details reading the proposed terms of the sale of Banadex to
Banacol to DOJ for the first time. Olson told the government about the history of the
negotiations, and specifically, that Banacol had initially approached the Company about
a potential sale and that the issue of payments to the AUC had not come up during the
course of the negotiations. DOJ was also told that Chiquita would have “no physical
presence” in Colombia post-sale. Notes of Audrey Harris (Jan. 20, 2004). Olson
explained, however, that Banacol would not make the deal without a post-sale bananapurchase agreement with the Company.
As it had for some time on a periodic basis, the possibility of the Company’s
participation in an undercover operation was also discussed at this meeting. See id.
Olson was comforted by this discussion because it indicated to him that DOJ must have
known that the payments were still continuing, since the Company could not
participate in an undercover investigation if it had already stopped making the
payments and was pulling out.171 Finally, at this meeting, the parties discussed a
170
Olson said that he never had a meeting with Kistinger and Aguirre prior to Aguirre joining the
Company. Rather, Olson said that he had a meeting with Aguirre (without Kistinger) before
Aguirre joined the Company, at which he provided Aguirre with a general overview of the
Company’s legal issues, including the payments to the AUC. Olson said that his meeting with
Aguirre was approximately forty-five minutes long, with twenty to twenty-five minutes devoted
to the Colombia situation. He said that Aguirre asked a lot of questions and was “not happy”
about the situation.
171
Hills shared Olson’s view that any continuing discussion of an undercover operation meant that
DOJ was implicitly acknowledging that the payments were continuing; as Hills told the SLC,
discussion of an undercover operation made no sense if the Company had ceased making the
payments and was pulling out of Colombia. This is why Hills reacted so negatively when
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waiver of privilege with respect to certain legal advice given to the Company through
February 20, 2003.172 See id.
4.
Final Payment
Four days later, on January 24, 2004, [Banadex Employee #5] initiated the
approval process for the final payment to the AUC in Santa Marta. In total, Chiquita
made payments of $365,865 to the convivir and the AUC between February 20, 2003, the
date on which [the Chiquita lawyer] discovered the FTO designation, and January 24,
2004. See KPMG Sensitive Payments Schedule. According to Aguirre, after he learned
from Olson and Kistinger that a payment was made in late January, he ordered that no
payments be made in the future without his knowledge and approval.173 No other
witnesses recalled that Aguirre issued this directive, or how the payments actually
ended. In any event, as discussed below, no further payments were made to the AUC.
5.
Banadex Sale Announcement
Around the same time as the last payment was authorized, on January 26, 2004,
Chiquita issued a press release that it was negotiating with Banacol regarding the
potential sale of its Colombian operations.174 See Press Release, Chiquita Brands Int’l,
Inc., Chiquita Confirms Discussions for Potential Sale of Banana Operations in
Colombia (Jan. 26, 2004). The release reflected the fact that negotiations had progressed
to a point where the Company believed disclosure to be in its best interests. In
addition, the issuance of the release was designed to stimulate other potential bidders to
Beasley told him in early December that Olson and Urgenson had, in effect, said they were not
interested in an undercover operation because of the risk to Company employees: to Hills, if the
discussion about an undercover operation had ended, this would have eliminated a central part
of the Company’s rationale for continuing to make the payments.
172
This waiver excluded legal advice concerning “Chiquita’s strategy in dealing with any
government investigations.”
173
As support for this statement, Aguirre pointed to an e-mail, dated January 31, 2004, in which he
states that the Company will not do business in any country in which extortion is the “modus
operandi,” but the e-mail does not order that the payments be stopped. See E-mail from
Fernando Aguirre to Michael Mitchell, et al. (Jan. 31, 2004).
174
The release states:
Chiquita Brands International, Inc. (NYSE: CQB) today confirmed reports that it
is having discussions regarding the potential sale of its banana-producing and
port operations in Colombia to Invesmar Ltd., the holding company of C.I.
Banacol S.A. C.I. Banacol S.A. is a Colombian-based producer and exporter of
bananas. The discussions also involve a potential long-term agreement for
Chiquita’s purchase of Colombian bananas.
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come forward so as to ensure that the Company would get the best deal. However, no
additional bidders came forward as a result of the release. According to Kistinger, one
of the benefits of issuing the release was that [Banadex Employee #10] and [Banadex
Employee #5] were then able to use the pending sale as an excuse to stall the payments
to the AUC.
6.
February 9, 2004 Audit Committee Meeting
On February 9, 2004, the Audit Committee met to discuss the potential sale of
Banadex; they discussed the current terms of the deal, the status of the negotiations,
steps in conducting due diligence, and the details of financing the transaction. See
Minutes of Chiquita Board Meeting (Feb. 9, 2004). At that time, the terms of Banacol’s
proposal included (i) a $33 million cash payment, (ii) an $8 million pension assumption,
(iii) $8 million (NPV) of seller’s financing, (iv) $25 million (NPV) in preferential
discount for pineapple purchasing, and (v) an eight-year purchasing contract for
bananas and pineapples, with a total net value to Chiquita of $37 million. See Chiquita
PowerPoint Presentation (Feb. 9, 2004). Aguirre expressed strong support for the sale
and, while some directors viewed the transaction as potentially risky because Colombia
was significant to the Company’s operations, the Audit Committee supported the sale.
At the same meeting, the Board received a presentation from Jack Devine,
president of the Arkin Group, a security consulting firm, and a former Director of
Operations for the Central Intelligence Agency. The Audit Committee retained Devine
in January 2004 to perform a comprehensive security review of Chiquita’s operations
with the goal of assessing both the Company’s preparedness for retaliation if it stopped
the payments to the AUC and the feasibility of providing effective security for
employees after the sale. See Minutes of Chiquita Board Meeting (Feb. 9, 2004).
Based on considerable fieldwork by a team of operatives in Colombia, as well as
tapping his firm’s intelligence and security sources, Devine’s presentation largely
validated the judgments the Company had been making for many years about the
situation in Colombia. Devine told the Audit Committee that if the Company ceased
making payments to the AUC, Banadex could expect “an escalating threat situation,”
beginning with threats and harassment and eventually sabotage and kidnapping. See
Arkin Group Talking Points (Feb. 9, 2004). Devine criticized the Company’s crisis
management plans as inadequate to deal with the dimensions of the threat posed by the
AUC. Devine told the Board that the Colombian military was aware of the Company’s
payments to the AUC and tolerated them because the military was unable to provide
sufficient protection to the banana growers. Finally, Devine confirmed a key point that
the Company had been making internally as well as to DOJ – that other U.S.-based
multinational companies were making similar payments. See id.
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Those who attended the meeting reported to the SLC that they came away from
the presentation confirmed in the belief that Colombia was a dangerous place and that
Chiquita’s employees were in danger by virtue of operating there. Devine’s
presentation also confirmed to the Board and management what they had been told by
Company personnel about the risks they faced. Devine told the SLC that he was asked
to give his independent and honest assessment, and no one attempted to influence his
views.
7.
March 4, 2004 Audit Committee Meeting
By early March, the payments to the AUC had been halted for a little over a
month. At a March 4, 2004 meeting, the Audit Committee engaged in an extended
discussion regarding whether the Company should make “one last payment to the
AUC” before the sale of Banadex. Minutes of Chiquita Audit Comm. Meeting (Mar. 4,
2004). Along with the Audit Committee, Urgenson, Leary, and Goldstock participated
in the discussion. Goldstock was the only attendee who advocated that additional
payments should be made in order to protect Company employees. See Notes of
Chiquita Audit Comm. Meeting (Mar. 4, 2004). Goldstock recalled a crisp, coherent
debate on the issue, with each director focusing only on the best interests of the
Company. In a letter that Goldstock wrote in support of Hills in June 2007, he said that,
as he left the meeting with Urgenson and the Audit Committee began its executive
session, he:
stated to [Urgenson] that it was [his] belief that had a video
camera been hidden in the conference room where the
meeting occurred, anyone viewing it (including the
Government) could only come to the conclusion that this
was precisely the way an Audit Committee should act when
faced with a complicated situation without an obvious
solution.
Letter from Ronald Goldstock to Reid Weingarten (June 28, 2007).
While Kreps’s notes indicate that Aguirre may have made a statement in support
of the payments – “continue payments; preserve life” – Aguirre said that he did not,
and no attendees recalled that Aguirre advocated making further payments. See Notes
of Chiquita Audit Comm. Meeting (Mar. 4, 2004). Rather, several witness have noted
that Aguirre simply stated that by making a payment, the Company would preserve the
lives and safety of its employees. No decision was made with respect to making a
payment at this meeting.
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March 23, 2004 Meeting with DOJ
Through the middle of March, the Company continued to be in regular contact
with the government regarding next steps, policy issues, and the sale of Banadex.175
Then, on March 23, 2004, representatives of the Company met with David Nahmias,
Michael Taxay, John Beasley, and various other government attorneys. The purpose of
this meeting was for the Company to notify DOJ of the upcoming sale of Banadex, as
per Audit Committee instructions. See Memorandum from Audrey Harris to File (Mar.
27, 2004).
At the outset of the meeting, Nahmias, the highest-ranking DOJ official with
whom the Company had met since its meeting with then-Deputy Attorney General
Larry Thompson seven months earlier, discussed the background of the investigation,
including the April 24 Chertoff meeting, which Nahmias had attended. See id.
Nahmias stated that the government’s view of the Chertoff meeting was that,
“historically the Department could not ‘give a pass,’ although they would give credit
for the voluntary disclosure; and that they had real concerns about the behavior going
forward, but understood the tough position the Company was in, but if [the payments]
continued it needed to be under full cooperation with authorities.” Id. Olson said that
Nahmias’s account of the Chertoff meeting was different from his own recollection, but
he and Urgenson did not take issue with Nahmias’s version at this meeting. Rather,
they emphasized that the Company wanted to focus on its cooperation going forward.
The discussion then turned to the Company’s cooperation to date. Taxay
expressed concern about a number of issues, including that he was not given details
about the sale of Banadex quickly enough, that the Company was proceeding too
slowly in the document collection process, and for various reasons, the government had
not yet been able to interview any witnesses. See id. In a statement of considerable
significance, Nahmias also informed Chiquita that DOJ considered Chiquita and some
of its officers and former officers subjects of an investigation, but did not identify which
officers. See id. According to Olson, the Company’s view of DOJ investigation
“changed dramatically” as a result of this information.
175
In connection with the sale, the Board debated by e-mail, at the end of February, whether it
needed a fairness opinion to move forward with the sale. On February 24, 2004, Olson e-mailed
the Board questioning whether it felt that a fairness opinion was necessary in connection with the
transaction with Banacol. Stanbrook was the only director to express interest in obtaining a
fairness opinion, but acceded to the other members of the Board, who believed that obtaining
such an opinion was unnecessary because (i) it would be unusual to obtain a fairness opinion for
the sale of a production division, as opposed to a major business, (ii) the transaction was
relatively small, (iii) no other potential buyers had come forward after the sale was made public,
and (iv) “the primary motivation for the sale [was] non-financial.” Olson shared the view that a
fairness opinion was not required, which was expressed in his original e-mail to the Board. See Email from Robert Olson to the Board (Feb. 24, 2004).
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In addition, Nahmias expressed concern that Chiquita might be aiding and
abetting payments to the AUC if, pursuant to the sale agreement, it purchased fruit
from Banacol and Banacol continued to make the payments. Nahmias also expressed
concern about the Company’s ability to continue to cooperate if a sale was completed.
In short, DOJ refused to “bless the sale” of Banadex and told Chiquita to “proceed at its
own risk.” Id.
9.
March 30, 2004 Board Meeting
The discussion at the March 23 meeting with DOJ was shared with the Board at a
meeting on March 30, 2004. Urgenson and Olson told the Board that DOJ now
considered the Company and certain of its current and former officers subjects of the
investigation and that the government had raised potential issues with respect to a sale
to Banacol, including potential aiding and abetting issues and concerns relating to
access to documents controlled by the Company in Colombia. Urgenson and Olson also
told the Board that subpoenas had been issued to the Company and certain executives.
Finally, Kistinger reported that the Company had ceased making payments to the AUC.
See Minutes of Chiquita Board Meeting (Mar. 30, 2004).
The Board members and executives were troubled by this report and recognized
that the status quo could not continue. The Board agreed that the Company’s
cooperation efforts should be accelerated and directed that the payments to the AUC
should not resume. The Board did not consider the resolutions that had been prepared
for the meeting relating to the Banacol transaction, in part because of DOJ’s concerns
about the sale. See id.176
BB.
Spring 2004: Subpoenas are Issued
and the Sale of Banadex is Approved
1.
Retention of K&L Gates
Within days of the March 30 Board meeting, in early April 2004, the Audit
Committee retained former U.S. Attorney General Dick Thornburgh of K&L Gates.
According to Hills, the hiring of Thornburgh was prompted by the classification of the
Company and some of its officers as subjects of the DOJ investigation. To Hills, this
meant that that the Audit Committee needed independent counsel. Thornburgh
believed that he was retained in part to help focus high-level DOJ officials on the
176
By the time of the March 30 meeting, Banacol’s proposal to Chiquita: included (i) a $31 million
cash payment, (ii) an $8 million pension assumption, (iii) $12 million (NPV) of seller’s financing,
(iv) a $25 million preferential discount on pineapples, and (v) an eight year purchase contract for
bananas and pineapples, with a total net value to Chiquita of $43 million. See Chiquita
PowerPoint Presentation (Mar. 30, 2004).
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matter. Initially, K&E’s role remained unchanged, and K&E continued to produce
documents to, and communicate with, DOJ on behalf of Chiquita.
2.
April 2004 Banacol Meeting
On April 6, 2004, Chiquita representatives traveled to Panama to advise Banacol
executives of the DOJ investigation. See Banacol Deal Chronology (May 10, 2004). Until
then, the Company had mentioned nothing about the investigation, as it was concerned
both about the fallout of disclosing the investigation as well as the possibility that
Banacol might use the existence of the investigation as leverage to extract additional
concessions from the Company. Somewhat to the Company’s surprise, Banacol did not
use the disclosure to change the terms of the sale, except to require a break-up fee in the
event DOJ blocked the sale, and an indemnity.
On the same day as the disclosure to Banacol, KPMG made a presentation to DOJ
summarizing its forensic investigation in Colombia. KPMG provided the government
with a detailed summary, based on its independent review, of the Company’s payments
to the convivir and the AUC between 2001 and 2004. See Memorandum from Jeffrey
Maletta to File (Apr. 6, 2004). Leary told the SLC that the purpose of the presentation
was, in part, to demonstrate the extent of the effort Chiquita was making to cooperate
and to understand the facts surrounding the payments.
3.
DOJ Concerns About Cooperation and the Sale
To help facilitate the sale, on April 26, Thornburgh requested, by letter, a meeting
with Assistant Attorney General Wray to discuss the concerns raised by DOJ regarding
the proposed transaction. See Letter from Dick Thornburgh to Christopher Wray (Apr.
26, 2004). In early May 2004, both Nahmias and Taxay responded to Thornburgh’s
request by telling him that DOJ had obtained information, apparently from the
testimony of a Colombian witness, that the Company was continuing to make
payments to the AUC. See E-mail from Dick Thornburgh to Roderick Hills, et al. (May
4, 2004).
During a May 4 call with Thornburgh, Nahmias also warned that Chiquita
needed to be careful to structure the Banadex transaction in such a way that there
would be no basis for suspecting that the Company was somehow arranging
surreptitiously to continue making the payments. Nahmias refused to give the
Company any more specific guidance on a course of conduct with respect to the sale; it
was a warning to be careful without any specific guidance on how to proceed. See Email from Dick Thornburgh to Roderick Hills, et al. (May 4, 2004). On May 11, in
response to the information that Nahmias had said the government had received,
Aguirre confirmed in a letter to DOJ that payments to the AUC had stopped. See Letter
from Fernando Aguirre to Christopher Wray (May 11, 2004).
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May 7, 2004 Joint Board and Audit Committee Meeting
On May 7, 2004, the Board and Audit Committee met jointly to discuss various
aspects of the issues faced by the Company in Colombia. In addition to receiving an
update on the Company’s most recent communications with DOJ, the Board considered
and approved the sale of Banadex. The terms of the deal were: (i) approximately $27
million in cash, (ii) approximately $4 million in notes of 90 days or less, (iii) longer-term
notes and deferred payments having a net present value of $12 million, and (iv) the
assumption of $8 million pension liability. In addition, the Board authorized the
Company to enter into eight-year purchase contracts with Banacol for bananas and
pineapples, with a preferential discount on the pineapples. See Minutes of Chiquita
Board and Audit Comm. Meeting (May 7, 2004).
The Board also approved an indemnification/rescission arrangement and a
break-up fee to address the uncertainties created by DOJ’s warnings about the
transaction and the risk that DOJ might try to block the sale or otherwise make it
untenable. See id. To address concerns of DOJ regarding continued access to
documents, the deal included a provision granting Chiquita control of certain books
and records of Banadex, some of which were transferred to the U.S. See Banacol Deal
Chronology (May 10, 2004).
Further, the Audit Committee, advised by Skadden attorneys Peter Atkins and
David Freidman, discussed the Company’s disclosures at length. According to Kreps’s
notes, Freidman advised that the Company would have to balance its need for fuller
disclosure (based upon pressure the Company was receiving from DOJ) with the risks
such disclosure created for Chiquita’s employees in Colombia. See Minutes of Chiquita
Board and Audit Comm. Meeting (May 7, 2004); Notes of Chiquita Board and Audit
Comm. Meeting (May 7, 2004). Indeed, [Chiquita Employee #2] and [Banadex
Employee #10] had traveled to Cincinnati to voice security concerns, explaining that the
AUC would retaliate against Banadex employees if it became public that those
employees were cooperating with DOJ. Accordingly, Kistinger advised the Committee
that there were “no clear answers” and that the “risk is big.” Notes of Chiquita Board
and Audit Comm. Meeting (May 7, 2004). Three days later, on May 10, 2004, the
Company issued an earnings release, which disclosed the DOJ investigation, but did not
mention the AUC by name. See Release, Chiquita Brands Int’l, Inc., Chiquita Reports
Net Income of $20 Million, $0.46 EPS, in the First Quarter of 2004 (May 10, 2004).
Finally, according to the minutes from that meeting, Aguirre and Hills proposed
that the Company “should consider making a charitable donation that would be used
exclusively for bona fide civic projects in the Urabá and Santa Marta regions.” Minutes
of Chiquita Board Meeting (May 7, 2004). This was considered as a way to potentially
soften the blow of the Company’s leaving Colombia and to reduce the risk of violence
from the guerrillas and the AUC. Indeed, Kreps’s notes from the meeting state: “Make
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a donation to Pan American Develop Org as an alternative? This may help pacify the
guerillas.”177 Notes of Chiquita Board Meeting (May 7, 2004). The Board approved a
donation in the amount of $300,000, with the caveats that the Company needed to
ensure the funds were used properly and to disclose the contribution to DOJ prior to
making it. However, the donation ultimately was not made. See Minutes of Chiquita
Board Meeting (May 7, 2004).178
Following the meeting, in a May 8, 2004 letter to the Board, Aguirre again
expressed his support for the Company’s exit from Colombia. Aguirre could not
specifically recall why he wrote this letter, but told the SLC that he sometimes uses
these types of letters to “clarify” issues in his own mind. Aguirre outlined possible next
steps for the Company. These included (i) negotiations with Banacol,
(ii) communication with the Colombian ambassador to the U.S., and (iii) preparation for
making the transaction public. See Letter from Fernando Aguirre to the Chiquita Board
(May 8, 2004).
5.
State Department: No Objection to Prosecution
On May 13, Nahmias called Thornburgh to inform him that the U.S. State
Department had no policy objection to the possible prosecution of Chiquita by DOJ. See
E-mail from Laurence Urgenson to Roderick Hills, et al. (May 13, 2004). Some viewed
this call as vindication that DOJ had promised to consult with other branches of the
government regarding the policy issues raised by Chiquita’s situation. In contrast,
Urgenson believed that this call was a signal that Chiquita should stop pushing its
policy agenda. In any event, by now, it was clear that DOJ viewed Chiquita in a very
different light than it did in the summer of 2003.
6.
May 13, 2004 Board Meeting
The same day that Nahmias called Thornburgh, the Board met. Among other
things, the Board again considered the sale of Banacol because the sale had been voted
on by a bare quorum at the May 7 meeting; given the importance of the transaction and
the issues that it raised, the directors thought it was important to make sure that the
transaction was considered and approved by the full Board. As such, the resolutions
relating to the sale of Banadex were approved again without change. See Minutes of
Chiquita Board Meeting (May 13, 2004).
177
The organization being considered was actually the Pan American Development Foundation.
178
The payment was not made because (i) K&E advised the Company against making such a
payment, and (ii) after raising the issue with DOJ, DOJ questioned the good faith nature of the
payment. See E-mail from Roderick Hills to Laurence Urgenson (July 8, 2004).
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Olson reported that the closing of the Banacol deal would be “subject to
financing and the absence of regulatory action, including action by the Justice
Department with respect to the proposed sale.” Id. He also reported that Hills had sent
a letter on behalf of the Audit Committee to DOJ “describing the chronology of
discussions with Banacol” in order to demonstrate that the transaction was not in any
way designed to facilitate future payments by Banacol to the AUC and that Aguirre had
sent a letter to DOJ “reaffirming the ‘protection’ payments that are a focus of the
Department’s investigation have stopped.” Id.
CC.
OFAC Presentation and Thompson Memorandum Submission
1.
OFAC Presentation
Having lost the State Department as an option, Hills looked for another avenue
to approach the government and recommended that the Company contact the Office of
Foreign Assets Control (“OFAC”) and seek to brief the agency on the Company’s
situation. Hills thought that this was a prudent step because OFAC had regulatory
jurisdiction over the Colombia payments and because he thought OFAC might be a
sympathetic audience and exert some influence on DOJ. On June 23, 2004, Urgenson,
Hills, Olson, Thornburgh, Leary, Devine, and Harris met with OFAC. See Letter from
Audrey Harris to OFAC Director Richard Newcomb (June 16, 2004); Memorandum
from Jonathan Borrowman to File (June 23, 2004). The Company decided to make
Devine’s work on assessing the security situation the centerpiece of the presentation to
provide a credible and objective justification for the Company’s course of conduct in
making the payments. Although DOJ lawyers were invited to the meeting, they
declined to attend, apparently because they learned that Devine would not agree to
disclose all the sources of his information.
The meeting was primarily devoted to Devine’s presentation, which focused on a
history of violent incidents in Colombia and other information supporting the
conclusion that paying paramilitary groups was a necessary condition of doing business
in Colombia. See Presentation to Office of Foreign Asset Control (June 23, 2004). The
Company’s representatives who attended the meeting thought that the presentation
went extremely well and had a favorable impact on OFAC.
2.
Sale of Banadex
On June 28, 2004, after many months of negotiation, Chiquita completed the sale
of Banadex to Banacol on substantially similar terms as those authorized by the Board at
the May 7 and 13, 2004 Board meetings. Although the primary motivation for the sale
was the DOJ investigation, many directors and officers also felt that the sale fit within
Chiquita’s planned shift from an owned farm to purchased fruit model. In addition,
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many also felt that the dangerous environment in Colombia dictated that the Company
leave Colombia, separate and apart from the DOJ investigation.
Although some Board members and members of management were more
enthusiastic about the sale than others, in the end no one was against it – views ranged
from very positive to acceptable under the circumstances. [Chiquita Employee #2],
who was primarily responsible for negotiating the terms of the deal, summed up what
many said about the deal when he told the SLC that the sale was, under the
circumstances, a “remarkably good deal,” although not necessarily one he would have
endorsed absent the need to leave Colombia. No one interviewed by the SLC believed
that Chiquita conducted a “fire sale” of Banadex, citing, among other things, the length
of the diligence and negotiations and the ultimate terms of the deal. As discussed
further below, the SLC agrees with this conclusion.
3.
Request for Thompson Submission
By the end of July, it appeared that a resolution to the DOJ investigation may be
in the offing. On July 29, 2004, Beasley told Urgenson that DOJ wanted Chiquita to
prepare a “Thompson Memorandum Submission,” setting forth Chiquita’s arguments
as to why DOJ should not prosecute it for violations of § 2339B. See E-mail from
Laurence Urgenson to Roderick Hills, et al. (July 30, 2004).179 In the months that
followed, there was heated disagreement – principally between Hills and Urgenson –
about the role that the Chertoff meeting should play in the Company’s submission. See,
e.g., E-mail from Roderick Hills to Laurence Urgenson (Aug. 6, 2004); E-mail from
Roderick Hills to Robert Olson (Aug. 25, 2004); E-mail from Roderick Hills to Dick
Thornburgh, et al. (Sept. 10, 2004); E-mail from Roderick Hills to Laurence Urgenson, et
al. (Sept. 22, 2004).
Hills argued that DOJ clearly understood that Chiquita would continue to make
payments following the meeting and that the Company had every right to do so until it
heard back from the government. See E-mail from Roderick Hills to Laurence Urgenson
(Aug. 6, 2004). Urgenson thought that it was provocative to make that argument as
aggressively as Hills wanted to make it – he thought it placed the government on the
defensive and increased the odds that DOJ would react poorly to the Company’s
179
The “Thompson Memorandum” is the name given to a memorandum entitled “Principles of
Federal Prosecution of Business Organizations” issued by then-Deputy Attorney General Larry
Thompson in January 2003 that established the criteria federal prosecutors are required to use in
deciding whether corporate entities should be prosecuted. It is common for companies and
individuals under investigation to file a submission with federal prosecutors setting forth why,
under the factors set forth in the Thompson Memorandum, DOJ should not bring a prosecution
in a particular case. Subsequent to the Thompson Memorandum, a revised version of the
memorandum was issued by Deputy Attorney General Paul McNulty in December 2006, and in
2008, a further revised set of standards was incorporated in the USAM.
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arguments. In addition, Urgenson felt that this argument might distract DOJ from
making a favorable decision based on the overall merits of Chiquita’s case. As various
drafts of the submission were exchanged between Hills, Urgenson, Olson, and
Thornburgh, this issue came to a head at an October 1 meeting with DOJ.
4.
October 1, 2004 Meeting with DOJ
On October 1, 2004, Chiquita representatives gave a presentation to DOJ
substantially similar to the June 23, 2004 presentation it made at OFAC. During the
meeting, Hills raised the subject of the Chertoff meeting and, according to Urgenson,
suggested to DOJ that Chertoff had given Chiquita “assurances of non-prosecution.”
The DOJ representatives, including Beasley and Taxay, had an extremely strong and
negative reaction to Hills’ statements. Taxay in particular was incensed by Hills’
statements and, after the meeting, had several conversations with Urgenson in which he
said in very strong terms that it would be counter-productive for Chiquita to make
similar arguments in the future. Taxay went so far as to argue that if Hills continued to
press his interpretation of the Chertoff meeting, a special prosecutor might need to be
appointed to determine whether the former head of the Criminal Division (Chertoff)
had authorized continued payments to an FTO. See E-mail from Laurence Urgenson to
Audrey Harris, et al. (Oct. 1, 2004); E-mail from Laurence Urgenson to Roderick Hills, et
al. (Oct. 1, 2004).
Following this meeting, the Company and Urgenson, with Hills only reluctantly
going along, reached a consensus that Chiquita should de-emphasize its discussion of
the Chertoff meeting in its Thompson Memorandum Submission. On October 4, 2004,
after circulating a draft to the Audit Committee for comment, the Company delivered
its Thompson Memorandum Submission to DOJ.
DD.
Supplemental Thompson Memorandum Submission
Shortly after the submission was delivered, on October 15, 2004, Taxay followed
up with Urgenson to request a supplemental Thompson Memorandum Submission
focusing on several topics related to the Company’s books and records. Specifically,
Taxay requested that further information be provided about: (i) payments to guerrillas,
(ii) procedures for recording and accounting for guerrilla and paramilitary payments,
(iii) SEC testimony concerning guerrilla payments from the 1998 investigation, and
(iv) legal advice received by Chiquita related to the payments. See E-mail from Michael
Taxay to Laurence Urgenson (Oct. 15, 2004). The Company’s Supplemental Thompson
Memorandum Submission included KPMG’s conclusions regarding Chiquita’s
compliance with its own internal controls. See Supplemental Thompson Submission.
Based on KPMG’s independent review, with respect to the convivir/AUC payments,
the Company’s submission stated: “Chiquita complied with their internal policies
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regarding accounting for sensitive payments with one possible exception that was
discovered and corrected in a timely manner.” Id.
EE.
Quiet Period: November 2004 – Summer 2005
Following the delivery of the Company’s submissions, the Company had little
contact with DOJ for many months. The contacts that took place encouraged the
participants in the process to believe that a reasonable, and favorable, disposition was
possible. On December 31, 2004, Taxay sent an e-mail to Urgenson suggesting a
meeting with DOJ sometime in February 2005 to discuss settling the matter. See E-mail
from Michael Taxay to Laurence Urgenson (Dec. 31, 2004); E-mail from Laurence
Urgenson to Roderick Hills, et al. (Jan. 3, 2005). The meeting never took place as Taxay
never contacted Urgenson to set up a meeting.
In mid-March, Taxay left Urgenson a voice-mail stating that he had drafted a
settlement proposal that was in the process of being reviewed within the chain of
command at the U.S. Attorney’s Office for the District of Columbia and DOJ, and that
Chiquita would be asked to participate in settlement discussions in the coming weeks.
See E-mail from Laurence Urgenson to Dick Thornburgh, et al. (Mar. 16, 2005).
Urgenson and Olson were encouraged by these developments, but nothing came of the
plan. The request never came from DOJ, and, in fact, there was no communication of
any kind between DOJ and the Company for more than five months, until early
September 2005. The Company never learned what happened to the settlement
proposal drafted by Taxay, nor about who in DOJ was responsible for turning the
investigation in a new and more aggressive direction starting in September.
FF.
Fall 2005: Transition of Chiquita Investigation to AUSA Malis
1.
AUSA Jonathan Malis Takes Over
On September 8, 2005, Assistant U.S. Attorney Jonathan Malis of the U.S.
Attorney’s Office for the District of Columbia contacted Urgenson to notify the
Company that he had assumed responsibility for the DOJ investigation, taking over for
Taxay and Beasley. See Letter from Jonathan Malis to Laurence Urgenson (Sept. 8,
2005). Almost immediately, Malis took a very aggressive tone with the Company,
accusing it of failing to cooperate sufficiently with DOJ and demanding that the
Company expand its previous waiver of the attorney-client privilege. See Letter from
Laurence Urgenson to Jonathan Malis (Sept. 28, 2005); Letter from Jonathan Malis to
Laurence Urgenson (Oct. 6, 2005). Specifically, Malis suggested that Chiquita would be
viewed as “non-cooperative” unless it agreed to expand the privilege waiver to include
all communications with counsel dating from February 2003 and extending through the
Company’s final payment to the AUC in February 2004. Given the amount of energy
that Chiquita had invested in cooperation to date, and the risks of being labeled “non-
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cooperative,” Chiquita agreed to expand the privilege waiver, which now covered the
advice given by K&E in February and March 2003.
In October 2005, pursuant to the waiver, the Company produced documents
containing the advice of counsel during the course of the investigation, including the
February 2003 memo from Harris that states “CANNOT MAKE THE PAYMENT.”
Memorandum from Audrey Harris to File (Feb. 26, 2003); see Letters from Laurence
Urgenson to Jonathan Malis (Oct. 14, 2005 and Oct. 21, 2005). These documents became
central to the Company’s prosecution. Once Malis took over the investigation, and for
the next eighteen months, the investigation of the Company became much more
aggressive.
2.
Directors Subpoenaed
In late October 2005, Malis issued subpoenas for all of the Company’s
independent directors, except Roderick Hills. In a telephone conversation, Malis
informed Jeffrey Maletta of K&L Gates, Thornburgh’s partner, that “the definition of
subject in the [U.S. Attorneys’ Manual] is so broad that any directors who were serving
on the Board while the payments were ongoing should be considered subjects [of the
DOJ’s investigation].” Email from Jeffrey Maletta to Dick Thornburgh, et al. (Oct. 21,
2005). The Company asked K&L Gates to represent the independent directors, and K&L
Gates agreed to do so. Between December 2005 and January 2006, all of Chiquita’s
directors, with the exception of Hills, testified before the Grand Jury.180 During the
testimony from these directors, AUSA Malis focused largely on the payments Chiquita
made after the Chertoff meeting. By this point, K&E’s role had shifted primarily to
producing documents demanded by DOJ, while K&L Gates managed new
developments in the DOJ investigation.
3.
Olson Retires
In late 2005 and early 2006, Olson disclosed to the Board that the Company still
had certain limited ties to Colombia (apart from its banana purchase contract with
Banacol), including (i) a banana purchase contract with another farm, whose owner,
180
The following witnesses testified before the grand jury in November 2005: (i) [Chiquita
Employee #1], (ii) [Banadex Employee #10], (iii) Steven Kreps, (iv) Barbara Howland, and (v)
Robert Kistinger. The following witnesses testified in December 2005: (i) Robert Thomas, (ii)
[Banadex Employee #4], (iii) Cyrus Freidheim, (iv) [the Chiquita lawyer], (v) Jaime Serra, (vi)
Steven Stanbrook, (vii) Morten Arntzen, and (viii) Jeffrey Benjamin. The following witnesses
testified in January 2006: (i) Robert Fisher, (ii) Durk Jager, (iii) [Banadex Employee #5], (iv) James
Riley, (v) Fernando Aguirre, (vi) [Chiquita Employee #1], and (vii) Jeffrey Zalla. The following
witnesses testified in February 2006: (i) [Banadex Employee #5], (ii) [Banadex Employee #4], (iii)
[the Chiquita lawyer], (iv) [Chiquita Employee #2], (v) William Tsacalis, (vi) Jorge Solergibert,
and (vii) Manuel Rodriguez.
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according to 2005 Colombian media reports, had ties to the AUC; and (ii) ownership of
two tracts of land. See Letter from Jeffrey Maletta to Jonathan Malis (Feb 7, 2006). The
disclosure of this information to the Board, which had been told that the Company had
no other ties to Colombia other than banana purchase contracts, led the Board, and
Aguirre, to lose confidence in Olson. For that reason, among others, including
Aguirre’s desire to bring in new management, the Board ultimately decided to replace
him as General Counsel. James Thompson was hired in April 2006, originally as Chief
Compliance Officer, but with an eye towards eventually becoming the General Counsel.
After a brief transition period, Thompson replaced Olson as General Counsel as of July
1, 2006.
4.
Continuing Investigation
Between February and September 2006, DOJ’s investigation plodded steadily
along, with K&E producing documents on a rolling basis. In June 2006, Malis called
Urgenson and requested that the Company agree to toll the statute of limitations with
respect to certain possible charges, which the Company agreed to do without significant
debate. Then, in early summer 2006, Maletta spoke with Malis, who expressed
frustration with the pace of the Company’s document production and, more generally,
with the level of the Company’s cooperation. Malis then issued several rounds of
subpoenas that addressed different subjects relating to document production. From
June through September 2006, K&E made weekly productions to the government
according to a pre-arranged protocol, and attorneys from K&E and K&L Gates spoke
periodically regarding the pace of the production.
GG.
Covington & Burling LLP Takes Over For K&E
In late September 2006, Malis requested interviews of Urgenson and Harris,
signaling a new and even more aggressive phase of the investigation. In the wake of
the broader privilege waiver demanded by the government, DOJ was now seeking
testimony from the Company’s own lawyers regarding the legal advice they had
provided. The request created a conflict of interest for the K&E lawyers because they
were now being asked to testify against their own client; this made their continued
representation of the Company in dealings and negotiations with DOJ untenable.181
181
The Rules of Professional Responsibility generally prohibit a lawyer from serving as a witness
and advocate in the same matter. See, e.g., ABA Model Rules of Professional Responsibility, Rule
3.7. Although by their terms, many such rules apply specifically to trials, the rule is generally
construed to apply more broadly. The lawyers involved in this matter recognized that DOJ’s
demand to interview Urgenson and Harris meant that they could not continue to deal with the
government as advocates for the Company.
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Due to this conflict, created by Malis’s request, the Company retained
Covington, which was already representing Aguirre individually, to represent it in
connection with the DOJ investigation. See Minutes of Chiquita Board Meeting (Oct. 24,
2006). After Covington became counsel for the Company, K&E’s role was limited to
responding to subpoenas, gathering documents, and putting together production
materials for the government.182
HH.
Plea Negotiations
Shortly after Covington came on board, the Company and the government began
to work in earnest toward a negotiated resolution to the investigation. Over a four
month period, with the active involvement of Covington, K&L Gates, management, and
the entire Board, Chiquita agreed to plead guilty.
1.
The Board Authorizes the Company
to Enter into Plea Negotiations
At a November 16, 2006 Board meeting, Eric H. Holder, who was lead counsel
for Covington, gave a presentation on the DOJ investigation to the Board based on
Covington’s discussions with DOJ to date. Based on Holder’s presentation, the Board
authorized Covington “to continue its discussions with the Department of Justice.”
Minutes of Chiquita Board Meeting (Nov. 16, 2006). In explaining this authorization,
Board members cited the risks and costs associated with a criminal trial as the primary
reasons for seeking a disposition of the matter without going to trial.
For example, Jaime Serra recalled that, during Holder’s presentation, he
estimated that pursuing litigation could cost Chiquita as much as $180 million,
including costs of litigation and the size of the potential fine that could be imposed if
the case was lost. The Board also discussed the possible reputational damage to the
Company of pleading guilty and the ways this could be mitigated. The Board asked
Holder what a guilty plea by the Company would mean for individual directors, and he
told them it would increase the probability of individual prosecution. The directors
engaged in extensive discussions before arriving at the conclusion that the Company
should pursue a plea agreement.
Following this meeting, the Company engaged in an extended period of intense
negotiations with DOJ, including various offers and counter-offers regarding a plea
agreement. The primary issues to be negotiated were: (i) the specific statute to which
the Company would agree to plead guilty, (ii) the amount of the fine that would be
assessed on the Company, and (iii) whether individual officers or directors would be
182
Once Covington entered the case, the requests to interview Urgenson and Harris were put on
hold for a period of several months while the Company negotiated a disposition with DOJ.
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prosecuted. The Company considered (i) and (ii) to be the most critical issues – because
either could result in such catastrophic damage to the Company that it could no longer
continue as a viable enterprise.
There were two possible statutes that the Company could plead to under federal
law. The first, 50 U.S.C. § 1705,183 prohibits knowingly engaging in transactions with a
specially designated global terrorist without obtaining a license from OFAC. The
second, 18 U.S.C. § 2339B, prohibits providing material support to a foreign terrorist
organization, a much more serious offense. Section 2339B carries with it the implication
that the offender is “in bed” with the terrorist organization and supports the goals of
that organization. As such, the Company was concerned that a plea under § 2339B
could potentially cause devastating global public relations issues, and sought to plead
under § 1705.
2.
Initial Plea Offer and DOJ Response
On December 5, 2006, Holder sent an initial proposal to Malis. The key aspects
of the Company’s offer were (i) to plead guilty to two counts of violating § 1705, for the
two payments made to the convivir in February and March 2003, (ii) the payment of a
fine of $1 million, and (iii) the government would agree to “conclude its investigation
into this matter in its entirety,” including any investigation into individuals. See Letter
from Eric Holder to Jonathan Malis (Dec. 5, 2006).
On December 18, 2006, DOJ responded with its first counter-offer. The key
elements of DOJ’s counter-offer were that the Company would (i) plead guilty to one
count of conspiracy to violate § 2339B and one count of conspiracy to violate § 1705, and
(ii) pay a $79 million fine. See E-mail from Jeffrey Maletta to the Board (Dec. 20, 2006).
The Board and management unanimously considered the size of DOJ’s proposed fine to
be inappropriate, unrealistic, and unaffordable.
183
At the time of the Company’s guilty plea, as amended effective March 9, 2006, § 1705 stated: “(a)
A civil penalty of not to exceed $10,000 may be imposed on any person who violates, or attempts
to violate, any license, order, or regulation issued under this chapter. (b) Whoever willfully
violates, or willfully attempts to violate, any license, order, or regulation issued under this
chapter shall, upon conviction, be fined not more than $50,000, or, if a natural person, may be
imprisoned for not more than ten years, or both; and any officer, director, or agent of any
corporation who knowingly participates in such violation may be punished by a like fine,
imprisonment, or both.” Pub. L. No. 109-177, Title IV, § 402, 120 Stat. 243. On October 16, 2007,
the statute was amended to, among other things, (i) increase the ceiling of the civil penalty to the
greater of $250,000 or an amount twice that of the transaction that served as the basis of the
violation, and (ii) increase the ceiling of the criminal penalty to $1,000,000. Pub. L. No. 110-96, §
2(a), 121 Stat. 1011.
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Board Update
On January 5, 2007, the Board met telephonically to receive an update on the
progress of Covington’s negotiations with DOJ. See Minutes of Chiquita Board Meeting
(Jan. 5, 2007). During the meeting, the Board discussed the potential prosecution of
individuals. In the view of James Thompson, the Company’s new General Counsel,
which was shared by the Board, the prosecution of individuals was not appropriate and
not in the best interests of the Company for a number of reasons, including that (i) the
Company would have to pay the substantial legal fees of those individuals, (ii) the
Company’s reputation would be further damaged, (iii) any director or officer of the
Company who was indicted would be unable to perform his or her duties for the
Company, and (iv) the Company had just gone through a series of amendments to its
credit facilities, which were only possible because of the Company’s financial stability
and reputation; individual prosecutions could put this access to credit in jeopardy. In
addition, Aguirre was extremely concerned with the potential prosecution of Board
members because he feared it could create a serious corporate governance problem for
the Company if DOJ chose to pursue multiple directors. Based on detailed discussions,
the Board authorized the Company to develop and transmit a counter-offer to DOJ.
4.
Chiquita Counter-Offer
On January 17, 2007, Holder sent Malis a counter-offer. The key aspects of the
Company’s offer were to (i) plead guilty to three counts of § 1705 for payments made
between October 2001 and April 2003, (ii) pay a $5 million fine, and (iii) agree to
cooperate in investigations of individuals for improper conduct occurring prior to the
disclosure to the government on April 24, 2003.184 In addition, the letter also set forth a
chronology of relevant contacts and communications between the Company and the
government after the April 24, 2003 meeting to address DOJ’s concerns about postdisclosure payments and to make the argument that prosecution based on those
184
Specifically with respect to cooperation, the letter states:
Chiquita understands and appreciates the government’s policy that corporate
plea agreements not be used to shield culpable individuals from criminal
liability. Nevertheless, the Company feels strongly that, for the reasons set forth
above and in the attached appendix, no liability should attach for payments
made following the Company’s voluntary disclosure – either to Chiquita or to
those officers, directors, or employees involved solely in the continuation of the
payments. If, however, the government has reason to believe that individuals
appropriately bear responsibility for pre-disclosure conduct or for improper
conduct during the course of the government’s investigation, Chiquita can agree
to the government’s request that it cooperate in further the investigation of those
individuals. In such circumstances, we would seek additional information
concerning the nature and scope of any contemplated cooperation.
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payments was inappropriate. See Letter from Eric Holder to Jonathan Malis (Jan. 17,
2007).
5.
January 22, 2007 Meeting with DOJ
The Company and DOJ met on January 27, 2007 to negotiate in person. At this
meeting, which was attended by, among others, Holder, Aguirre, and Thompson, DOJ
made clear that its focus was on the post-designation payments, and shared with the
Company a draft of its indictment. The draft indictment identified ten individual coconspirators by job title and letter designation. According to Aguirre and Thompson,
the government was “very aggressive” at this meeting and said that it would not accept
a plea from the Company without an agreement to cooperate in its continuing
investigations of the individuals. In addition, the government asked for additional
information regarding (i) “remedial actions” (punishments) taken against Chiquita
employees involved in the payments, (ii) the Company’s financial condition, and (iii) a
description of the Company’s compliance programs instituted after the discovery of the
AUC’s FTO designation.
6.
January 26, 2007 Board Meeting – Hills Recuses Himself
Four days later, at a January 26, 2007 Board meeting, Hills voluntarily recused
himself from all matters related to Colombia and from his role as Chair of the Audit
Committee on these issues. See Minutes of Chiquita Board Meeting (Jan. 26, 2007). The
Board believed that this was the appropriate course of action, given the growing tension
between DOJ’s prosecutorial interest in Hills – he was one of the ten individual
“conspirators” identified by letter and job title in the draft indictment – and his
responsibilities as Chair of the Audit Committee. The Board named Morten Arntzen
acting Chair of the Audit Committee with respect to all matters relating to Colombia.
Thereafter, Arntzen took the lead in dealing with the plea negotiations on behalf of the
Audit Committee.
7.
Continuing Negotiations with DOJ
The Company continued to engage in detailed and intense negotiations during
the first two weeks of February. At a February 2, 2007 Board meeting, the Board
authorized and directed the Company to make another plea offer to DOJ, which
authorized its counsel to offer to pay a financial penalty not to exceed $12.5 million. See
Minutes of Chiquita Board Meeting (Feb. 2, 2007). Four days later, on February 6,
Chiquita sent a letter containing a revised plea proposal to DOJ and attached a financial
analysis prepared by Jeffrey Zalla, the Company’s Chief Financial Officer, which
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supported the Company’s claims concerning its limited ability to pay a fine.185 The key
aspects of the offer were for the Company to (i) plead to one count of § 1705 for all
payments from 2001 through 2004, (ii) pay a $12.5 million fine, and (iii) cooperate in the
government’s ongoing investigation of the case. See Letter from Eric Holder to Jonathan
Malis (Feb. 6, 2007) (“Chiquita would agree to cooperate in the government’s
investigation of this case”). Thus, at this point, Chiquita had completely abandoned its
efforts to prevent the prosecution of individuals through the Company’s plea.
The government’s response, faxed to Covington lawyers on the same date,
February 6, noted that the government and Chiquita still remained “far apart” on the
amount of the fine and the statute to which the Company would plead guilty, and
attached a proposed plea agreement and draft criminal information. The key aspects of
the government’s counter-offer were that the Company would (i) plead to one count of
conspiracy to violate § 2339B and one count of conspiracy to violate § 1705, and (ii) pay
a $70 million fine. See Letter from Jonathan Malis to Eric Holder (Feb. 6, 2007). The
draft information was worded to suggest that the government had no knowledge
between April 2003 and January 2004 that the payments were continuing.
On February 7, Holder, Aguirre, Thompson, and Zalla met with Malis and other
DOJ representatives for approximately four hours. During the meeting, Zalla reviewed
the Company’s finances with DOJ in response to the proposed $70 million fine. The
discussion was heated at times, with the Company’s representatives arguing that they
did not have the flexibility to accede to the conditions the government was demanding,
and that if the government did not make additional concessions, the Company would
have no choice but to take the case to trial. As Aguirre advised the Board via e-mail
later that day, the Company “played hardball” on the amount of the fine and
“threatened several times that we are prepared to go to trial.” E-mail from Fernando
Aguirre to the Chiquita Board (Feb. 7, 2007).
On February 8, the Board met telephonically to discuss DOJ’s February 6
counterproposal. The Board authorized Zalla to conduct further financial analysis to
determine if an increased settlement offer was possible. See Minutes of Chiquita Board
Meeting (Feb. 8, 2007).
8.
The Parties Reach an Agreement
At a Board meeting held on February 15, Zalla provided the analyses requested
by the Board regarding the Company’s ability to pay a fine greater than $12.5 million.
See Minutes of Chiquita Board Meeting (Feb. 15, 2007). After reviewing Zalla’s findings,
185
Zalla was asked by Aguirre to prepare two analyses to present to DOJ, including (i) a response to
an analysis prepared by DOJ’s expert relating to the profits Chiquita allegedly earned from its
Colombian operations, and (ii) the impact of various fines on the Company’s financial position.
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the Board approved a plea offer consisting of (i) a plea to one count of a violation of §
1705, (ii) a maximum $25 million fine, and (iii) continued cooperation in any ongoing
investigation. See Minutes of Chiquita Board Meeting (Feb. 15, 2007).
The following day, Holder sent a letter to Jeffrey Taylor, the United States
Attorney for the District of Columbia, containing the revised offer. The letter raised
several issues with the draft criminal information that had been sent on February 6,
including that it contained misleading or inaccurate facts, and identified individuals as
co-conspirators. The Company also challenged the fairness and appropriateness of the
proposed charges and proposed financial penalty and argued that the Company’s
voluntary disclosure to the government and its extensive cooperation should count
more heavily in its favor. Consistent with the authorization granted at the February 15
Board meeting, the Company made a counter-offer, the key aspects of which were that
the Company would (i) plead to one count of § 1705 for all payments from 2001 through
2004, and (ii) pay a $25 million fine. See Letter from Eric Holder to Jeffrey Taylor (Feb.
16, 2007).
A significant breakthrough in the negotiations occurred four days later. In a
letter dated February 20, 2007, Malis, while noting his disagreement with Chiquita’s
characterization of its cooperation, agreed to the $25 million fine. While there were
remaining issues to be negotiated – the statute to which the Company would plead
guilty and the factual allegations contained in the charging document – this was the
first major concession made by the government. See Letter from Jonathan Malis to Eric
Holder (Feb. 20, 2007). On Feb. 22, 2007, the Company publicly disclosed in an 8-K
filing that it had reserved $25 million for the purpose of paying a criminal fine. See
Chiquita Brands Int’l, Inc., Current Report (Form 8-K) (Feb. 22, 2007).
Throughout the remainder of February and the beginning of March, the
Company and the government continued to exchange proposals, focusing on the
language to be contained in the criminal information. The Company fought to keep
“collateral issues,” such as issues relating to the Company’s books and records, out of
the information and to prevent the government from identifying individuals by name
and position. These were issues of enormous interest and importance to the Board, and
there was an extensive exchange of views between Aguirre and the other members of
the Board, both by e-mail and conversations – as there had been throughout the plea
negotiations – about the remaining issues. See Letter from Eric Holder to Jonathan
Malis (Feb. 23, 2007).
At a Board meeting on March 9, Holder updated the Board on the Company’s
discussions with DOJ. Holder reviewed a proposed offer letter he had prepared, which
outlined the terms upon which the Company would accept a plea. Those terms
included (i) pleading guilty to one count of violating § 1705, and (ii) paying a $25
million fine. The letter also requested that the government make two modifications to
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the criminal information and factual proffer: (i) collapse the descriptions of “relevant
persons” section, which described each individual’s position at the Company, into a
single paragraph with a general description of the individuals as “senior executives or
employees of Chiquita,” and (ii) eliminate additional identifying information regarding
Individual B (Hills). See Minutes of Chiquita Board Meeting (Mar. 9, 2007); Letter from
Eric Holder to Jonathan Malis (Mar. 9, 2007).
The Board members asked a number of questions and had extended discussions
about the elements of the plea and the appropriate factors for the Board to consider,
including the Board’s duties of care and loyalty. At the end of the meeting, the Board
directed counsel to offer DOJ a settlement with the terms set forth in the letter. See
Minutes of Chiquita Board Meeting (Mar. 3, 2007). The same day, DOJ rejected the
Company’s two requests regarding the identifying information, but otherwise accepted
the terms of the Company’s offer.
Two days later, on March 11, the Board resolved to enter into the plea agreement
with DOJ. The directors engaged in a lengthy discussion regarding the potential
ramifications of the proposed agreement for the Company and its stakeholders, as well
as available alternatives and their potential ramifications for the Company, but in the
end they were satisfied that this was the best course for the Company. See Minutes of
Chiquita Board Meeting (Mar. 11, 2007).
The Board members who participated in these lengthy, important, and
sometimes contentious discussions believed that the Board and management were
searching for results that were in the best interests of the Company. That is what the
SLC was told repeatedly in its interviews of the officers and directors who participated
in this process. Although many directors were concerned that entering into a plea
agreement without any resolution on whether charges would be brought against
individuals was risky, the Board decided the Company’s interests were best served by a
settlement that resolved the case against the Company, even if it left open the
possibility that individuals would be prosecuted.
All directors were aware, and in fact had been explicitly told, that the plea
agreement was conditioned on the Company’s continuing cooperation with the DOJ
investigation, which they understood to mean that some directors might be required to
testify against other directors and former officers of the Company, and that some
directors might ultimately be charged. The directors understood that continued
cooperation would also entail providing DOJ with documents, witnesses, and other
materials it might request to assist DOJ in its continuing investigation of individuals.
On March 17, 2007, four months after the process began and after more than two
months of serious negotiations, the Company signed a plea agreement with the
government and entered its guilty plea in the U.S. District Court for the District of
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Columbia in Washington, D.C. The Company entered a plea of guilty to one count of a
violation of § 1705 for payments made from September 2001 through January 2004,
agreed to pay a $25 million fine, paid over five years, and agreed to be subject to
corporate probation for a period of five years. In addition, the Company agreed to
cooperate in the continuing investigation of individual Chiquita officers and directors.
The Court provisionally accepted Chiquita’s plea the same day, pending the conclusion
of the government’s investigation of the individuals. See Plea Agreement, U.S. v.
Chiquita Brands Int’l, Inc., No. 07-055 (Mar. 19, 2007) (Chiquita “agrees to cooperate
fully, completely and truthfully with all investigators and attorneys of the government,
by truthfully providing all information in your client’s possession relating directly or
indirectly to all criminal activity and related matters which concern the subject matter of
this investigation”).
9.
Continued Investigation of Individuals
Subsequent to the plea being entered, DOJ continued its investigation of
individuals. Among the investigative steps the government took during this period
was obtaining the grand jury testimony of Larry Urgenson and requesting additional
documents from the company. See Letter from Laurence Urgenson to Jonathan Malis
(April 19, 2007). The government interviewed Urgenson on six separate occasions prior
to his testimony. Urgenson then testified in the grand jury for over four hours. During
that time, DOJ requested and received individual memos in support of non-prosecution
from five then-current and former officers and directors, which sought to persuade DOJ
not to pursue criminal charges against them in connection with the payments to the
AUC. In early September, DOJ notified counsel for the individuals that their clients
would not be prosecuted. See Transcript of Sentencing, U.S. v. Chiquita Brands Int’l,
Inc., No. 07-055 (2007).
The Company was sentenced on September 17, 2007, according to the terms set
forth in the plea agreement. See id.
II.
Compensation & Severance
The Amended Complaint alleges that the individual defendants made wrongful
and excessive compensation decisions that rewarded officers and directors who had
been involved in unlawful activity relating to the payments in Colombia. See Am.
Compl. ¶ 119. The following section details the severance and compensation decisions
taken with respect to senior management and the directors in the period following the
Company’s discovery of the FTO designation in February 2003.
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Freidheim’s Retirement
Cyrus Freidheim served as CEO from the time the Company emerged from
bankruptcy in March 2002 until Fernando Aguirre joined the Company as CEO in midJanuary 2004. Freidheim assumed the CEO position on an interim basis after the Board
decided not to retain Steven Warshaw. The Board ultimately decided to hire a CEO
with substantial operational experience in the food or consumer goods industries.
On March 11, 2003, the Compensation Committee approved a compensation
package for Freidheim as interim CEO, which consisted of the following: (i) annual
base salary of $700,000 and an increased target bonus opportunity from 170% to 200% of
annual salary (under a program that was previously approved by the Compensation
Committee);186 (ii) 30,000 shares of restricted stock and stock options for 150,000 shares;
and (iii) continued eligibility for awards of restricted stock under the Company’s Long
Term Incentive Program (“LTIP”). See Minutes of Chiquita Compensation Comm.
Meeting (Mar. 11, 2003). This arrangement was memorialized in a letter agreement,
dated July 23, 2003, which was signed by Jeffrey Benjamin, then-Chair of the
Compensation Committee. See Letter from Cyrus Freidheim to Jeffrey Benjamin (July
23, 2003).
Pursuant to the letter agreement, Freidheim was to be paid normal director’s fees
as non-executive chairman after the election of a new CEO. The arrangement also
provided that any stock options and restricted stock grants would vest if Freidheim
were to leave the Board at its request, for health reasons, or after January 1, 2004 at the
government’s request187 and, should he leave under any of those circumstances, he
would forfeit eligibility for unearned LTIP restricted stock awards. See id.
In December 2003, Michael Kesner, a consultant from Deloitte Touche Tohmatsu
(“Deloitte”), who began advising the Compensation Committee earlier that year,
reviewed the terms of Freidheim’s compensation in connection with providing
recommendations to the Board regarding Aguirre’s employment agreement. According
to Kesner, Freidheim’s compensation was weighted in favor of cash compensation (base
salary and bonus) rather than equity compensation due to his age and the fact that he
was expected to hold the CEO position for only a short time. According to Kesner, both
186
A target bonus is commonly tied to the attainment of pre-determined performance goals by the
Company and, under Chiquita’s plan, is calculated by multiplying each senior executive’s annual
base salary by a factor set by the Compensation Committee.
187
This referred to the possibility that during the DOJ investigation, DOJ might make it clear that
Freidheim needed to step aside. At no time during the DOJ investigation did the government
request that Freidheim do so.
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of these factors made long-term incentive compensation less preferable for Freidheim,
despite the fact that this type of compensation typically accounts for the bulk of public
company CEO pay packages.
When he retired as Chairman in May 2004, Freidheim received only the
previously granted stock options and restricted stock that were due to vest upon his
retirement in accordance with the July 23, 2003 agreement. See Letter from Cyrus
Freidheim to Jeffrey Benjamin (July 23, 2003); Minutes of Chiquita Board Meeting
(Mar. 30, 2004).
2.
Riley’s Severance
Jim Riley served as CFO from January 2001 to August 2004, when he was
replaced by Jay Braukman. Freidheim had told Riley that Aguirre planned to bring in a
new CFO once he assumed the CEO position. In July 2004, Riley approached Aguirre to
discuss his long-term plans, and they made a mutual decision that Riley should leave
the Company.
In anticipation of Riley’s departure, the Compensation Committee proposed and
discussed certain severance arrangements for Riley at its February 9 and March 30, 2004
meetings.188 At its July 26 and 27, 2004 meeting, the Board discussed and approved
certain additional enhancements to the proposed severance package for Riley,
consisting of pro rata vesting of his LTIP restricted stock award and a two-year life
insurance policy. See Minutes of Chiquita Board Meeting (July 26–27, 2004). The
directors recalled in general that this award was standard and appropriate. Although
he did not consult on Riley’s award, upon reviewing the terms at a later date, Kesner
found them to be appropriate and not “excessively generous.”
3.
Salary Increases for Kistinger, Olson, and Zalla
At a February 16, 2005 Compensation Committee meeting, Aguirre
recommended annual salary increases for Kistinger ($25,000), Olson ($15,000), and Zalla
($10,000), among others – his direct reports – which the Committee approved. See
Minutes of Chiquita Compensation Comm. Meeting (Feb. 16, 2005). The directors
interviewed by the SLC viewed these decisions as reasonable based on both market
compensation rates at Chiquita’s peer companies and advice provided by Kesner. At its
meeting on July 9, 2007, which was attended by Kesner of Deloitte, the Compensation
Committee approved a salary increase in the amount of $30,000 for Jeffrey Zalla. See
Minutes of Chiquita Compensation Comm. Meeting (July 9, 2007).
188
In or around mid-2003, the Compensation Committee began to be referred to as the
Compensation and Organization Development Committee. For purposes of clarity, this Report
will refer to the committee as the Compensation Committee throughout.
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Braukman’s Severance
Jay Braukman replaced Riley as CFO, and served in that position from August
2004 to June 2005. In or around May 2005, Aguirre informed Braukman that he was being
terminated from the Company because of his performance and because several shareholders
had complained about him to Aguirre. In structuring the terms of Braukman’s separation,
Aguirre proposed that he would remain at the Company for three additional months – from
June until August 2005 – in order to allow him to qualify for severance under the Company’s
policy.189 In July 2005, the Compensation Committee ultimately approved an award of a cash
payment equal to nine months of salary (one year’s salary reduced by three months to reflect
Braukman’s tenure as CFO), with no bonus. See Email from Fernando Aguirre to Chiquita
Compensation Comm. (July 28, 2005). Braukman was granted a modest severance award in
recognition of the disruption to Braukman’s career caused by his brief tenure and his abrupt
termination by Chiquita, as well as the fact that he had moved to Cincinnati to take the job.
5.
Olson’s Retirement
After eleven years as General Counsel, Robert Olson retired as of August 31,
2006. The evidence developed by the SLC shows that Olson retired as part of Aguirre’s
attempts to bring in new management and after questions were raised about Olson’s
performance in late 2005. Olson received an individually negotiated retirement
agreement, approved by Aguirre after discussion with certain directors, under which he
received: (i) a cash benefit of $622,500, (ii) a pro rata bonus of $138,333, (iii) twelve
months of office space and services, and (iv) accelerated vesting of stock options, among
other things. See Retirement Agreement between Chiquita Brands Int’l, Inc. and Robert
Olson (Aug. 3, 2006). Although Olson’s retirement agreement was not granted
pursuant to any existing Company plan, it largely mirrors what the Company offered to
departing (rather than retiring) executives of his level of seniority under the Executive
Officer Severance Pay Plan (the “Plan”).190 Moreover, because Olson was over age 55
189
Although he did not advise the Compensation Committee on Braukman’s severance, Kesner
informed the SLC that the Company’s treatment of Braukman is typical of the practices at many
of the companies for which he has served as a compensation consultant. Kesner explained that
when it becomes apparent almost immediately that a new senior officer is not a good fit,
companies tend to recognize that they have made a hiring mistake, and generally avoid
penalizing the employee for that error. Therefore, according to Kesner, even if the employee has
served for less than one year, companies commonly grant a standard severance award or fair
severance compensation, in recognition of the impact of the mistake on that person’s career and
as a means of creating a “financial bridge” to that individual’s next position.
190
The Plan was largely drafted by Kesner and Olson in 2005 and became effective as of March 27,
2006. See Chiquita Brands Int’l, Inc., Annual Report (Form 10-K), Exhibit 10.37 (Mar. 8, 2007).
Kesner advised the Company to adopt a severance plan in order to avoid long and distracting
negotiations with individuals over severance awards. According to Kesner, such plans are
standard practice among companies in Chiquita’s peer group. The Plan, in relevant part, applies
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and had served the Company for over ten years, he was eligible to receive accelerated
vesting of certain equity awards upon departure.191
Directors and senior management recalled discussions about the fairness of
Olson’s retirement package and the desire to ensure his continued cooperation with the
ongoing DOJ investigation, but none believed that the benefits he received had been
“sweetened” in exchange for his cooperation. Benjamin noted that, in his experience,
the market severance package for someone at Olson’s level ranges from one to two
years’ salary, so Olson’s retirement pay – which was one year’s salary – was believed to
be at the lower end of this range. Stanbrook noted that the Board wanted to treat Olson
fairly and in a manner that would allow the Company to benefit from his institutional
knowledge and ensure his ongoing cooperation with the DOJ investigation, and that
this agreement was designed to do both while not deviating from standard practice at
the Company. Fisher said that he believed Olson’s award was standard and fair; the
Company was wary of granting any severance that went over and above its established
practices because doing so would “set a precedent.”
6.
Aguirre’s Salary Increases
As CEO, Fernando Aguirre was granted certain enhancements in his
compensation between 2004 and 2008. At its meeting on February 16, 2005, the
Compensation Committee approved a $50,000 increase in his salary and a cash bonus of
$1,506,960 (which was a reduction of the bonus to which he was otherwise entitled
under the annual bonus plan and his employment agreement). See Minutes of Chiquita
Compensation Comm. Meeting (Feb. 16, 2005).
One year later, at its meeting on February 15, 2006, the Compensation Committee
approved an increase in Aguirre’s annual salary from $750,000 to $800,000 and a cash
bonus of $1,857,275 (which likewise was a reduction of the bonus to which he was
otherwise entitled under the annual bonus plan and his employment agreement). See
Minutes of Chiquita Compensation Comm. Meeting (Feb. 15, 2006).
to senior executive officers who separate from the Company for reasons other than “for cause”
termination or retirement. Under the Plan, participants receive the following severance award:
(i) cash benefit equal to the sum of the participant’s current annual base salary and annual bonus
target, (ii) cash benefit equal to the participant’s pro-rata cash bonus for the year of termination,
based on the annual bonus target, (iii) continuation of health benefits under normal COBRA rules
for 12 months, (iv) accelerated vesting of restricted shares awarded under the Company’s LTIP,
(v) one additional year of vesting for the purposes of the Company employee stock options and
non-LTIP restricted stock, and (vi) outplacement services, provided that the participant begins
using those services within 30 days of his separation from service.
191
Although he did not consult on Olson’s agreement, in reviewing it at the SLC’s request, Kesner
did not find any of the terms to be excessive or inappropriate, including the accelerated vesting
provision, which he described as standard practice at many companies.
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On or around April 15, 2007, the Compensation Committee discussed and
approved via e-mail an increase in Aguirre’s compensation whereby (i) his base salary
was increased by 13% to $900,000, (ii) he was given a target bonus of 130% of that
salary, (iii) he received a restricted stock award of shares worth $1.2 million, and (iv) he
received an additional restricted stock grant with a targeted value of $1.6 million. See Email from Steven Stanbrook to James Thompson, et al. (Apr. 13, 2007); see also Chiquita
Brands Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 15, 2008). According to
Stanbrook, then-Chair of the Compensation Committee, the increases were granted
with the goal of positioning the Company in the 75th percentile of its peer companies in
CEO salary, while providing incentives to Aguirre. Stanbrook also believed that
Aguirre’s compensation reflected the fact that Aguirre had not played any role in the
Colombia situation and the resulting DOJ investigation – the seriousness of which he
was not fully aware prior to joining the Company – was a significant distraction for him
in running the Company. In addition, the increase in compensation was viewed as
reasonable because a substantial portion of Aguirre’s compensation package consisted
of equity awards and the Company’s stock price was not particularly strong at the time.
See E-mail from Steven Stanbrook to Chiquita Compensation Comm. (Jan. 30, 2007).
Finally, at its February 13, 2008 meeting, the Compensation Committee deferred
discussion of Aguirre’s compensation, but, according to the meeting minutes, later (on
an unspecified date) approved an increase in his annual base salary to $950,000 and a
target bonus in the amount of $1,235,000. See Minutes of Chiquita Compensation
Comm. Meeting (Feb. 13, 2008).
According to Kesner, who advised the Compensation Committee with regard to
Aguirre’s compensation during this period, the Board handled Aguirre’s requests to
revisit his salary appropriately, and took additional steps to balance the need to
incentivize and retain Aguirre with the need to keep executive compensation within
range of the median of Chiquita’s peer group, with the goal that Aguirre’s
compensation not differ materially from standard practice at similarly sized and
situated companies.
7.
Director Compensation Increases
In addition, during this period, there were increases in directors’ compensation.
At a regularly scheduled Board meeting on February 15, 2007, the Board adopted a
resolution in favor of increasing annual director fees to $80,000 in cash and $80,000 in
Company stock. The Board also approved an additional $20,000 for the Chairs of the
Audit and Compensation Committees, and an additional $15,000 for the Chair of the
Nominating and Governance Committee. Newly elected or appointed directors were
also granted a restricted stock award with a fair market value of $160,000. See Minutes
of Chiquita Board Meeting (Feb. 15, 2007).
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This meeting marked the first time that the Company raised its annual fees for
directors since 2002.192 Prior to this increase, director compensation was $50,000
annually, payable half in stock and half in cash, plus a ten-year option to purchase
50,000 shares of Company stock. These increases were made in consultation with
Kesner, who informed the Nominating and Governance Committee that the Company’s
director fees were well below market, after reviewing the Company’s peer group,
general industry group, and other data.
Several directors said that they became aware that the gap in director
compensation could no longer be ignored, as it threatened the Company’s ability to
attract and retain directors in an already difficult market. The directors who attended
the February 15, 2007 meeting recalled a lively discussion of the raise, but did not recall
that anyone questioned the appropriateness of the increase or its timing (given the
forthcoming guilty plea). Kesner said that although the total compensation of $160,000
per year in combined stock and cash did no more than raise director compensation to
market range, he advised the Board that it might want to consider increasing its fees in
two equal steps over two years. However, the Board decided to raise its fees at one
time.
On the whole, the Board believed that the increases were appropriate and
necessary in light of the serious challenges facing the Company, the amount of time and
attention the Board had spent on the DOJ investigation, the Company’s relatively recent
emergence from bankruptcy, and the Company’s need to remain competitive with its
peer group. Indeed, this decision came immediately after the resignation of director
Jeffrey Benjamin, who left the Board on February 6, 2007 because of complications to his
other gaming-related business activities caused by the DOJ investigation.
8.
Kistinger’s Severance
In December of 2007, after approximately twenty-eight years of service to the
Company, Robert Kistinger was terminated from employment in connection with an
effort led by Aguirre to reduce the Company’s overhead costs that included eliminating
the position of COO of Chiquita Fresh Group, which Kistinger held. On October 25,
2007, the Board approved a compensation and severance package for Kistinger (whose
separation from the Company was to become effective as of December 31, 2007),
“consistent with the terms of the Company’s Executive Officer Severance Pay Plan.” See
Minutes of Chiquita Board Meeting (Oct. 25, 2007).
192
See Chiquita Brands Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 15, 2008); Chiquita Brands
Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 23, 2007); Chiquita Brands Int’l Inc., Proxy
Statement (Form Def 14-A) (Apr. 19, 2006); Chiquita Brands Int’l Inc., Proxy Statement (Form Def
14-A) (Apr. 18, 2005); Chiquita Brands Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 20, 2004);
Chiquita Brands Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 22, 2003).
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In addition to an award consistent with the terms set forth in the Plan (including
a cash payment equal to one year’s salary and a bonus) (see supra note 190), Kistinger
received (i) the full balance of his employee deferred compensation account, (ii)
reimbursement for $10,000 in legal fees, (iii) continued D&O liability insurance
coverage, (iv) accelerated vesting of all his shares of unvested restricted stock, (v) three
years to exercise all stock options, and (vi) an additional two months to determine
whether to use Company provided outplacement services. Like Olson, Kistinger
qualified for and received acceleration of certain equity awards due to his age and
tenure at the Company.
Several Board members said that Kistinger was extremely dissatisfied with his
severance, which was less than what he had requested, but that they viewed it as
appropriate under the circumstances. See Minutes of Chiquita Board Meeting (Oct. 25,
2007). Kistinger told the SLC that he attempted to negotiate a larger severance package
because of his many years of service to the Company and because he ran the most
profitable aspect of its business. In the end, Kistinger’s severance award was consistent
with the terms of the Plan, with the exception of the minor deviations described above.
JJ.
Remedial Measures
As part of its investigation, the SLC, under the direction of Audit Committee
Chair and SLC member Barker, also examined what, if any, remedial measures and
enhancements to the Company’s compliance programs the Company implemented in
connection with the events described in this report. The SLC found that, following the
discovery of the AUC’s FTO designation and the DOJ investigation, the Company
appropriately focused on the adequacy of its compliance measures. It developed
various enhancements to its compliance program that are designed to minimize to the
greatest extent possible the chances that the Company will experience a problem of this
type ever again. This review is continuing and the SLC will make recommendations to
management as to whether any further enhancements are appropriate.
The SLC has summarized below the major enhancements to Chiquita’s
compliance program that have been implemented over the past several years:
First, in February 2005, at the direction of Chiquita’s Audit Committee, the
Company created the position of Chief Compliance Officer (“CCO”). The CCO reports
directly to the Chair of the Audit Committee and oversees the Company’s Compliance
and Ethics Program. The Program includes, (i) establishing institutional compliance
policies and procedures designed to prevent illegal and unethical conduct, (ii)
communicating compliance policies and procedures throughout the Company, (iii)
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training for Company employees,193 and (iv) monitoring, auditing, and enforcing
compliance with policies and procedures. In particular, over the last several years, the
Company has implemented a broad variety of new or updated mandatory compliance
policies, including an International Trade Compliance Policy, a revised FCPA
Compliance Manual, an updated Antitrust Policy, and an updated Code of Conduct.
The CCO attends all Audit Committee meetings and reports no less than once per year
on the status and effectiveness of the Company’s compliance programs.
Second, in the fourth quarter of 2005, the Company implemented a
comprehensive OFAC screening program. Under this program, the Company’s
Controller group is responsible for screening all third party suppliers and customers
against all OFAC lists of restricted persons and entities, and several additional lists of
persons and organizations published by, among other government agencies, the
Department of Homeland Security.194 For this screening program, the Company
employs the JPMorgan Chase Vastera software tool, which electronically screens all
vendor/customer records and identifies potential matches with persons or
organizations that appear on the OFAC and other lists. No non-cash payments can be
made by the Company or any of its personnel to a third party until the third party is
cleared through this system. If Vastera is unable to resolve a potential match,195 the
Company conducts an investigation to determine whether there is any connection
between the third party and the prohibited entity. If there is any doubt as to the thirdparty’s identity, the Company will not allow the payment to be made. All consolidated
subsidiaries globally are required to comply with this screening policy, as well as noncontrolled affiliates in potentially higher risk geographic areas.
193
In 2008, in addition to traditional in-person training, Chiquita introduced new online training
programs covering FCPA compliance, antitrust, global competition law, and Chiquita’s revised
Code of Conduct.
194
The Company has reviewed the specific lists it includes in this screening program with OFAC
counsel at two separate law firms to ensure they are appropriate. The lists are automatically
updated when there is a change made.
195
Vastera identifies both “hard hits” and “soft hits.” Where there is a “soft hit” there is no match to
a name, but there may be a match to some other identifying information such as an address, birth
date, or country. Where there is a “hard hit” there is a match to a name, plus a match to one or
more other identifiers.
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Third, in 2004, the Company established an external anonymous reporting
system (the “Chiquita Helpline”) that allows employees to anonymously report
potential ethical, legal and compliance issues. Each employee communication is
promptly reviewed according to standard procedures, and logged into a central record
keeping system, classified by type, and the investigative facts and disposition are
recorded. A summary report of all Chiquita Helpline matters is presented to the Audit
Committee for review and discussion on a monthly basis.
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APPLICABLE LAW AND ANALYSIS OF THE CLAIMS
The Amended Complaint alleges, in a single cause of action, that each of the
defendants breached their fiduciary duties owed to the Company and, as a result,
caused the Company to wrongfully waste corporate assets. See Am. Compl. ¶¶ 157–
165; 166-169. However, the Amended Complaint contains allegations spanning a nearly
20-year period and includes numerous different types of allegedly wrongful conduct.
Thus, for purposes of its investigation and analysis, the SLC divided the plaintiffs’
single cause of action into the following distinct claims:196
196
(i)
breach of fiduciary duty by causing Chiquita to make payments to the
FARC and the ELN from approximately 1989 to 1997, or by failing to be
aware of such payments;
(ii)
breach of fiduciary duty by causing Chiquita to make payments to the
AUC, from approximately 1997 through February 2004, or failing to be
aware of those payments;
(iii)
breach of fiduciary duty by conducting an alleged “fire sale” of Chiquita’s
Colombian operations (Banadex), in June 2004 as a result of the pending
Department of Justice investigation;
(iv)
breach of fiduciary duty and waste of corporate assets by 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;
(v)
breach of fiduciary duty by causing Chiquita to 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;
(vi)
breach of fiduciary duty by causing 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, or
allowing such false statements to be made; and
(vii)
breach of fiduciary duty and waste of corporate assets by 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
Counsel for the SLC reviewed these categories with Lead Counsel at a meeting held on October
31, 2008, and Lead Counsel raised no objection at that time or at any time since.
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wrongdoing to remain at the Company and to receive excessive
compensation.
In addition, while the Amended Complaint fails to apply any particular cause of action
to any particular defendant, the SLC has considered the conduct of each defendant
individually in making its assessment of each claim. In the section that follows, the SLC
discusses and analyzes applicable law to each claim.
A.
Summary of Relevant Legal Standards197
The SLC has analyzed the relevant legal standards that apply to the actions taken
by directors and officers of a New Jersey corporation. These standards governed the
SLC’s review of the Amended Complaint and the relevant facts developed during the
course of its investigation.
1.
The Duty of Care
New Jersey law requires that directors and officers “discharge their duties in
good faith and with that degree of diligence, care and skill which ordinarily prudent
people would exercise under similar circumstances in like positions.” N.J.S.A. § 14A:614. Delaware law, which is substantially more developed, imposes a similar
requirement. See In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 749 (Del. Ch. 2005)
(directors and officers owe a duty of care to the corporation that requires officers and
directors to “‘use that amount of care which ordinarily careful and prudent men would
use in similar circumstances,’” and “‘consider all material information reasonably
available in making business decisions’”) (citation omitted); Aronson v. Lewis, 473 A.2d
805, 812 (Del. 1984) (“directors have a duty to inform themselves, prior to making a
business decision, of all material information reasonably available to them”).
Business Judgment Rule. The business judgment rule arises from the
fundamental principle that the business and affairs of a corporation are managed by or
under the supervision of, its board of directors. See In re PSE&G S’holder Litig., 801 A.2d
295, 306 (N.J. 2002). The business judgment rule exists to protect and promote the full
and free exercise of the managerial power granted to directors. See id. (“One of the
rule’s purposes is to promote and protect the full and free exercise of the power of
management given to the directors”) (citation omitted); Zapata Corp. v. Maldonado, 430
A.2d 779, 782 (Del. 1981).
197
As noted above, Chiquita is incorporated in New Jersey, and thus New Jersey law governs the
conduct of Chiquita’s directors and officers. However, New Jersey courts generally consider the
law of Delaware and New York in interpreting New Jersey corporate law.
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Courts also apply the business judgment rule to decisions made by corporate
officers. See In re Classica Group, 2006 WL 2818820, at *7 (Bankr. D.N.J. 2006) (“The
business judgment rule applies equally to corporate directors and officers”) (applying
New Jersey law); Maul v. Kirkman, 637 A.2d 928, 937 (N.J. Super. Ct. App. Div. 1994)
(“bad judgment, without bad faith, does not ordinarily make officers individually
liable”); Gantler v. Stephens, C.A. No. 2392 (Del. Jan. 27, 2009) (“In the past, we have
implied that officers of Delaware corporations, like directors, owe fiduciary duties of
care and loyalty, and that the fiduciary duties of officers are the same as those of
directors. We now explicitly so hold”).
The rule itself creates “a presumption . . . that disinterested directors act ‘on an
informed basis, in good faith and in the honest belief that their actions are in the
corporation’s best interest.’” In re PSE&G S’holder Litig., 718 A.2d 254, 256 (N.J. Super.
Ct. Ch. Div. 1998), aff’d, 801 A.2d 295 (N.J. 2002); see also Temiz v. Temiz, 2006 WL 163503,
at *12 (N.J. Super. Ct. Ch. Div. Jan. 23, 2006) (the business judgment rule “is a rebuttable
presumption that good faith decisions based on reasonable business knowledge by
directors and officers are not actionable”); Aronson, 473 A.2d at 812 (same). This
presumption applies when there is no evidence of “fraud, self-dealing, or
unconscionable conduct” on the part of the officers or directors. Maul, 637 A.2d at 937.
Thus, courts are typically precluded from second-guessing the decisions of
corporate officers and directors. See PSE&G, 801 A.2d at 306 (“New Jersey courts have
long accepted that a decision made by a board pertaining to the manner in which
corporate affairs are to be conducted should not be tampered with by the judiciary so
long as the decision is one within the power delegated to the directors and there is no
showing of bad faith”); In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del.
Ch. 1996) (“To employ a different rule – one that permitted an ‘objective’ evaluation of
the decision – would expose directors to substantive second guessing by ill-equipped
judges or juries, which would, in the long-run, be injurious to investor interests”).
Accordingly, “[w]here a director in fact exercises a good faith effort to be informed and
to exercise appropriate judgment, he or she should be deemed to satisfy fully the duty
of attention.” Caremark, 698 A.2d at 968. Indeed, it is well-settled under New Jersey law
that, “[B]ad judgment, without bad faith, does not ordinarily make officers individually
liable.” Maul, 637 A.2d at 937 (citation omitted).
In order to overcome the presumption created by the business judgment rule, it
must be shown that there was fraud, illegality, a conflict of interest, or gross negligence.
See id. (“the burden of proof shifts to the defendant . . . upon the showing of self-dealing
or other disabling factor”); Auerbach v. Bennett, 47 N.Y.2d 619, 631 (N.Y. 1979) (“absent
evidence of bad faith or fraud . . . the courts must and properly should respect [director]
determinations”). Absent any of these conditions, the decision “will be upheld unless it
cannot be ‘attributed to any rational business purpose.’” Disney, 907 A.2d at 747
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(citation omitted); see also PSE&G, 718 A.2d at 257 (“Unless they engage in conduct in
which no reasonable owner would be likely to engage, the directors should not expect
to be monetarily liable”).
Gross Negligence. Typically, absent outright fraud, the actions of officers or
directors will not subject them to liability for breach of the duty of care unless “gross
negligence” is shown. Classica Group, 2006 WL 2818820, at *7 (“the business judgment
rule is commonly referred to as requiring grossly negligent acts to trigger personal
liability, such as directors who ‘completely abdicate their duties and fail to exercise any
judgment’”); Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 192 (Del. Ch. 2005)
(“Director liability for breaching the duty of care ‘is predicated upon concepts of gross
negligence’”) (internal citation omitted).
With respect to actions of corporate fiduciaries, gross negligence has been
defined as “reckless indifference to or a deliberate disregard of the whole body of
stockholders or actions which are without the bounds of reason.” Disney, 907 A.2d at
750 (citation omitted); see also Benihana, 891 A.2d at 192. To show gross negligence, the
facts must suggest a “wide disparity” between the decision-making process employed
by the board, and a process that would be rational. See Guttman v. Huang, 823 A.2d 492,
507 n.39 (Del. Ch. 2003) (“If gross negligence means something other than negligence,
pleading it successfully in a case like this requires the articulation of facts that suggest a
wide disparity between the process the directors used to ensure the integrity of the
company’s financial statements and that which would have been rational”) (emphasis
in original). As a result, “duty of care violations are rarely found.” Disney, 907 A.2d at
750.
2.
The Duty of Loyalty and Good Faith
The duty of loyalty “mandates that the best interest of the corporation and its
shareholders take [ ] precedence over any interest possessed by a director, officer or
controlling shareholder and not shared by the stockholders generally.” Cede & Co. v.
Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993) (citation omitted). To discharge the duty
of loyalty, directors and officers must “not only affirmatively . . . protect the interests of
the corporation committed to [their] charge, but also . . . refrain from doing anything
that would work injury to the corporation, or . . . deprive it of profit or advantage which
[their] skill and ability might properly bring to it . . . in the reasonable and lawful
exercise of its powers.” Disney 907 A.2d at 751 (citation omitted); see also AYR
Composition, Inc. v. Rosenberg, 619 A.2d 592, 595 (N.J. Super. Ct. App. Div. 1993) (“This
duty includes an obligation not to take action which would be adverse to the
Corporation’s interests”).
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Duty of Oversight
The duty of oversight has been categorized as a subset of the duty of loyalty.
While there is no New Jersey case law discussing the issue, the law in Delaware has
recently developed in this area and the SLC believes that it is more likely than not that,
if confronted with the issue, New Jersey law would impose a duty of oversight similar
to the duty that has been found by the Delaware courts to exist under Delaware law.
As a result, the SLC has analyzed the claims in the Amended Complaint applying the
approach to this issue articulated by the Delaware courts.198
To establish a failure of oversight, one must show “either (1) that the directors
knew or (2) should have known that violations of law were occurring and, in either
event, (3) that the directors took no steps in a good faith effort to prevent or remedy that
situation, and (4) that such failure proximately resulted in the losses complained of.”
Caremark, 698 A.2d at 971 (emphasis added); see also Saito v. McCall, 2004 WL 3029876, at
*6 (Del. Ch. Dec. 20, 2004).
This test can be satisfied by showing either that: (i) “the directors utterly failed to
implement any reporting or information system or controls,” or “having implemented
such a system or controls, consciously failed to monitor or oversee its operations thus
disabling themselves from being informed of risks or problems requiring their
attention” (Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (“Stone II”) (emphasis added)) or
(ii) that the directors “had notice of serious misconduct and simply failed to
investigate,” i.e., intentionally ignored “red flags” (Shaev Profit Sharing Account v.
Armstrong, 2006 WL 391931, at *5 (Del. Ch. Feb. 13, 2006) (“a Caremark plaintiff can plead
that ‘the directors were conscious of the fact that they were not doing their jobs,’ and
that they ignored ‘red flags’ indicating misconduct in defiance of their duties”)
(citations omitted).
The “fail[ure] to exercise oversight” and the “fail[ure] to investigate” claims are
“closely related,” but distinct. Shaev, 2006 WL 391931, at *5. For both claims, however,
“imposition of liability requires a showing that the directors knew that they were not
discharging their fiduciary obligations.” See Stone II, 911 A.2d at 370 (emphasis added);
Guttman, 823 A.2d at 506 (Del. Ch. 2003) (liability is premised on “a showing that the
directors were conscious of the fact that they were not doing their jobs”); Brehm v.
Eisner, 906 A.2d 27, 67 (Del. 2006) (“A failure to act in good faith may be shown . . .
where the fiduciary intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties”).
198
According to one commentator, under New Jersey law, “it is not clear whether a gross inattention
to duty could be characterized not only as a breach of the duty of care but also as a breach of the
duty of loyalty.” 2-12 NJ Corporations and Other Business Entities § 12.08 (2007).
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In either case, such conduct by a director constitutes a failure to discharge
his/her fiduciary duties in good faith, and, therefore, violates the duty of loyalty (not
the duty of care). See Stone II, 911 A.2d at 370 (“Where directors fail to act in the face of
a known duty to act, thereby demonstrating a conscious disregard for their
responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary
obligation in good faith”); Guttman, 823 A.2d at 505 (the “standard for liability for
failures of oversight . . . requires a showing that the directors breached their duty of
loyalty by failing to attend to their duties in good faith”) (citation omitted). Indeed, a
lack of good faith is a “necessary condition to liability” with respect to a failure to
exercise adequate oversight and “a failure to act in good faith requires conduct that is
qualitatively different from, and more culpable than, the conduct giving rise to a
violation of the fiduciary duty of care (i.e., gross negligence).” Stone II, 911 A.2d at 369
(citation omitted).
Accordingly, directors alleged to have violated their duty of oversight do not
receive the protection of the business judgment rule, as there is no “business judgment”
to which the courts can defer. See, e.g., Rattner v. Bidzos, 2003 WL 22284323, at *8 (Del.
Ch. Oct. 7, 2003); Fagin v. Gilmartin, 2007 WL 2176482 at *7 (N.J. Supr. Ct. Ch. Div. Jul.
19, 2007) (“It is well established, however, that mere inaction by the Board does not
constitute a decision which is subject to business judgment analysis”). However,
liability under this theory is extremely rare, and courts have noted that an oversight
claim is “possibly the most difficult theory in corporation law upon which a plaintiff
might hope to win a judgment.” Caremark, 698 A.2d at 967; see also Rattner, 2003 WL
22284323, at *12 (“a claim for failure to exercise proper oversight is one of, if not the,
most difficult theories upon which to prevail”).
(i)
Duty to Monitor
The duty of oversight does not require directors to possess detailed information
about all operational aspects of a business. See Caremark, 698 A.2d at 971. Rather,
directors must “attempt in good faith to assure that a corporate information and
reporting system, which the board concludes is adequate, exists, and that failure to do
so under some circumstances may, in theory at least, render a director liable for losses
caused by non-compliance with applicable legal standards.” Id. at 970. However, “only
a sustained or systematic failure of the board to exercise oversight – such as an utter
failure to attempt to assure a reasonable information and reporting system exists – will
establish the lack of good faith that is a necessary condition to liability.” Id. at 971
(emphasis added); see Stone II, 911 A.2d at 369 (affirming the standard for oversight
liability articulated in Caremark).
There is no formula prescribing the steps directors must take to ensure that a
company has in place reasonable information and reporting systems. Delaware courts,
however, have provided some guidance as to the types of controls that, if implemented,
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satisfy the Board’s duty of oversight. For example, a duly-constituted audit committee
that meets regularly, and the retention of an independent audit firm, establish the types
of reporting systems that a Board can implement to satisfy its duty of oversight. See
Shaev, 2006 WL 391931, at *5 (a failure of oversight can be shown by demonstrating that
a board “entirely lacked an audit committee or other important supervisory structures,
or that a formally constituted audit committee failed to meet”); Ash v. McCall, 2000 WL
1370341, at *15 n.57 (Del. Ch. Sept. 15, 2000) (“the existence of an audit committee,
together with [the] retention of Arthur Anderson as . . . outside auditor to conduct
annual audits of the Company’s financial reporting, is some evidence that a monitoring
and compliance system was in place”).
Whether the reporting systems actually worked is not the test. Indeed, in a
recent decision, the Delaware Supreme Court explicitly rejected an attempt to “equate a
bad outcome with bad faith” in the oversight context. Stone II, 911 A.2d at 373. In that
case, certain employees of AmSouth Bancorp failed to file Suspicious Activity Reports
(“SARs”), as required under federal law, in connection with a customer’s establishment
of custodial accounts that were then used by the customer in a criminal scheme. Id. at
365. AmSouth ultimately became the subject of a federal criminal investigation because
of the failure of its employees to file SARs. See id. at 365-66.
To resolve the criminal investigation, AmSouth entered into a deferred
prosecution agreement in which it admitted that “at least one” employee knowingly
failed to file SARs in a timely manner, and agreed to pay a $50 million fine. See id. In
addition, the Federal Reserve Board and Alabama Banking Department issued orders
requiring AmSouth to, among other things, engage an independent consultant to
review its compliance programs and make recommendations “for new policies and
procedures to be implemented by the Bank.” Id. at 366.
The plaintiffs brought a derivative claim against the AmSouth Board alleging
solely that the directors “had utterly failed to implement any [sort of statutorily
required monitoring,] reporting or information [] controls” that would have enabled
them to learn of “problems requiring their attention.” Id. at 370. The Delaware
Supreme Court affirmed the Court of Chancery’s dismissal for failure to make a
demand on the AmSouth Board, as there were no particularized facts that “created
reason to doubt whether the directors had acted in good faith in exercising their
oversight responsibilities.” Id. at 373. Based on findings made by AmSouth’s
independent consultant (which were incorporated into the complaint), the Supreme
Court concluded that “the Board received and approved relevant policies and
procedures, delegated to certain employees and departments the responsibility for
filing SARs and monitoring compliance, and exercised oversight by relying on periodic
reports from them.” Id.
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The Supreme Court added that “the directors’ good faith exercise of oversight
responsibility may not invariably prevent employees from violating criminal laws, or
from causing the corporation to incur significant financial liability, or both.” Id.; see also
Shaev, 2006 WL 391931, at *5 (“one thing that is emphatically not a Caremark claim is the
bald allegation that directors bear liability where a concededly well-constituted
oversight mechanism, having received no specific indications of misconduct, failed to
discover fraud”).
Thus, a claim that a board must have violated its duty of oversight simply
because criminal conduct occurred lacks merit. See Shaev, 2006 WL 391931, at *5
(rejecting a claim that “only a board violating its fiduciary duties could possibly have
remained ignorant” of alleged accounting improprieties); Stone v. Ritter, 2006 WL
302558, at *2 (Del. Ch. Jan. 26, 2006) (“Stone I”), aff’d, 911 A.2d 362 (Del. 2006) (“Neither
party disputes that the lack of internal controls resulted in a huge fine – $50 million,
alleged to be the largest ever of its kind. The fact of those losses, however, is not alone
enough”).
As the applicable law has been summarized, “[i]n the absence of red flags, good
faith in the context of oversight must be measured by the directors’ actions ‘to assure a
reasonable information and reporting system exists’ and not by second-guessing after
the occurrence of employee conduct that results in an unintended adverse outcome.”
Stone II, 911 A.2d at 373 (citation omitted).
(ii)
Duty to Investigate
For a “failure to investigate” claim to succeed, there must be “specific red-or
even yellow-flags” that put the directors on notice of potential misconduct. Guttman,
823 A.2d at 507. As the Delaware courts have observed, such flags “are only useful
when they are either waved in one’s face or displayed so that they are visible to the
careful observer.” In re Citigroup Inc. S’holders Litig., 2003 WL 21384599, at *2 (Del. Ch.
June 5, 2003); see also Guttman, 823 A.2d at 507 (“the complaint does not plead a single
fact suggesting specific red or even yellow flags were waved at the outside directors”);
Rattner, 2003 WL 22284323, at *13 (same).
Thus, “absent grounds to suspect deception, neither corporate boards nor senior
officers can be charged with wrongdoing simply for assuming the integrity of
employees and the honesty of their dealings on the company’s behalf.” Caremark, 698
A.2d at 969 (citation omitted). Further, once a red flag is “waved,” for the Board to be
liable, the Board must willfully and intentionally ignore that flag. See Stone I, 2006 WL
302558, at *2.
For example, in the AmSouth case, described at length above, the Delaware
Supreme Court defined “red flags” as “facts showing that the board was aware that
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AmSouth’s internal controls were inadequate, [and] that these inadequacies would
result in illegal activity.” Stone II, 911 A.2d at 370 (emphasis added). In that case, the
Court of Chancery found that:
Plaintiffs’ complaint is devoid of the particularized
allegations of fact needed to tie the defendants to any of the
alleged wrongdoing. Plaintiffs fail to point to any facts
either showing how the [criminal] scheme, or any other
problems at AmSouth, waved a ‘red flag’ in the face of the
board. Nor do plaintiffs point to facts suggesting a
conscious decision to take no action in response to red flags.
Without these well-pled allegations, there is no possibility
the defendants faced a substantial likelihood of liability.
Stone I, 2006 WL 302558, at *2. Thus, in the absence of specific facts showing that a red
flag was waved “in the face” of the directors, and evidence of a conscious decision to
ignore those facts, directors will not be found liable for a breach of their duty of
oversight. Id.
The District Court’s decision in In re Veeco Instruments Inc. Sec. Litig., 434 F. Supp.
2d 267, 277-78 (S.D.N.Y. 2006) provides an example of what constitutes a “red flag.” In
that case, an employee reported to management that Veeco had violated federal export
laws. Id. The company then conducted an internal audit, and found several violations
of law. See id. at 278. The initial report of the employee, and the results of the
Company’s audit, were reported to the board. Because Veeco derived seventy percent
(70%) of its revenue from export sales, and a single violation of federal export laws
could have led to the suspension of its export privileges, “the reported violations
threatened to jeopardize the future viability of Veeco.” Id. Seven months later, the
same employee reported another set of export law violations.
The plaintiffs, while failing to plead specific facts regarding the Board’s response
to the first reported violation, claimed that, in light of the second reported infraction,
“the Audit Committee permitted additional violations to occur, either by completely
disregarding the first report, or by establishing procedures that were wholly inadequate
and ineffective and that failed to protect the Company from potentially enormous
liability.” Id. In denying the Board’s motion to dismiss, the Court held that “[t]his is
not a case where the directors had no grounds for suspicion or were blamelessly
unaware of the conduct leading to the corporate liability.” Id. (quotations omitted). The
Court added that “[t]his is precisely the type of case the Delaware Chancery Court was
contemplating when it recently held, ‘A claim that an audit committee or board had
notice of serious misconduct and simply failed to investigate, for example, would
survive a motion to dismiss, even if the committee or board was well constituted and
otherwise functioning.’” Id. (citations omitted); see also, e.g., In re Abbott Laboratories
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Deriv. Litig., 325 F.3d 795, 809 (7th Cir. 2003) (the plaintiffs sufficiently alleged the
existence of “red flags” spanning a six-year period in the face of which the directors’
knowing violation of law and failure to take remedial action constituted a “sustained
and systematic failure . . . to exercise oversight”).
With these standards in mind, the SLC evaluated the facts it learned through the
course of its investigation. The SLC’s analysis and conclusions are detailed below.
B.
Breach of Duty in Connection with Payments to the
FARC and the ELN From Approximately 1989 to 1997
The plaintiffs allege that the defendants breached their fiduciary duties by
causing Chiquita to make payments to the FARC and the ELN from approximately 1989
to 1997, or failing to be aware of the payments. See Am. Compl. ¶ 100. Based on their
dates of employment, and the facts developed during the SLC’s investigation, this claim
applies to the following defendants: (i) management: Robert Kistinger, Warren Ligan,
Carl Lindner Jr., Keith Lindner, Robert Olson, William Tsacalis, Steven Warshaw, and
Jeffrey Zalla; (ii) directors: Fred Runk, William Verity, and Oliver Waddell. In support
of this claim, the plaintiffs allege:
From around 1989 through 1997, Chiquita had improperly
paid bribes to two violent, left-wing terrorist organizations
in Colombia, i.e., the FARC and ELN. In 1989, FARC
controlled the areas where Chiquita’s [subsidiary], Banadex,
had its commercial banana-producing operations, including
Uraba. From 1989 through at least 1997, Chiquita made
numerous and substantial secret payments to FARC, and
also provided FARC with weapons, ammunition and other
supplies through its transportation contractors.
Am. Compl. ¶ 100.
Accordingly, the SLC investigated and analyzed: (i) whether the management
defendants breached their duties of care or loyalty by causing – or allowing – Chiquita
to make payments to guerrilla groups in Colombia starting in 1989 and continuing until
approximately 1997; and (ii) whether the director defendants breached their duty of
loyalty (by failing to provide oversight) by failing to have adequate information and
reporting systems in place to ensure compliance with relevant law. For the reasons
discussed below, the SLC will seek to dismiss this claim.
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Payments to Guerrilla Groups
a.
Legal Standard
As discussed above, New Jersey law mandates that directors and officers
“discharge their duties in good faith and with that degree of diligence, care and skill
which ordinarily prudent people would exercise under similar circumstances in like
positions.” N.J.S.A. § 14A:6-14; see also Aronson, 473 A.2d at 812 (“directors have a duty
to inform themselves, prior to making a business decision, of all material information
reasonably available to them”); see Classica Group, 2006 WL 2818820, at *7 (business
judgment rule covers officers). Further, the business judgment rule creates “a
presumption . . . that disinterested directors act ‘on an informed basis, in good faith and
in the honest belief that their actions are in the corporation’s best interest.’” PSE&G, 718
A.2d at 256 (citation omitted).
Accordingly, the decision to make the payments to guerrilla groups will be
protected by the business judgment rule unless it can be shown that the defendants
acted with fraud, illegality, a conflict of interest, or with gross negligence. Absent any
of these conditions, the decision “will be upheld unless it cannot be ‘attributed to any
rational business purpose.’” Disney, 907 A.2d at 747 (citation omitted); see also Maul, 637
A.2d at 937 (“bad judgment without bad faith, does not ordinarily make officers
individually liable”).
2.
Analysis
a.
Management Defendants: Kistinger, Ligan, C. Lindner, K.
Lindner, Olson, Tsacalis, Warshaw, and Zalla
Decision to Make the Payments. The SLC found that the initial decision to
authorize the payments to the guerrilla groups was made on an informed basis, in good
faith and in the honest belief that it was in the Company’s best interest.199
First, when Banadex received the initial demand for payment of $10,000 from the
FARC, in approximately 1989, the demand was promptly communicated to senior
management in Cincinnati, where Chiquita’s headquarters are located. Senior
management had several discussions about how to respond to the demand, and
instructed [a Banadex employee] to travel to Cincinnati to provide additional
information and further discuss the issue. A meeting was then held with, among
others, then-head of Latin American operations and defendant Robert Kistinger, Dennis
Doyle (then-head of Banana Operations), and Charles Morgan (then-General Counsel).
199
Robert Kistinger was the only management defendant involved in the decision to make the initial
payment to the FARC.
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It was not until this meeting, which included the Company’s General Counsel, that
authorization to make the payment was given.
Second, the SLC has determined that the decision to make the payment was made
based on a reasonable and good faith belief that the Company’s employees and
operations were in serious and real danger and that failure to make the payment would
have increased the likelihood of harm. At the time of the first demand for payment,
Banadex and Chiquita personnel were already well aware of the widespread violence
committed by guerrilla groups such as the FARC and the ELN. The SLC credited
Kistinger’s explanation that senior management understood the payments to be
extortion payments, and that they were made to protect employees from being killed
and infrastructure from being destroyed.
The SLC found no evidence that this process of deciding to make the initial
payment was tainted by fraud, self-dealing, or a conflict of interest. To the contrary, the
SLC concluded that the process employed to make the decision was reasonable and
rational given the amount at issue ($10,000) and the potential consequences for refusing
to make the payment. Thus, Chiquita management did not act with “reckless
indifference to or a deliberate disregard of the whole body of stockholders” and their
actions were not “without the bounds of reason.” Disney, 907 A.2d at 750 (citation
omitted). Finally, the SLC found that the decision to make the payment was supported
by a rational business purpose – protecting the Company’s employees and property.
As such, the SLC concludes that this decision is protected by the business judgment
rule.
Continuing Payments. The SLC has determined that the management
defendants reasonably and in good faith continued to believe that the payments were
necessary in order to safeguard the welfare of its employees and to protect its property,
and that the payments were legal under local law. As a result, the SLC concludes that
the management defendants did not breach their fiduciary duties in allowing the
payments to continue.
Management’s Knowledge. The SLC concludes that, based on the totality of the
evidence, each senior member of Chiquita management knew at some point of the
payments to the guerrilla groups. While Carl Lindner (CEO), Keith Lindner (COO), and
Steven Warshaw (CAO and CFO) told the SLC that they do not recall learning of the
payments, the SLC believes that the evidence supports the conclusion that they had
knowledge of the payments made by Banadex at some point after the first demand was
made in 1989. In addition, as noted above, Robert Kistinger was aware of the
payments, having been involved in the decision to make the initial payment. William
Tsacalis (Controller) was aware of the guerrilla payments at some point during this
period. Likewise, Robert Olson was aware of the payments, having learned about them
when he joined Chiquita as General Counsel in 1995.
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By contrast, even though they were employed by Chiquita during this period,
the SLC found no evidence that Warren Ligan or Jeffrey Zalla were aware of the
payments, and nothing about their positions suggests that they should have been.
Through May of 1998, Ligan worked in Chiquita’s Tax Department, where he held the
positions of Assistant Vice President of Tax and then Vice President of Tax. Through
2000, Zalla held various positions in the Treasury and Finance Departments, including
Supervisor of Treasury Analysis. Based on the genuine security concerns that limited
knowledge of the payments to a select group of executives, the SLC does not believe
that Ligan or Zalla knew – or should have known – about the guerrilla payments in
their roles at the Company. Accordingly, the SLC concludes that there is no basis to
assert a claim for breach of fiduciary duty against Ligan or Zalla for their conduct
during this period.
A different analysis applies to the remaining members of management who
knew, or should have known, of the payments – C. Lindner, K. Lindner, Warshaw,
Kistinger, Tsacalis, and Olson.
Payments Were Necessary. Around the time of the first demand for payment and
continuing throughout this period, senior management in Cincinnati maintained the
reasonable and good faith belief that the payments were necessary to avoid harm to the
Company’s employees and infrastructure. Management engaged Control Risks, a
leading U.K.-based consulting firm, to assess the security situation in Colombia and to
advise the Company on how to deal with what it correctly anticipated to be continuing
demands for payments. Control Risks advised that the Company had no meaningful
choice but to continue to make the payments.
Senior management was aware that the situation in Colombia remained violent
throughout the 1990s and that its employees and infrastructure remained at risk. For
example, in 1990 or 1991, Banadex’s first Security Director was kidnapped by a group
believed to be the ELN. Senior management was also aware of additional kidnappings
of and armed attacks against Banadex employees, including the ambush of [Banadex
Employees #1 and #3] by guerrilla groups in the mid-1990s. Finally, there was
widespread knowledge at Chiquita headquarters in Cincinnati of a 1995 incident in
which approximately twenty-five passengers traveling on a bus, consisting mostly of
Chiquita farm employees, were killed in an attack that was believed to have been
carried out by the FARC.
At the same time as these violent acts were being committed, the evidence was
overwhelming that the Colombian government could not protect Banadex and its
employees. For example, in early 1995, a senior Colombian General wrote an in-house
lawyer for Banadex advising the Company that the Army had knowledge of a threat
against certain Banadex facilities and that the Army, while “capable of supporting the
normal development of [the Company’s] banana operations,” recommends that the
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Company “make a greater commitment to increase and improve [its] own security.”
This was well-known to senior executives such as [Chiquita Employee #2] and
Kistinger, who were in close touch with Warshaw and Keith Lindner.
Indeed, in mid-1997, as the Company was winding down its payments to the
guerrilla groups and began paying the convivir, senior Chiquita management remained
concerned about the threat to employees. Their concern is reflected in a discussion that
took place at the May 7, 1997 management meeting in Cincinnati (attended by White,
Olson, Kistinger, Thomas and, most likely, Tsacalis). As recorded in the meeting notes:
“Need to keep this very confidential – people can get killed” and “security is an issue.”
Accounting Procedures and Monitoring. The Company also had adequate
accounting policies and procedures to record the guerrilla payments. The Company
employed its normal accounting procedures for guerrilla payments, but made
adjustments to accommodate for security concerns relating to the payments. For the
most part, the guerrilla payments were recorded as “sensitive payments,” consistent
with Company policy. This description of the payments on Banadex’s books allowed
appropriate review by internal auditors from Cincinnati. Indeed, audits of Banadex’s
internal controls, such as the one in 1995 led by [Chiquita Employee #3], then an Audit
Manager, showed that “sensitive payments” were properly recorded on Banadex’s
books and records.
Payments Were Not Illegal Under Local and U.S. Law. On a periodic basis, the
Chiquita Legal Department took steps to confirm the legality of the payments under
Colombian law. As described below, these legal opinions, obtained from in-house and
outside Colombian counsel, monitored the development of Colombian law and
uniformly concluded that the payments were legally justified under Colombian law:
•
June 10, 1994 [Banadex lawyer] memo: [A Banadex lawyer’s] memo stated
that Colombian Law 40 of 1993 concerning kidnapping ransom and
extortion payments had recently been held to be “unconstitutional” by the
Constitutional Court of Colombia. It concluded that a person making
kidnapping ransom or extortion payments “acts in a State of Necessity
and, therefore, cannot be penalized.”
•
February 3, 1997 [Banadex lawyer] memo: [A Banadex lawyer’s] memo,
titled “Crime of Extorsion and Kidnapping in Colombia” [sic], updated
and expanded on his June 10, 1994 memo. As with his earlier memo, this
memo stated that, “no punishment will be applied” when one makes
ransom and extortion payments “in a state of necessity.”
•
September 9, 1997 B&M memo: B&M’s memo, titled “Payments to Guerrilla
Groups,” which the Legal Department received in order to confirm [the
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Banadex lawyer’s] conclusions, concluded that payments to guerrilla
groups are not illegal if made to “defend the life and freedom of
individuals.”
The Legal and Internal Audit Departments also monitored the payments on a
periodic basis. Under the Company’s FCPA compliance program, all employees of a
certain salary grade were required, on a quarterly basis, to complete a form detailing
any payments that might potentially be covered by the FCPA. The forms submitted by
individuals contained both payments to government officials and “sensitive” payments,
or payments that the Company treated as confidential, regardless of whether they were
covered by the FCPA. The FCPA compliance program was administered by both the
Legal and Internal Audit Departments. During this period, Robert Thomas, a senior inhouse lawyer, and Bud White, the Vice President of Internal Audit, analyzed
employees’ FCPA reports and compiled them in a comprehensive FCPA report
summary, organized by country and division.
These FCPA reports were first shared with the General Counsel and then
presented to the Audit Committee, initially on a quarterly basis, but later (at some point
prior to 1995) on a semi-annual basis. The guerrilla payments were reported to
Cincinnati in connection with FCPA reporting, although they were not included in the
report summaries presented to the Audit Committee, because, according to Thomas,
they were not payments to government officials. Thus, in connection with the
Company’s FCPA reporting program, both the Legal and Internal Audit Departments
were aware of the payments.
Further, the guerrilla payments made by Banadex were not prohibited as a
matter of U.S. law for at least the first eight years (1989-1997) during which the
payments were made.200 The applicable legal framework changed on October 8, 1997,
when the U.S. Department of State designated the FARC and the ELN as FTOs, and
therefore knowingly making the payments became illegal under U.S. law.201 The SLC
was unable to determine with precision when the Company stopped making the
guerrilla payments. While certain documentary and testimonial evidence suggests that
the Company made the payments to the guerrilla groups until approximately mid-1997
or, according to at least one witness, until 1999, KPMG, which conducted an extensive
forensic review in connection with the DOJ investigation, concluded that there is no
evidence that the Company made payments to the FARC or ELN after the October 1997
designation (other than a 2004 kidnapping ransom payment, which the Company
200
As described above, Robert Thomas determined that the guerrilla payments did not violate the
FCPA because they were not being made to government officials.
201
In the Amended Complaint, the plaintiffs do not make any reference to the FARC’s FTO
designation.
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disclosed to DOJ in advance of making the payment).202 In short, the SLC has
determined that the evidence supports the conclusion that the payments to the guerrilla
groups were not prohibited during this period under Colombian or U.S. law. In any
event, there is no evidence that Chiquita management had knowledge of the FARC’s
FTO designation at any point during this period.
The SLC also considered the fact that payments to the guerrillas were known to
the SEC, DOJ, and USAO SDNY, but that the government took no action. As described
above, during the SEC’s investigation into Chiquita’s books and records arising out of
the payments made by Banadex employees to customs officials in Colombia in
connection with the renewal of a port license, the government was advised by K&E (on
more than one occasion) and by numerous witnesses in sworn testimony that Banadex
made payments to guerrilla groups. At no time did government representatives say
anything to suggest that the payments violated U.S. law, other than as a potential
violation of the FCPA, and no enforcement action was ever taken with respect to the
payments. Likewise, at no time did K&E, which was aware of the guerrilla payments,
advise the Company that they raised any potential legal issues under U.S. law.
Conclusion. Because there was no fraud, illegality, or conflict of interest, and
because the decision to continue the payments did not amount to gross negligence, the
management defendants did not breach their duty by allowing the payments to
continue from approximately 1989 to 1997. This conclusion is based on: (i) the
defendants’ reasonable and good faith belief that the payments were necessary to
prevent harm to Company employees and infrastructure; (ii) the adequate monitoring
of the payments by the Legal and Internal Audit Departments; (iii) the legal opinions
received that uniformly concluded that the payments were not illegal under Colombian
law; (iv) the absence of any reason for the Legal Department to believe that the
payments were illegal under U.S. law; and (v) the fact that federal prosecutors and
regulators were aware of the payments but took no action. Further, the SLC found that
allowing the payments to continue was supported by a rational business purpose –
protecting the Company’s employees and property.
Though the SLC finds that the evidence does not support a claim for breach of
duty, this is not to say that the course of conduct pursued by the Company during this
period is without fault. The SLC believes that it would have been prudent, at some
point during this period when the security situation remained violent and unstable,
with continuing risks posed to the Company and its employees, for management to
have seriously considered withdrawing from Colombia. Indeed, as noted above, the
202
As stated above, the SLC determined that KPMG conducted a thorough and independent
forensic analysis of the payments and that, therefore, it relied on the KPMG Sensitive Payments
Schedule as evidence of payments made after January 1, 1997.
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SLC raised questions as to why, during this period, there appeared to be no serious
discussion within the Company about the possibility of selling its farms in Colombia
and purchasing fruit rather than making extortion payments. Even so, the SLC
recognizes that whether or not it would have made the same decisions as management
about staying in Colombia for as long as it did is legally irrelevant. The SLC has
concluded that the implicit decision to remain in Colombia, which required the
Company to continue making the payments, was reasonable under the circumstances
and made in good faith, and that the members of the Company’s management did not
breach their fiduciary duty under the applicable legal standards.
b.
Directors: Runk, Verity and Waddell
The SLC next considered the claims for breach of duty against the director
defendants during this period. There are only two non-management, independent
directors from that period named as defendants in the Amended Complaint, William
Verity and Oliver Waddell, both of whom served on the Audit Committee from
approximately May 1994 to March 2002. However, Waddell suffers from a debilitating
mental illness, which rendered him incapable of being interviewed by the SLC.203 In
addition, defendant Fred Runk was also a director from 1984 to March 2002, having
previously served as the Company’s CFO during the 1980s.204
As discussed above, there is conflicting evidence regarding whether the directors
were aware of the guerrilla payments. While the guerrilla payments were not listed on
the FCPA report summaries that were regularly presented to the Audit Committee,
Verity said that he recalled that the Company made “security” payments in Colombia,
but could not independently recall during which years the Company made payments to
guerrilla groups. Olson said that, around the time that he joined the Company as
General Counsel in 1995, he was led to believe that the Audit Committee had been
informed of the payments and that he also believed that guerrilla payments were
discussed with the Audit Committee prior to 1997. Likewise, Kistinger said that Jean
Sisco, the Chair of the Audit Committee until 2000, was aware of the guerrilla
payments. While this provides some evidence that the Audit Committee was aware of
the guerrilla payments, the SLC found no evidence that the full Board (which included
defendant director Fred Runk) was aware of these payments. Thus, while the evidence
of knowledge is mixed, there is no evidence to suggest that directors Runk, Verity or
203
The Chair of the Audit Committee during this period, Jean Sisco, was also unavailable to the SLC,
as she passed away in early 2000.
204
Fred Runk was Chiquita’s CFO from 1984 to 1989 and served as a director from 1984 until March
2002. The SLC assessed Runk’s conduct as a director, given that, when the relevant events
occurred in this period starting in 1989, he was no longer an officer of the Company. As
discussed above, regardless of whether Runk was technically an independent director or a
management director, there is no evidence that he was aware of the guerrilla payments.
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Waddell played any role in approving the guerrilla payments. Accordingly, the SLC
considered whether Runk, Verity and Waddell breached their duty of loyalty by failing
to provide appropriate oversight.
3.
Oversight During the Period From 1989 to 1997
a.
Legal Standards
As discussed above, to establish a failure of oversight, one must show “either (1)
that the directors knew or (2) should have known that violations of law were occurring
and, in either event, (3) that the directors took no steps in a good faith effort to prevent
or remedy that situation, and (4) that such failure proximately resulted in the losses
complained of.” Caremark, 698 A.2d at 971 (emphasis added); see also Saito, 2004 WL
3029876, at *6. This test can be satisfied by showing either that: (i) “the directors utterly
failed to implement any reporting or information system or controls” or “having
implemented such a system or controls, consciously failed to monitor or oversee its
operations thus disabling themselves from being informed of risks or problems
requiring their attention” (Stone II, 911 A.2d at 370 (emphasis added)); or (ii) that the
directors “had notice of serious misconduct and simply failed to investigate,” i.e.,
intentionally ignored “red flags” (Shaev, 2006 WL 391931, at *5).
Again, the duty of oversight does not require directors to possess detailed
information about all operational aspects of a business. See Caremark, 698 A.2d at 971.
Rather, directors must “attempt in good faith to assure that a corporate information and
reporting system, which the board concludes is adequate, exists, and that failure to do
so under some circumstances may, in theory at least, render a director liable for losses
caused by non-compliance with applicable legal standards.” Id. at 970. However, “only
a sustained or systematic failure of the board to exercise oversight – such as an utter
failure to attempt to assure a reasonable information and reporting system exists – will
establish the lack of good faith that is a necessary condition to liability.” Id. at 971
(emphasis added).
b.
Analysis
No Violation of Law. Here, as an initial matter, there was no violation of law.
Because a violation of law is a necessary precondition of liability and did not occur, the
SLC concludes that any claim for breach of the duty of loyalty fails as a matter of law.
See Canadian Commercial Workers v. Alden, 2006 WL 456786, at *6 (Del. Ch. Feb. 22, 2006)
(noting that, among other things, a claim for breach of the duty of oversight must allege
facts showing “that the directors knew or [ ] should have known that violations of law
were occurring”); see also Beam v. Stewart, 833 A.2d 961, 976 (Del. Ch. 2003) (noting that
one of the “key elements” for an oversight claim is that “the directors knew or should
have known that a violation of the law was occurring”).
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As discussed above, the Company received multiple legal opinions that the
payments were not illegal under Colombian law and, until October 8, 1997, the
payments were not illegal under U.S. law. Regardless of whether the payments to the
guerrilla groups were made after October 8, 1997, and the SLC found no substantial
evidence that they were made after that date, there is no evidence that anyone at the
Company was aware of the designation of the FARC and ELN as FTOs until many
years later. As a result, it is unclear whether the knowledge element required under 18
U.S.C. § 2339B and the willfulness element required for criminal liability under 50
U.S.C. § 1705 would be satisfied. In support of the absence of illegality, the Company
has never been charged with any violation of § 2339B or § 1705 arising from its
payments to guerrilla groups (even though the payments were disclosed during the
SEC investigation that began in 1998), and the statutes of limitations under § 2339B
(eight years) and § 1705 (five years) would bar any such claims.
Adequate Oversight. Even if there was evidence of a violation of law, the SLC
has concluded that there was no sustained or systemic failure of the Board to exercise
oversight. To the contrary, at all times, the Company had a fully-functioning Audit
Committee; a robust FCPA compliance and reporting program, which included
reporting on non-FCPA “sensitive” payments; a major accounting firm, E&Y, serving as
outside auditor, which was aware of the “sensitive” payments and considered them to
be immaterial; and a fully functioning Internal Audit Department, which reported to
the Audit Committee on a periodic basis.
First, between 1990 and 1997, the Audit Committee met an average of four times
per year. According to the witnesses interviewed by the SLC, the Audit Committee
members were generally regarded as knowledgeable and informed, and many
witnesses specifically mentioned the energy, diligence, and persistence of the Audit
Committee Chair, Jean Sisco. These facts suggest that the Audit Committee was
functioning fully and properly during this period.
Second, during this period, the Company had a robust FCPA compliance
program that was jointly administered by the Legal and Internal Audit Departments.
Under this program, “sensitive” payments, including guerrilla payments, were reported
to Cincinnati. The FCPA report summaries were then presented to the Audit
Committee, initially on a quarterly basis, but later on a semi-annual basis. These report
summaries, however, did not include guerrilla payments. This was based on the Legal
Department’s view that they were not FCPA payments, because they were not made to
government officials.
Nonetheless, the mere fact that the Audit Committee was not informed about the
guerrilla payments in connection with the presentation of FCPA report summaries does
not render the reporting system inadequate, particularly since the payments were not
against the law. See Stone II, 911 A.2d at 373 (rejecting the plaintiffs’ “hindsight”
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allegation that reporting system was inadequate given that it failed to prevent
employees from violating criminal laws). In the SLC’s view, the Audit Committee
appropriately received and relied on FCPA report summaries, and properly delegated
to the Legal and Internal Audit Departments the tasks of analyzing and summarizing
employees’ reports regarding potential FCPA payments. The SLC found that this was
an appropriate and reasonable oversight mechanism.
Third, Chiquita engaged E&Y, which provided independent auditing services
throughout this period. E&Y was aware of the “sensitive” payments made by Banadex
and determined that they were not material to the Company.
Fourth, the Company had a functioning and active Internal Audit Department
which reported to the Audit Committee on a periodic basis. Among other things, in
1995, the Internal Audit Department conducted an audit of Banadex in which it
concluded that the guerrilla payments were being properly recorded in Banadex’s
books and records.
In sum, based on this evidence, the SLC concludes that the directors simply did
not “utterly fail” to implement any reporting or information system or controls and
there was no sustained or systemic failure to exercise oversight. See Stone II, 911 A.2d at
370, 372; See Ash, 2000 WL 1370341, at *15 n.57 (“the existence of an audit committee,
together with [the] retention of Arthur Anderson as . . . outside auditor to conduct
annual audits of the Company’s financial reporting, is some evidence that a monitoring
and compliance system was in place”).
Possible Red Flags. The SLC also considered whether there were any “red flags”
that would have put the directors on notice of potential misconduct during the period
of the guerrilla payments. There are no such red flags alleged in the Amended
Complaint, and the SLC likewise found none. See Stone I, 2006 WL 302558, at *2
(rejecting the plaintiffs’ contention that “red flags” were waved in the face of the board
but ignored in the absence of any such allegations).
Conclusion. For these reasons, the SLC has determined that this claim lacks
merit because there was no violation of law during this period and the director
defendants – Runk, Verity, and Waddell – engaged in legally adequate oversight.
4.
Additional Legal Considerations
Separate from the factual and legal merits of the claim itself, several other
considerations create substantial uncertainty as to the viability of this claim and raise
serious questions whether the costs of pursuing any such claim outweigh any potential
benefit. These considerations, detailed below, further support the SLC’s decision, in the
exercise of its business judgment, to seek dismissal of this claim.
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No Harm
The SLC’s decision to seek dismissal is supported by the fact that, to date, the
Company has not suffered any harm as a result of the guerrilla payments. The
payments were never the basis for any governmental sanctions and played no role in
the Company’s March 2007 guilty plea. See, e.g., DeGregorio v. American Bd. of Internal
Medicine, 844 F. Supp 186, 188 (D.N.J. 1994) (“A claim for breach of fiduciary duty is a
tort. Damages must be alleged and cannot be inferred. On this ground alone [a] claim
[that does not allege damages] must fail”); see also Sery v. Fed. Bus. Ctrs. Inc., 2008 WL
1776551, at *7 (D.N.J. April 16, 2008) (dismissing breach of fiduciary duty claims against
defendant trustees because “it is uncontroverted that Plaintiffs have not suffered any
damages arising out of the [conduct on which their fiduciary breach was premised]”).
The SLC is aware of the ATA/ATS lawsuits pending before the Court, and is
therefore aware that those suits seek to impose liability on the Company, in part, based
on payments to guerrilla groups made during this period. However, it is established
law that the mere possibility of future harm does not constitute legally cognizable
injury, as required to support a breach of fiduciary duty claim. See Stroud v. Milliken
Enters, Inc., 552 A.2d 476, 480-81 (Del. 1989) (“Courts in this country generally, and in
Delaware in particular, decline to exercise jurisdiction over cases in which a controversy
has not yet matured to a point where judicial action is appropriate. Courts decline to
render hypothetical opinions . . . [on] the definition of rights which are only future or
contingent”); Saito, 2004 WL 3029876, at *5 (finding that breach of fiduciary duty claim
“[had] not yet matured to a point where judicial action [was] appropriate, and fail[ed]
to allege any harm for which this Court at present could hold the [ ] directors
accountable”). Thus, if this claim were to be brought, the defendants would raise the
defense of lack of harm, rendering the success of any such claim highly uncertain.
b.
Bankruptcy Release
The bankruptcy release contained in Chiquita’s Plan of Reorganization (the
“Plan”), effective as of March 19, 2002, constitutes another defense by which the claim
relating to the guerrilla payments could be defeated. That release, contained in an
Order of the Bankruptcy Court, provides, in relevant part:
On and after the Effective Date, except as otherwise
specifically provided in the Plan, for good and valuable
consideration, the D&O Releasees . . . are released by Debtor
[Chiquita] and Reorganized Debtor from any and all Claims (as
defined in section 101(5) of the Bankruptcy Code),
obligations, rights, suits, damages, causes of action, remedies
and liabilities whatsoever, whether known or unknown,
foreseen or unforeseen, existing or hereafter arising, in law,
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equity or otherwise, that the Debtor or its subsidiaries would
have been legally entitled to assert in their own right
(whether individually or collectively) or on behalf of the
Holder of any Claim or Equity Interest or other Person or
Entity (including any derivative shareholder claims or
actions that could be asserted), based in whole or in part upon
any act or omission, transaction, agreement, event or other
occurrence taking place on or before the Effective Date, except in
the case of the D&O Releasees, for claims or liabilities (i) in
respect of any loan, advance or similar payment by the
Debtor or its subsidiaries to any such Person, or (ii) in
respect of any contractual obligation owed by such Person to
the Debtor or its subsidiaries. No portion of the limited
releases by the Debtor in any way impairs (other than as
provided in Article X of the Plan) any Cause of Action or
Claim of any person or entity against Debtor or any other
party not specifically released the Plan.
(See Confirmation Order) (emphasis added).
In the Plan, “D&O Releasees” are defined as “all officers, directors, employees,
attorneys, financial advisors, accountants, investment bankers, agents and
representatives of Debtor and its subsidiaries, in each case in their capacity as such.” See
Plan Article I.B.31 (emphasis added). Thus, the release, granted by Chiquita, covers all
of the defendants, as they were officers and directors of Chiquita at the time of the
conduct in question. Further, the release is applicable as of the “Effective Date,” which
was March 19, 2002. Therefore, unless an exception applies, by operation of (i) the
substantive provisions of the release, (ii) the definition of D&O Releasees, and (iii) the
Effective Date, the release operates to insulate all of the defendants from liability to the
Company for acts or omissions that occurred on or before March 19, 2002.
The release, however, is subject to an exception.205 According to the terms of the
Plan (but not the Order), the release does not apply to:
claims or liabilities . . . (b) in respect of any act or omission of
such Person, Entity or Professional that is determined in a
Final Order not to have been taken in good faith and in a
manner believed to be in or not opposed to the best interests
of Debtor, including its subsidiaries. . . .
205
The two exceptions expressly contained in the terms of release, which carve out claims based on
loans or other contractual obligations owed to Chiquita, do not apply here for obvious reasons.
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Plan, Article X.B (the “Bad Faith Exception”) (emphasis added).206
In substance, by incorporating concepts of good faith, the Bad Faith Exception
mirrors the standard under New Jersey law for permissive indemnification of corporate
agents. Under New Jersey’s indemnification statute, in suits brought by a corporation
(or on its behalf), a corporation is permitted to:
indemnify a corporate agent against his expenses in
connection with any proceeding by or in the right of the
corporation to procure a judgment in its favor which
involves the corporate agent by reason of his being or having
been such corporate agent, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the corporation.
N.J.S.A. § 14A:3-5(3) (emphasis added). However, New Jersey law prohibits
corporations from indemnifying a corporate agent where, among other reasons, “a
judgment or other final adjudication adverse to the corporate agent establishes that his
acts or omissions . . . (b) were not in good faith or involved a knowing violation of
law. . . .” N.J.S.A. § 14A:3-5(8).
While the law in New Jersey regarding the obligation of fiduciaries to act in
“good faith” is not well developed, courts have described “bad faith” in the context of
indemnity as “consist[ing] of a ‘showing of facts and circumstances . . . so cogent and
obvious that to remain passive would amount to a deliberate desire to evade
knowledge because of a belief or fear that inquiry would disclose a defect in the
transaction.’” U.S. v. Princeton Gamma-Tech, 1992 WL 349630, at *1, *6 (D.N.J. 1992)
(quotations omitted).
Delaware’s indemnity statute, 8 Del. C. § 145, is similar to that of New Jersey and
is therefore instructive in this matter. See Vergopia v. Shaker, 922 A.2d 1238, 1245 n.7
(N.J. 2007) (noting that New Jersey’s indemnification statute was modeled on and is
similar to Delaware’s law). In a series of opinions issued by the Delaware courts in
litigation arising from the compensation awarded to the Walt Disney Company’s
former President Michael Ovitz, those courts commented extensively on the duty of
directors and officers to act in good faith. The Delaware Court of Chancery stated as
follows: “I am of the opinion that the concept of intentional dereliction of duty, a conscious
disregard for one’s responsibilities, is an appropriate (although not the only) standard for
determining whether fiduciaries have acted in good faith.” Disney, 907 A.2d at 755
206
The Bad Faith Exception is not included in the Confirmation Order. However, based on the
terms of the release and the Confirmation Order’s incorporation of the Plan, the SLC believes that
the Bad Faith Exception as contained in the Plan nonetheless operates to limit the release.
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(emphasis in original); see also Nagy v. Bistricer, 770 A.2d 43, 48 n.2 (Del. Ch. 2000) (The
“utility [of the good faith requirement] may rest in its constant reminder . . . that,
regardless of his motive, a director who consciously disregards his duties to the
corporation and its stockholders may suffer a personal judgment for monetary damages
for any harm he causes,” even if for a reason “other than personal pecuniary interest”).
In affirming the Court of Chancery’s decision in the Disney litigation, the
Delaware Supreme Court set forth three categories of conduct that could fall within the
definition of “not in good faith” for purposes of exculpation and indemnity:
(a)
“The first category involves so-called ‘subjective bad faith,’ that is,
fiduciary conduct motivated by an actual intent to do harm.”
(b)
“The second category of conduct, which is at the opposite end of
the spectrum, involves lack of due care — that is, fiduciary action
taken solely by reason of gross negligence and without any
malevolent intent.”207
(c)
The third category is where “the fiduciary intentionally fails to act
in the face of a known duty to act, demonstrating a conscious
disregard for his duties.”
Brehm, 906 A.2d at 63-67. These “categories” are intended to assess actions, which,
while not necessarily intended to confer a personal benefit on the actor, are taken with
something other than the best interests of the corporation in mind.
Thus, in order to overcome the bankruptcy release, the SLC would have to show
that the defendants engaged in some form of gross negligence or other intentional bad
faith conduct. Because the SLC has concluded that the defendants did not engage in
this conduct in making, continuing, or overseeing the payments to the guerrilla groups
from 1989 to 1997, the bankruptcy release provides additional support to the SLC’s
conclusion that it should seek dismissal of the claims regarding these payments.208
207
As noted above, the Delaware Court defined “gross negligence” as “reckless indifference to or
deliberate disregard of the whole body of stockholders or actions which are without the bounds
of reason.” Disney, 907 A.2d at 750.
208
The SLC also considered whether it could seek relief from the order containing the bankruptcy
release under applicable law. Under certain limited circumstances, the Bankruptcy Code gives
courts the authority to revoke or modify a confirmation order or plan of reorganization. See 11
U.S.C. § 1127(b) (2008) (“[a] proponent of a plan and a reorganized debtor may modify the plan
after confirmation” so long as they seek such modification “before substantial consummation of
the plan”); see also 11 U.S.C. § 1144 (“on request of a party in interest at any time before 180 days
after the date of the entry of the order of confirmation . . . the court may revoke such order if and
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Chiquita’s Exculpatory Clause and New Jersey
Business Corporation Act Section 14A:2-7(3)
The SLC also considered the effect of the exculpatory provision contained in the
Company’s Certificate of Incorporation (“Certificate”), which bars the Company from
recovering money damages from its officers and directors for breaches of the duty of
care. In accord with N.J.S.A. § 14A:3-5(3) (described above), Chiquita’s Charter
provides that, to the extent permitted by New Jersey law:
an officer or director of the Corporation shall not be liable to
the Corporation or its shareholders for damages for breach
of any duty, except that nothing contained herein shall
relieve an officer or a director from liability for breach of a
duty based upon an act or omission (a) in breach of such
person’s duty of loyalty to the Corporation or its
shareholders, (b) not in good faith or involving a knowing
violation of law, or (c) resulting in receipt by such person of
an improper personal benefit. As used in this subsection, an
act or omission in breach of a person’s duty of loyalty means
an act or omission which that person knows or believes to be
contrary to the best interests of the corporation or its
shareholders in connection with a matter in which he has a
material conflict of interest.
Certificate, Article Nine, §1(b); see also Kanter v. Barella, 489 F.3d 170, 182 n.15 (3d
Cir. 2007) (“New Jersey allows a corporation to include an exculpatory provision for its
directors and officers in its charter”). Exculpatory provisions are treated as an
affirmative defense and, where only a duty of care claim is made, bars that claim as a
matter of law. See Malpiede v. Townson, 780 A.2d 1075, 1101 (Del. 2001) (affirming
dismissal of due care claim based on exculpatory provision).
However, under Chiquita’s Certificate and New Jersey law, the exculpatory
provision does not apply where a final judgment establishes that the agent (i) breached
his or her duty of loyalty, (ii) acted not in good faith or in knowing violation of the law,
or (iii) received an improper personal benefit. See First Fid. Bankcorporation vs. Nat’l
Union Fire Ins. Co. of Pittsburgh, P.A., 1990 WL 165937, at *15 (E.D. Pa. Oct. 25, 1990)
(stating that because “the Derivative Complaint alleges breach of loyalty, knowing
only if such order was procured by fraud”). However, after reviewing case law interpreting
these provisions, the SLC concluded that it is highly unlikely that the law would support the
revocation or modification of Chiquita’s confirmation order or plan of reorganization almost
seven years after they were entered and approved by the bankruptcy court.
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violation of law and personal profit, . . . New Jersey law . . . explicitly precludes [the
company] from exempting the defendant officers and directors from liability”).
In short, the exculpatory clause bars on its face any claim for breach of the duty
of care in making the payments to guerrilla groups from 1989 to 1997. While any claim
based on a failure to provide proper oversight would not be covered by the exculpatory
clause, since it is a violation of the duty of loyalty, the SLC has concluded that there is
no such viable claim and that none of the other exceptions to exculpation apply.
Accordingly, Chiquita’s exculpatory clause provides additional support for the SLC’s
decision to seek dismissal of these claims.
d.
Indemnification and Advancement of Legal Fees
As yet another layer of protection for its officers and directors, Chiquita’s
Certificate also provides indemnification to the officer and director defendants to the
fullest extent permitted by New Jersey law:
Each person who was or is made a party, or is threatened to
be made a party to, or is otherwise involved (including as a
witness) in any pending, threatened, or completed (by
judgment, settlement or otherwise) Proceeding by reason of
his or her being or having been an Indemnitee shall be
indemnified and held harmless by the Corporation to the
fullest extent not prohibited by the New Jersey Business
Corporation Act . . . from and against any and all Liabilities
incurred or suffered in connection with any such
Proceeding.
Certificate, Article Nine, §1(c). Chiquita’s indemnity provision is in accord with New
Jersey law, which, with respect to suits brought by a corporation (or on its behalf),
permits corporations to:
indemnify a corporate agent against his expenses in
connection with any proceeding by or in the right of the
corporation to procure a judgment in its favor which
involves the corporate agent by reason of his being or having
been such corporate agent, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to
the best interests of the corporation.
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N.J.S.A. § 14A:3-5(3).209
Chiquita’s Certificate further provides, in relevant part, that the right to
indemnification “shall include the right to be paid by the Corporation the Expenses
incurred in connection with any Proceeding in advance of the final disposition of such
Proceeding. . . .” Certificate, Article Nine §1(d)(3). Thus, if the SLC brought a claim, the
Company may be required to advance the defendants’ fees and expenses in connection
with defending that claim. These fees and expenses are, of course, in addition to any
fees and expenses incurred by the Company in pursuing the claim. Because the
Company may have to advance legal fees to any defendant against whom the SLC
brings a claim, and potentially indemnify that person even if the claim is successful on
the merits (which is highly unlikely), the SLC believes that these provisions provide
additional support for its decision to seek dismissal of this claim.
e.
Statute of Limitations
Finally, the SLC has considered the applicable statute of limitations and related
issues in assessing the merits of these claims. New Jersey law provides a six-year
statute of limitations for a breach of fiduciary duty claim. See N.J. Stat. § 2A:14-1 (2008)
(“Every action at law for . . . for any tortious injury to real or personal property . . . shall
be commenced within 6 years next after the cause of any such action shall have
accrued.”); see also Fleming Cos. v. Thriftway Medford Lakes, 913 F. Supp. 837, 846 (D.N.J.
1995) (“A claim for breach of fiduciary duty, which has a six year statute of limitations,
commences to run at the point the plaintiff has actual or constructive knowledge of the
breach”) (citation omitted).
In this multi-district litigation, the earliest derivative complaint was filed on
behalf of Chiquita on October 12, 2007, in an action styled City of Philadelphia Public
Employees Retirement Sys. v. Aguirre, et al., Case No. 1:07-cv-851 (S.D. Ohio). Thus, any
claim that accrued before October 12, 2001 is presumptively time-barred under the sixyear limitations period unless preserved by some equitable tolling doctrine. See, e.g.,
Grunwald v. Bronkesh, 621 A.2d 459, 467 (N.J. 1993) (because the discovery rule did not
apply, breach of duty claim arising from alleged legal malpractice was barred by sixyear statute of limitations).
209
Chiquita’s indemnification provision contains certain exceptions. Chiquita’s Certificate,
consistent with N.J.S.A. § 14A:3-5(8), provides, “[N]o indemnification shall be made to or on
behalf of such person if a final, non-appealable judgment or adjudication adverse to such person
establishes that such person’s acts or omissions (a) were a breach of his duty of loyalty to the
Corporation or its shareholders, (b) were not in good faith or involved a knowing violation of
law, or (c) resulted in such person’s receipt of an improper personal benefit.” As discussed above
with regard to Chiquita’s exculpatory clause, the SLC has concluded that the defendants did not
engage in any form of gross negligence or intentional conduct and, therefore, these exceptions
would not apply.
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The SLC explored possible tolling doctrines that may affect the application of the
statute of limitations. In connection with its statute of limitations analysis, the SLC
sought and received a memorandum from Lead Counsel, which set forth the plaintiffs’
assessment of the applicable limitations period and related tolling doctrines, which the
SLC considered in reaching its conclusions. Among the doctrines that the SLC analyzed
was the discovery rule, which New Jersey courts apply “[u]nder special circumstances
and in the interest of justice . . . to postpone the accrual of a cause of action when a
plaintiff does not and cannot know the facts that constitute an actionable claim.” Id. at
463. However, it appears that New Jersey courts have not applied (or even considered)
the discovery rule in a derivative suit or in connection with a claim for breach of
corporate fiduciary duty. Thus, there is no New Jersey case law directly on point.210
Based on the factual record, the SLC also considered the possibility that the
plaintiffs were on “inquiry notice” of the guerrilla payments as of October 3, 2001, the
date on which the settlement of the SEC investigation into the Company’s books and
records was publicly announced. Although the SEC settlement only discussed the
customs payments in Colombia, an argument can be made that a reasonable investor
should have inquired further about the Company’s Colombian operations at that time.
If inquiry notice was triggered on October 3, 2001, the filing of the first derivative
complaint on October 12, 2007 was untimely under the six-year statute of limitations.211
210
However, Delaware law recognizes the discovery rule as a basis to toll claims alleging breach of
fiduciary duty. See In re Dean Witter P’ship Litig., 1998 WL 442456, at *6, *9 (Del. Ch. July 17, 1998)
(discovery rule applied to bar claims for breach of the duties of care, loyalty, and candor brought
by the owners of interests in various real estate limited partnerships against those partnerships’
general partners and financial advisors because the plaintiffs knew or should have known of the
facts giving rise to their injury); Albert v. Alex Brown Mgmt. Servs., 2005 WL 1594085, at *19-20
(Del. Ch. June 29, 2005) (noting that “[u]nder the so-called ‘discovery rule,’ the statute of
limitations is tolled where the injury is inherently unknowable and the claimant is blamelessly
ignorant of the wrongful act and the injury complained of,” but finding that exchange-fund
investor the plaintiffs knew or should have known of facts supporting their claim that the fund
manager defendants had breached their fiduciary duties).
211
In addition, well before 2001, the U.S. press published articles focusing on the extortion of U.S.
businesses operating in Colombia. For example, one New York Times article published in 1998
noted: “Foreign businesses are particularly vulnerable to kidnappings and extortion and
kickback demands from the rebels . . . To discourage kidnappings, they employ Colombian
executives and use local contractors. They hire such multinational security services as Control
Risks Group . . . to tailor security packages for their executives . . . Mr. Lara of Control Risks said,
. . . ‘So many have a policy of subcontracting to Colombian firms, and Colombians feel, especially
operating in rural areas, that they’ve got to pay to keep themselves safe.’” Diana Jean Schemo,
International Business: Risking Life, Limb and Capital; U.S. Companies Operate in Colombia, but Very
Carefully, N.Y. TIMES, Nov. 6, 1998, at C1. This provides further support an argument that
plaintiffs were on inquiry notice of the Company’s payments in Colombia before October 12, 2001
and, therefore, the complaint that was filed on October 12, 2007 was untimely.
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Because of the uncertainty concerning the possible application of the discovery
rule under New Jersey law, and the potential issue of whether the plaintiffs were on
inquiry notice as of the announcement of the SEC settlement, there is, at the very least, a
non-frivolous argument that any claim arising from the guerrilla payments is barred by
the statute of limitations. This provides yet another basis of support for the SLC’s
decision to seek dismissal of the claims.
*
*
*
Accordingly, with respect to this period, the SLC has concluded, in the exercise
of its business judgment, to seek dismissal of this claim. In exercising that judgment,
the SLC took account of the following factors. First, as discussed at length above, this
decision is based on the fact that the SLC found no breach of duty on the part of any
defendant. Second, as is also discussed at length above, the SLC found that various
considerations create, at a minimum, substantial uncertainty as to whether a viable
claim exists and therefore raise serious questions whether bringing such a claim is in the
best interests of the Company. These considerations are the lack of cognizable harm,
the bankruptcy release, Chiquita’s exculpatory clause, Chiquita’s potential
advancement and indemnity obligations, and the statute of limitations. Third, as
discussed below (see Business Judgment Considerations), the SLC took into account
additional factors apart from the legal and factual merits of the claims that are relevant
to the analysis of whether to bring litigation.
C.
Breach of Duty in Connection with Payments to the
AUC From Approximately 1997 Through February 2003
The SLC next considered whether the payments made to the convivir and the
AUC, which began in approximately 1997 and continued through February 2003,
support a claim that the defendants breached their duties to the Company. In support
of this claim, the plaintiffs allege that:
After having previously made improper and ultra vires
bribery payments to the ELN and FARC for several years,
from 1997 through February 2004, Chiquita, through its
Colombian subsidiary, Banadex, made improper or illegal
and ultra vires payments to a violent, right-wing terrorist
organization in Colombia, the AUC . . . Defendants caused
or permitted Chiquita to make payments to the AUC,
directly or indirectly, nearly every month from 1997 through
February 2004, making over 100 payments totaling over $1.7
million.
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Am. Compl. ¶ 100. In analyzing this claim, the SLC evaluated the payments in two
distinct time periods because, in the SLC’s view, each period presented distinct legal
issues. First, the SLC examined the payments made between mid-1997 and the
designation of the AUC as an FTO on September 10, 2001. Second, the SLC examined
the payments made from September 11, 2001 until February 20, 2003, when the FTO
designation was discovered by a member of Chiquita’s Legal Department in Cincinnati.
1.
Payments From 1997 Through September 10, 2001
Based on their dates of employment, and the facts developed during the SLC’s
investigation, this claim applies to the following defendants: (i) management: Robert
Kistinger, Warren Ligan, Carl Lindner, Jr., Keith Lindner, Robert Olson, James Riley,
William Tsacalis, Steven Warshaw, and Jeffrey Zalla, and (ii) directors: Rohit Manocha,
Fred Runk, Gregory Thomas, William Verity, and Oliver Waddell. Accordingly, the
SLC investigated and analyzed (i) whether the management defendants breached their
duties of care or loyalty by causing, or allowing, Chiquita to make payments to the
convivir and/or the AUC initially from approximately 1997 through September 10,
2001; and (ii) whether the director defendants breached their duty of oversight (loyalty)
by failing to have adequate information and reporting systems in place to ensure
compliance with relevant law. For the reasons discussed below, the SLC will seek to
dismiss this claim.
a.
Management Defendants: Kistinger, Ligan, C. Lindner, K.
Lindner, Olson, Riley, Tsacalis, Warshaw and Zalla
As set forth above, the payments to the convivir and/or to the AUC are
protected by the business judgment rule unless the defendants acted with fraud,
illegality, a conflict of interest, gross negligence, or the lack of a rational business
purpose. See Maul, 637 A.2d at 937; see also Auerbach, 47 N.Y.2d at 631. As an initial
matter, the SLC has found no evidence of, and the plaintiffs do not allege any,
fraudulent conduct, illegality or self-dealing on the part of the defendants in connection
with the payments made prior to the FTO designation. Thus, the SLC examined
whether the payments to the convivir and/or the AUC were the result of gross
negligence or lacked a rational business purpose.
Initial Payments to the Convivir. As described above, the payments to the
convivirs began without specific knowledge or approval by any of the management
defendants. Instead, both Chiquita’s Internal Audit and Legal Departments became
aware of the convivir payments in approximately April or May of 1997 in connection
with the Company’s routine accounting and legal oversight functions. Once they
learned about the payments, personnel from Internal Audit and the Legal Departments
took reasonable and appropriate steps to better understand the nature of the convivirs
and the legal implications of the payments.
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First, after becoming aware of the payments, members of senior Chiquita
management met on May 7, 1997 to discuss the payments, among other reasons. At
that meeting, Robert Thomas and Bud White, along with defendants Robert Olson,
Robert Kistinger, and likely William Tsacalis, had a detailed discussion regarding the
payments to convivirs (and guerrilla groups) and the appropriate reporting system for
these payments. In addition, they discussed the preliminary conclusion of [a Banadex
lawyer] that the convivir payments were legal under Colombian law.
Second, following the May 7 meeting, David Hills was directed to conduct a
further inquiry into the payments to the convivirs, and reported his conclusion that they
did not violate Colombian law to Thomas and Olson. During the course of his inquiry,
Hills reviewed background documents concerning convivirs that he received from [a
Banadex lawyer], which had been provided to [the Banadex lawyer] by the Secretary of
the Antioquia government in Colombia, and which stated that convivirs were legal
entities that provided legitimate security services. Hills also traveled to Colombia and
discussed the payments with Banadex personnel. In a memo dated August 29, 1997,
Hills reported his findings that convivirs were legal entities (and not paramilitary
groups) and that the Company’s payments were not illegal under Colombian law.
Third, Olson and Thomas reported the convivir payments to the Audit
Committee as part of their regular FCPA reporting process. The Chiquita lawyers told
the Audit Committee that the convivir payments did not violate Colombian law or the
FCPA and were, therefore, lawful.
Fourth, Chiquita’s Legal and Internal Audit Departments continued to monitor
the convivir payments in connection with the Company’s FCPA reporting practices.
Based on these facts, the SLC believes that Chiquita management acted
reasonably and appropriately in allowing the payments to the convivirs to continue.212
Likewise, once this initial review was complete, management monitored the payments
on a regular basis. On a quarterly basis, the convivir payments were reviewed by the
Legal and Internal Audit Departments as part of the Company’s FCPA reporting
practices and, on a periodic basis, reported to the Audit Committee.
In reaching this conclusion, the SLC found no evidence that Chiquita
management was told of the 1996 or 1997 Castaño meeting, which, by some accounts,
linked the convivir to the AUC. Thus, the SLC found that, until the summer of 2000, the
management defendants, all of whom were located in Cincinnati, were not aware of the
connection between the convivir and the AUC, and believed that the payments were
being made to legitimate, government-sponsored, security organizations, which is a
212
The SLC found no evidence that management defendants Ligan, Riley and Zalla participated in
the approval of payments.
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rational business purpose. This belief was reasonable given the information initially
shared with management at the May 7 meeting, the results of David Hills’ continued
factual inquiry, and the opinions of in-house legal counsel.
As further evidence of good faith, the SLC also considered the fact that the
Company provided information about the convivir payments to the SEC, DOJ, and the
USAO SDNY. As described above, during the SEC’s investigation concerning the
customs payments, K&E met with government representatives and, as part of its
discussions, described the fact that Banadex had been making payments to convivirs.
K&E told the federal authorities that the convivir was “a[n] entity that provides the
Army information concerning guerilla movements” and that the Company had a “local
opinion confirming that payments to Convivir are lawful.” None of the government
representatives indicated that the payments were an issue under U.S. law. Likewise, at
no time did K&E advise the Company that the convivir payments raised any potential
issues under U.S. law.
Discovery of the Convivir-AUC Connection. The SLC believes that the legal
considerations are somewhat different once the Legal Department became aware of the
connection between the convivir and the AUC in July 2000. In early 2000, during his
routine review of FCPA reports, Robert Thomas noticed a payment to Inversiones
Manglar, an entity based in Santa Marta whose name he did not recognize. Thomas
made inquiries to [Chiquita Employee #3] and [Banadex Employee #4]] who explained
to him that since the Colombian government would not permit the formation of new
convivirs, Inversiones Manglar was formed to function like a convivir in Santa Marta,
but was actually providing security.
Until he spoke with [Chiquita Employee #3] and [Banadex Employee #4],
Thomas did not know that convivir payments, which had begun in October 1999, were
being made in Santa Marta. [Chiquita Employee #3] and [Banadex Employee #4] also
told Thomas that, according to [Banadex Employee #5], Banadex could not stop making
the payments, as it needed the security provided by Inversiones Manglar. The
information Thomas learned on the call made him suspicious that the payments were
being routed to the paramilitary organizations and that further review was necessary.
After bringing this to the attention of Robert Olson, Thomas began a review of the
convivir payments.
In the initial stages of his review, Thomas received a memo from [a Banadex
lawyer] concerning the legality of the payments to the convivirs. The memo, dated June
17, 2000, concluded that paramilitaries extorted individuals and companies, threatening
them with harm in order to extract payments, and that the Company should pay
convivirs, which were legal security entities, in order to ensure the security of the
Company and its employees. Thomas also directed [Chiquita Employee #1] to travel to
Colombia to interview Banadex employees about the payments. [Chiquita Employee
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#1] reported his findings orally to Thomas, who summarized them in a memo to file.
The Thomas Memo stated that (i) the Urabá convivir was linked to Carlos Castaño, a
very dangerous figure who was affiliated with the AUC, (ii) the Santa Marta payments
were being routed to paramilitaries, and (iii) the payments were being funneled to
Santa Marta through the Urabá convivir. Members of senior management in Cincinnati
were briefed on [Chiquita Employee #1’s] findings: Thomas briefed (and also provided
his memo to) Olson, who, in turn, informed Kistinger and Warshaw.
Thomas then sought legal opinions from Jorge Solergibert and B&M concerning
the payments. Based on the facts outlined in the Thomas memo, Solergibert and B&M
concluded that the Company had been extorted to make payments to paramilitary
organizations, and the Company had no meaningful choice but to make the payments
and, therefore, would not be subject to liability under Colombian law for the payments
to the convivir.
At the conclusion of his review, Thomas reported his findings to the Audit
Committee at the September 12-13, 2000 meeting. Although individuals interviewed by
the SLC did not recall Thomas’s report of his findings, the notes of the meeting reflect
Thomas’s report that the Company was being extorted and Castaño was described as
the “convivir leader.” In addition, Thomas reported that outside counsel had
confirmed that the payments did not violate Colombian law and were legal in the
context of the FCPA.
Conclusion. Because there was no fraud, illegality, or conflict of interest, and
because the decision to continue the payments did not amount to gross negligence, the
management defendants did not breach their duty by allowing the payments to
continue from approximately 1997 to September 2001.
This conclusion is based on (i) the Legal Department’s monitoring and detection
of the different forms of payments (both initially in 1997 and in early 2000), (ii) the steps
taken to gather information about the payments, including Hills’ review in 1997 and
Thomas’s inquiry in 2000, (iii) the legal opinions received from in-house and outside
counsel, which uniformly confirmed that the payments were not illegal under Colombia
law, (iv) the consistent monitoring of the payments by the Legal and Internal Audit
Departments, and (v) management’s periodic reporting about the payments to the
Audit Committee.
The SLC has concluded that these facts demonstrate that the management
defendants employed a rational process designed to ensure that they acted on an
informed and adequate basis with regard to allowing the payments to the convivirs and
the AUC to continue. See Albert v. Alex Brown Mgmt. Serv., Inc., 2005 WL 2130607, at * 4
(Del. Ch. Aug. 26, 2005) (“Gross negligence . . . involves a devil-may-care attitude or
indifference to duty amounting to recklessness”) (citation omitted). With respect to the
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convivir payments, this conclusion is reinforced by the fact that federal authorities and
K&E were aware of these payments, but did not raise any issues about their legality.
Finally, the payments had a rational business purpose – senior management was
told that they were necessary payments to prevent serious harm to the Company
personnel and property, both before and after the Thomas inquiry. For those reasons
and others outlined below, the SLC will seek dismissal of this claim.
b.
Director Defendants: Manocha, Runk,
G. Thomas, Verity and Waddell
The SLC next considered the claims against the directors arising from both types
of payments made during this period. During the period from mid-1997 until mid2000, during which the Company was paying the convivir, the non-management
members of the Board were defendants Fred Runk, William Verity, and Oliver Waddell.
After the completion of Thomas’s review of the convivir payments in the summer of
2000, the non-management members of the Board were Runk, Waddell, Gregory
Thomas (who joined the Board in November 2000), and Rohit Manocha (who joined the
Board in January 2001). Manocha, Thomas, and Waddell served on the Audit
Committee.
The SLC found that the director defendants were aware of the convivir and AUC
payments during this period. The evidence that supports this finding includes the
regular FCPA reports presented by the Legal Department at Audit Committee
meetings, which included convivir payments starting in September 1997. In addition,
the results of Thomas’s review of the convivir payments were reported to the Audit
Committee in September 2000. Because it found that the defendants were aware of the
payments, the SLC considered whether these defendants breached their duty of loyalty
by failing to provide appropriate oversight.
As discussed above, to establish a failure of oversight, one must show that the
directors knew that violations of law were occurring and that the directors took no steps
in a good faith effort to remedy that situation. See Caremark, 698 A.2d at 971; Saito, 2004
WL 3029876, at *6. As an initial matter, as discussed above, there was no violation of
law. The payments made to the convivir and the AUC before September 10, 2001 were
not prohibited under Colombian or U.S. law. This is what the directors were repeatedly
told by the Chiquita Legal Department. Because a necessary precondition to liability
does not exist, this claim fails as a matter of law. See Canadian Commercial Workers, 2006
WL 456786, at *6; Beam, 833 A.2d at 976.
Even if there had been a violation of law of which the directors were unaware,
the SLC has concluded that there was no sustained or systemic failure of the directors to
exercise oversight. To the contrary, at all times, the Company had a properly
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functioning Audit Committee that met regularly; a robust FCPA compliance and
reporting program, which included reporting on non-FCPA “sensitive” payments; a
major accounting firm, E&Y, serving as outside auditor, which was aware of the
payments and considered them to be immaterial; and a fully functioning Internal Audit
Department, which reported to the Audit Committee on a periodic basis.
Initial Convivir Payments. As noted above, Chiquita had a duly-constituted
Audit Committee, which met at regular intervals throughout the year. In 1997, the
Audit Committee met 5 times; in 1998, it met 5 times; in 1999, it met 4 times; and in
2000, it met 4 times.
Beginning with its meeting on September 10, 1997, and continuing thereafter, the
Audit Committee received updates regarding the convivir payments in connection with
the Legal Department’s FCPA reporting. Notes of the meetings reflect that the Audit
Committee engaged in discussion and asked questions about the payments at these and
other meetings, including changes in the payment amounts and reasons for those
changes. At all times, Olson and Thomas presented these payments as legal.
AUC Payments Post-Thomas Review. The Audit Committee continued to
function appropriately during the period following Thomas’s review in mid-2000. The
Audit Committee received updates about the payments at meetings on September 1213, 2000 and May 8, 2001.213 At the September 12-13, 2000 meeting, Thomas presented
the findings from his review of the payments, which had recently been shared with
management. As discussed above, according to notes of the meeting, Thomas reported
that the Company was being extorted and Carlos Castaño was described as the
“convivir leader.” It is at least likely, given these contemporaneous notes of the
meeting, that the Audit Committee was informed about the link between the convivirs
and the AUC and the fact that the Company’s payments to the convivirs were being
routed to the paramilitaries. However, at the same time, the Audit Committee was
informed that, according to outside counsel B&M, the Company was not violating
Colombian law in making the payments. Thus, these facts support the SLC’s conclusion
that the directors engaged in legally adequate oversight, and the SLC found no “red
flags” that should have put the Board on notice of any misconduct.214
On May 8, 2001, the Legal Department provided another update to the Audit
Committee, which was now comprised of Manocha, Gregory Thomas, and Verity. At
213
Indeed, in the Amended Complaint, the plaintiffs acknowledge that the payments to the
convivir/AUC were regularly reported to Chiquita’s Audit Committee, “the agent of the full
Board,” during this period. See Am. Compl. ¶ 107; see also Stone II, 911 A.2d at 370.
214
The Amended Complaint identifies no such red flags. See Stone I, 2006 WL 302558 at *2 (rejecting
the plaintiffs’ contention that “red flags” existed in the absence of any such allegations).
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this meeting, the Legal Department again presented information about the convivir
payments in connection with David Hills’ FCPA report, which was the first such report
received by Manocha and Gregory Thomas. Again, these new directors, like the prior
members of the Audit Committee, were told that the payments were legal.
Finally, throughout this period, E&Y continued to provide independent auditing
services and its representatives regularly attended Audit Committee meetings. E&Y
was generally aware of both the convivir and AUC payments made by Banadex and
considered them to be immaterial. Likewise, the Internal Audit Department monitored
the “sensitive” payments, including the convivir/AUC payments, in accordance with
its normal procedures. This is yet further evidence that the directors had an
appropriate monitoring system in place. See Ash, 2000 WL 1370341, at *15 n.57.
Conclusion. For these reasons, the SLC has determined that this claim lacks
merit because there was no violation of law during this period and the director
defendants – Manocha, Runk, G. Thomas, Verity and Waddell – engaged in legally
adequate oversight.
2.
Payments From September 11, 2001
Through February 20, 2003
The SLC next reviewed and analyzed the period from September 11, 2001, when
the AUC was designated an FTO, to February 20, 2003, when the designation was
discovered by one of Chiquita’s in-house lawyers. The plaintiffs allege that, during this
period, the defendants “continued to pay the AUC after the United States designated
the AUC as an FTO on September 10, 2001, and as a Specially Designated Global
Terrorist on October 30, 2001.” Am. Compl. ¶ 110. Based on their dates of
employment, and the facts developed by the SLC, this claim applies to the following
defendants: (i) management: Robert Fisher,215 Cyrus Freidheim, Robert Kistinger, Carl
Lindner, Jr., Keith Lindner, Robert Olson, James Riley, William Tsacalis, Steven
Warshaw, and Jeffrey Zalla; and (ii) directors: (a) Rohit Manocha, Fred Runk, Gregory
Thomas, William Verity, and Oliver Waddell (the “Pre-Bankruptcy Board”), and (b)
Morten Arntzen, Jeffrey Benjamin, Robert Fisher, Roderick Hills, Durk Jager, Jaime
Serra, and Steven Stanbrook (the “Post-Bankruptcy Board”).
Accordingly, the SLC investigated and analyzed whether the defendants (i)
breached their duties of care or loyalty by causing, or allowing, Chiquita to make
payments to the AUC; and (ii) breached their duty of oversight (loyalty) by failing to
215
Robert Fisher joined the Board in March 2002 and also served as COO from March 2002 to
October 2002. He continued to serve as a director after he left the COO position. The SLC
analyzed Fisher’s conduct as a manager from March to October 2002 and as a director after that
time.
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have adequate information and reporting systems in place to ensure compliance with
relevant U.S. law. For the reasons discussed below, the SLC will seek to dismiss this
claim.
a.
Management Defendants: Fisher, Freidheim, Kistinger, C.
Lindner, K. Lindner, Olson, Riley, Tsacalis, Warshaw and Zalla
The SLC found that the management defendants, both before and after the
Company’s bankruptcy, were not aware that the payments to the convivir and/or the
AUC were prohibited under U.S. law during this period. To begin with, the SLC
attached substantial significance to the fact that during an investigation that lasted more
than three years, DOJ failed to develop evidence of such knowledge before February 20,
2003. More importantly, the SLC’s own review of the documentary evidence and
witness interviews found no such evidence. In the absence of such evidence (or other
fraud or conflict of interest, of which there is none), the SLC considered whether the
management defendants were grossly negligent in continuing to make the payments
after the FTO designation or whether the payments lacked a rational business purpose.
No Knowledge of the FTO Designation. The DOJ investigation focused heavily
on the issue of when Company executives or employees learned of the AUC’s FTO
designation. DOJ found evidence to suggest that, on September 30, 2002, [Chiquita
Employee #1] accessed a webpage through an Internet service to which the Company
subscribed that mentioned the FTO designation. However, DOJ was not able to
establish that [Chiquita Employee #1] actually knew of the FTO designation at any time
before [a Chiquita lawyer] learned of it on February 20, 2003. Nor did DOJ find that
anyone at the Company was aware of the FTO designation prior to February 20, 2003.
In conducting its own thorough investigation of this issue, the SLC found no
evidence of any such knowledge on the part of any of the defendants, or indeed of any
senior Company personnel in Cincinnati. The SLC reviewed all documents produced to
DOJ and questioned numerous witnesses on this issue and, despite reports about the
designation in the national and local media, was unable to find any evidence that any
individual at the Company – including any of the management defendants – knew
about the FTO designation at or around the time it occurred (or at any time before
February 20, 2003). While certain Banadex employees learned of the designation
around the time it was made, because it was widely reported in the Colombian media,
they did not understand the implication of the designation with regard to the payments,
and they did not recall talking to anyone in Cincinnati about it. Thus, the SLC, like
DOJ, concluded that none of the management defendants, who were all senior members
of Chiquita management, were aware of the FTO designation prior to [the Chiquita
lawyer’s] discovery on February 20, 2003.
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No Gross Negligence. The SLC found that senior management was not grossly
negligent in failing to learn of the AUC designation. Senior management reasonably
and in good faith relied on the Legal Department to keep the Company aware of
material legal developments. See Moran v. Household Int’l, Inc., 500 A.2d 1346, 1356 (Del.
1985) (court considered the “the extended discussion between the Board and [counsel]
before approval” of preferred share rights plan in determining that Board was not
grossly negligent).
First, the Legal Department was generally well thought of by senior
management. In fact, in his SLC interview, Robert Kistinger, who was employed by the
Company for almost thirty years, described General Counsel Robert Olson as “probably
the smartest business attorney I ever worked with.” This favorable view of Olson was
reported by numerous witnesses interviewed by the SLC.
Second, by all outward indications, the Legal Department was adequately
informed about and appropriately managed the situation in Colombia. At various
points, it considered and reported on the legality of the payments to the guerrillas, the
convivir and the AUC. For example, in early 2000, Olson was informed at the outset
about Thomas’s concerns that the convivir payments were being routed to the
paramilitaries and about his plans to review them. Even before Thomas did further
work on the issue, Olson and Thomas agreed that the payments could not continue
unless there was a “real threat of physical harm to employees” if the payments were not
made. Olson discussed [Chiquita Employee #1’s] trip to Colombia with senior
management. Olson was informed of Thomas’s findings from his review of the
payments in early September and told Kistinger and Warshaw. The Legal Department
consulted with outside counsel as appropriate and reported its findings.
Third, senior management was, on a periodic basis, generally informed of the
legal issues relating to the payments during this period. For example, the September
12-13, 2000 Audit Committee meeting, at which the Legal Department reported on the
results of the Thomas inquiry, including the opinion from B&M, was attended by
Tsacalis and Zalla. Kistinger recalled learning of the results. Shortly after the
Company’s emergence from bankruptcy in March 2002, Chiquita’s new CEO, Cyrus
Freidheim, was fully briefed by Olson about the payments. Olson briefed Freidheim on
the Colombia payments, including information about the convivirs, the paramilitaries,
and the AUC. Olson told Freidheim that the payments were legal.
In addition, senior management knew that the payments were tracked as part of
the FCPA process. As noted above, members of senior management attended Audit
Committee meetings during which the Legal Department reported on the legality of the
payments and the monitoring of the payments. For example, at a September 25, 2001
Board meeting attended by Carl Lindner, Keith Lindner, Steven Warshaw, James Riley
and William Tsacalis, Olson sought and received the Board’s approval to enter into the
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SEC settlement regarding Colombia port payments. In that settlement, the SEC credited
the Company’s response, which included identifying the issue and taking appropriate
corrective action. Moreover, Riley, Warshaw, and Tsacalis attended the March 7, 2002
Audit Committee meeting, at which the Legal Department reported on the convivir
payments in connection with its FCPA report presentation.
There were further discussions of the convivir/AUC payments and their legality
after the new Board was seated in March 2002. On April 23, 2002, the Legal Department
reported to the newly-appointed Audit Committee about the Colombia payments, at a
meeting attended by Freidheim, Riley, and Tsacalis. According to notes of that meeting
and Olson’s recollection, Olson reported that (i) convivirs were sponsored by the
Colombian government, but that they had started to be used to support paramilitaries
in Santa Marta, (ii) the Company was making cash payments in Santa Marta directly to
the AUC “or an organization that might be the AUC,” and (iii) the Company had
implemented new procedures to make the cash payments. At the October 4, 2002 Audit
Committee meeting, the Legal Department presented an FCPA report that listed
convivir payments; the meeting was attended by Freidheim, Riley and Tsacalis. At no
time during this period did the Legal Department report that the payments were illegal.
Conclusion. Because there was no fraud, illegality, or conflict of interest, and
because the decision to continue the payments did not amount to gross negligence, the
management defendants did not breach their duty by allowing the payments to
continue from approximately September 2001, after the AUC was designated as an FTO,
through February 2003.
This conclusion is based on the fact that senior management (i) appropriately
and in good faith relied on the Legal Department to keep the Company current with
material developments in the law; (ii) reasonably believed that the Legal Department,
led by Robert Olson, was competent and capable; (iii) was aware of material
developments in Colombia, such as the results of the Thomas inquiry; and (iv) was also
aware that the Legal Department tracked the payments through its FCPA reporting. At
all times, the Legal Department reported that the payments were legal. For these
reasons, the SLC found that the management defendants did not act with gross
negligence in allowing the payments to continue after the AUC was designated as an
FTO.
Finally, the SLC found that the payments to the AUC during this time did not
lack a rational business purpose. Throughout this period, members of senior
management had a reasonable basis for their good faith belief that the payments were
necessary to protect Company employees and infrastructure. For example, Kistinger
said that, around the time of the demand for cash payments by the AUC in Santa Marta
in 2002, Company executives and personnel continued to have security concerns and
“were constantly in fear.” He explained that, “even when [the AUC] are getting paid,
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there are incidents, but they are just more isolated.” This conclusion is supported by
ample evidence.
However, the SLC found that its conclusions about senior management in
general did not fully apply to Robert Olson, the Company’s General Counsel. Other
members of senior management justifiably relied on the advice and guidance of
counsel, but the Legal Department, led by Olson, failed to establish mechanisms to
monitor developments, such as the existence of the FTO list, and failed to establish a
system for bringing material information, including government designations and news
accounts, to the attention of management. Although this type of criticism may suggest
little more than the exercise of hindsight, the SLC found that the events of September
11, 2001 should have put Olson on notice that more needed to be done to determine
whether the various steps taken by the U.S. government to fight terrorism had any
impact on the Company’s legal exposure, especially on the exposure created by its
overseas operations. If such systems had been designed and properly implemented,
Olson may have learned of the AUC’s designation as an FTO at an earlier point and
minimized the harm suffered by the Company.216
Nevertheless, while the SLC believes that Olson could have done more to protect
the Company, the SLC has determined that Olson’s conduct in this regard did not
breach his duty of care to the Company.
First, the SLC found that 18 U.S.C. § 2339B, the FTO statute that prohibited
payments to the AUC as of September 10, 2001, was, in fact, little-known and obscure,
even to experienced practitioners. Larry Urgenson of K&E, while knowledgeable of the
Company’s payments to the guerrilla groups, was not aware of § 2339B at the time that
the FARC and the ELN were designated as FTOs or at any point during the three-year
SEC investigation. The relative obscurity of the statute and its criminal sanctions is
further reflected by the fact that prior to April 2003, DOJ had not brought a case under
the statute against a U.S. company. See Memorandum from Audrey Harris to File (Mar.
11, 2003). Olson also knew that the Company had discussed its payments to the FARC
at length with attorneys at the SEC, DOJ and USAO SDNY, who were involved in the
SEC investigation, yet the government never raised any questions about the
applicability of U.S. law in general or the FTO statute in particular.
Second, Olson’s Legal Department was comprised of senior lawyers who
oversaw the affairs of the Colombia division. This included [a Chiquita lawyer], who
was based in Cincinnati and was fluent in Spanish, and Jorge Solergibert, who was
216
The SLC found that Olson requested some limited legal guidance on whether post-9/11 legal and
regulatory developments affected the Company’s activities. However, this request for post-9/11
legal guidance does not adequately address the SLC’s concerns about putting appropriate
systems in place.
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based in Costa Rica. Like Olson, these Chiquita attorneys were unaware of the FTO
designation prior to February 20, 2003, when it was discovered by [a Chiquita lawyer].
Third, despite the significance of Olson’s failure to have a system in place by
which to monitor developments in U.S. law relating to the Company’s overseas
operations, the SLC found that Olson, on the whole, diligently worked to ensure that
the Company had compliance systems. Olson oversaw the Company’s comprehensive
FCPA compliance program, which ensured that the Company was in compliance with
applicable law and that the Audit Committee was apprised of facilitating payments
made by the Company. The Company subscribed to the Control Risks security website,
which provided updates on Colombia and was monitored by Chiquita employees.
Control Risks, on or before September 30, 2002, reported on the AUC’s FTO
designation, but there is no evidence that anyone at the Company saw the report at the
time. Therefore, while the SLC believes that, in hindsight, the compliance programs
implemented and overseen by Olson should have been broadened, such systems
existed and Olson, in good faith, believed that they were sufficient.
Fourth, the SLC found that although it would have been prudent for Olson and
the Legal Department to have undertaken a review of the Company’s worldwide
operations after the events of September 11, 2001, Olson’s failure to do so did not
display reckless indifference or gross negligence because the focus of the September 11
attacks, and the remedial steps taken by the U.S. government, focused on Middle
Eastern-based extremism and terrorist threats emanating from that part of the world,
not on paramilitary groups operating in Colombia, which posed no known risk of
attacks on the U.S.
Fifth, the SLC found that, during this period, Olson and the Legal Department
were substantially focused on other issues relating to the welfare of the Company.
Most fundamentally, Olson in particular spent much time and energy focusing on the
myriad legal issues related to the Company’s impending bankruptcy. In the early fall of
2001, the Company was preparing to file for bankruptcy, which it ultimately did on
November 28, 2001. The amount of time and energy spent by Olson on issues related to
the bankruptcy is suggested by evidence that Olson made three separate presentations
to the Board on issues relating to the bankruptcy in the month of November 2001 alone.
While the SLC did not find that Olson’s involvement in other matters excuses his
failure to make sure that he had taken necessary steps to protect the Company with
respect to the payments in Colombia, the SLC found that, when taken together with the
other considerations described above, they simply do not support a finding that his
conduct was sufficiently egregious to constitute a violation of his duty of care.
Accordingly, for the above reasons, the SLC has concluded that Olson did not breach
his duty of care by allowing the payments to continue during this period.
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Director Defendants: Pre-Bankruptcy Board (Manocha, Runk,
Thomas, Verity, Waddell); and Post-Bankruptcy Board (Arntzen,
Benjamin, Fisher, Freidheim, Hills, Jager, Serra, Stanbrook)
Prior to March 19, 2002, the date the Company emerged from bankruptcy, the
non-management members of the Board were Rohit Manocha, Fred Runk, Gregory
Thomas, William Verity and Oliver Waddell. After the Company emerged from
bankruptcy on March 19, 2002, the non-management members of the Board were
Morten Arntzen, Jeffrey Benjamin, Robert Fisher, Cyrus Freidheim, and Roderick Hills.
Durk Jager and Steven Stanbrook joined the Board in December 2002 and Jaime Serra
joined the Board in January 2003.
The Pre-Bankruptcy Board. As described above, the SLC concluded that the PreBankruptcy Board engaged in legally adequate oversight for the period through
September 10, 2001. That conclusion is no different for the approximately six-month
period that extended from the time of the FTO designation until the Board was
discharged on March 19, 2002. During this period, as with the earlier period, the Board
continued to have a fully-functioning Audit Committee, continued to have a robust
FCPA compliance and reporting program, continued to be audited by E&Y, and
continued to receive periodic updates from the Internal Audit Department. In addition,
even though the Board and management were primarily occupied by the Company’s
serious financial difficulties and bankruptcy, on March 7, 2002, less than two weeks
before these directors left the Board, the Audit Committee received a final FCPA
update. At all times, the directors continued to be advised by the Legal Department
that the payments identified as part of the Company’s FCPA reporting were legal.
The Post-Bankruptcy Board. The Post-Bankruptcy Board also engaged in legally
adequate oversight for the period from March 19, 2002 through April 3, 2003, when it
was first informed of the FTO designation (as discussed below). The new Board
immediately selected a new Audit Committee, chaired by Roderick Hills, the former
Chairman of the SEC, and including Morten Arntzen and Jeffrey Benjamin. This new
Audit Committee met eight times during 2002, and twice in 2003 prior to April 3.
During its second meeting, on April 23, 2002, the Audit Committee received a briefing
on the Colombia payments by Olson, which included a discussion about the
implementation of new procedures to make the cash payments that had recently been
demanded by the AUC in Santa Marta. The new Audit Committee, like the old one,
was told by Olson that the payments were legal. The Company continued to be audited
by E&Y. Internal Audit continued to provide periodic updates. In short, the SLC found
that the new Audit Committee was active and engaged, and provided legally sufficient
oversight.
Possible “Red Flags.” The SLC also considered whether the director defendants
ignored any “red flags” during this period. As discussed above, the SLC considered
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whether the events of September 11, 2001 and its impact on the political, social and legal
climate in the U.S., constituted a “red flag” that put the Pre-Bankruptcy Board on notice
of enhanced risks of liability because Chiquita conducted business in difficult operating
environments around the world. While the SLC believes that it would have been
prudent for Chiquita to have conducted a review of its international operations after
September 11, 2001, the SLC found no legal requirement to do so. See Graham v. AllisChalmers Manuf. Co., 188 A.2d 125, 130 (Del. 1963) (“absent cause for suspicion there is
no duty upon directors to install and operate a corporate system of espionage to ferret
out wrongdoing which they have no reason to suspect exists”). Nor, given that the
events of September 11 concerned terrorism originating from the Middle East, did the
events of that date put the directors on notice that additional steps needed to be taken
to protect the Company in Colombia.
Finally, the SLC considered whether the coverage of the AUC’s FTO designation
in U.S. national and local media in the fall of 2001 constituted a “red flag.” As noted
above, the SLC has already concluded that senior management was not grossly
negligent for failing to discover the FTO decision, so the SLC cannot and does not
conclude that the Board acted with conscious disregard, which requires a higher level of
culpability, in failing to see or understand the newspaper accounts.
In any event, the SLC has found only one decision in which press reports were
determined to have been a potential “red flag” to a board of directors. In that case, the
court found that the press reports standing alone were not a “red flag,” but only became
one when “taken as a whole” with other facts. McCall v. Scott, 239 F.3d 808, 819-20 (6th
Cir. 2001) (applying Delaware law).217 Therefore, the SLC found that the articles that
addressed the FTO designation of the AUC published in, among others, the Wall Street
Journal, Washington Post and Cincinnati Enquirer, without any additional information
suggesting problems or issues relating to the payments, did not constitute “red flags,”
as that concept has been developed in the law. The plaintiffs have asserted no “red
flags,” and the SLC has found none. See Stone I, 2006 WL 302558, at *2.
Conclusion. For these reasons, the SLC has determined that this claim lacks
merit since both the Pre- and Post-Bankruptcy Boards engaged in legally adequate
oversight.
217
The other relevant facts in that case included (i) alleged internal audit reports of fraud, (ii) the
director defendants’ alleged personal knowledge of improper practices, (iii) a pending qui tam
action in which particularized allegations of fraud were alleged, and (iv) an investigation by the
federal government. See McCall, 239 F.3d at 819-2.
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*
Accordingly, in the exercise of its business judgment, the SLC has concluded to
seek dismissal of this claim with respect to this period. In exercising that judgment, the
SLC took account of the following factors. First, as discussed at length above, this
decision is based on the fact that the SLC found no breach of duty on the part of any
defendant. Second, as is also discussed at length above, the SLC found that various
considerations create, at a minimum, substantial uncertainty as to whether a viable
claim exists and therefore raise serious questions whether bringing such a claim is in the
best interests of the Company. These considerations are the lack of cognizable harm
(through September 10, 2001), the bankruptcy release (which covers claims prior to
March 19, 2002), Chiquita’s exculpatory clause, Chiquita’s advancement and indemnity
obligations, and the statute of limitations (which may bar claims arising prior to
October 12, 2001). Third, as discussed below (see Business Judgment Considerations),
the SLC took into account additional factors apart from the legal and factual merits of
the claims that are relevant to the analysis of whether to bring litigation.
D.
Breach of Duty in Connection with Payments to
the AUC After Discovery of the FTO Designation
in February 2003 Through January 2004
As set forth in detail above, on February 20, 2003, [a Chiquita lawyer] discovered
that the AUC had been designated as an FTO by the U.S. Department of State. After
retaining K&E and working to understand the factual and legal situation, Olson advised
the Board of the situation at an April 3, 2003 Audit Committee meeting (which was
attended by the full Board). At the direction of Audit Committee Chair Roderick Hills,
Chiquita disclosed the payments to senior DOJ officials, including then-Assistant
Attorney General Michael Chertoff. Shortly thereafter, the payments resumed as the
Company waited for a response from DOJ that would address the issues it had raised.
The SLC has concluded that, at some point following the Chertoff meeting, each
member of senior management and the Board (other than Fernando Aguirre, who did
not have advance knowledge of the single payment made after he became CEO) knew,
or should have known, that the payments were being made.
The plaintiffs allege that the defendants breached their fiduciary duties by
causing and/or allowing the Company to continue to make payments to the AUC after
the discovery of the FTO designation in February 2003. See Am. Compl. ¶ 111-117. In
support of this claim, the Amended Complaint alleges that the defendants willfully and
knowingly caused the Company to violate the law, which ultimately resulted in the
guilty plea and accompanying $25 million fine. See Am. Compl. ¶ 118. Based on their
dates of employment, this claim applies to the following defendants: (i) management:
Fernando Aguirre, Cyrus Freidheim, Robert Kistinger, Robert Olson, James Riley,
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William Tsacalis, and Jeffrey Zalla; (ii) directors: Morten Arntzen, Jeffrey Benjamin,
Robert Fisher, Roderick Hills, Durk Jager, Jamie Serra, and Steven Stanbrook.
1.
Legal Standard
In the absence of the FTO designation, the decision to make the payments, as
analyzed above, would, under appropriate circumstances, be protected by the business
judgment rule. However, where a knowing violation of the law exists, the business
judgment analysis no longer applies, and director liability may be premised on a breach
of the duty of loyalty. That is because the requirement of “legal fidelity” is a
“subsidiary element of the fundamental duty of loyalty.” Gagliardi v. TriFoods Int’l Inc.,
683 A.2d 1049, 1051 n.2 (Del. Ch.1996); see also Stone II, 911 A.2d at 370; Disney, 907 A.2d
at 754, n.447; Ryan v. Gifford, 918 A.2d 341, 358 (Del. Ch. 2007) (holding that “intentional
violation of a shareholder approved stock option plan, coupled with fraudulent
disclosures regarding the directors’ purported compliance with that plan, constitute
conduct that is disloyal to the corporation and is therefore an act in bad faith”). This
principle has been applied under Delaware and New York law, and the SLC believes
that, if confronted with the issue, New Jersey courts would adopt it as well.
Several decisions illustrate how the duty of loyalty is implicated where a
knowing violation of the law is alleged. For example, in Desimone v. Barrows, 924 A.2d
908, 934-35 (Del. Ch. 2007), a plaintiff shareholder brought a derivative action against
directors and officers arising from alleged backdating of stock options. The Delaware
Court of Chancery ultimately dismissed the complaint for failure to make a demand
because the plaintiff failed to plead facts showing that the directors faced a substantial
threat of liability with respect to the alleged wrongdoing. See id. at 946. However, in
the course of reaching its decision, the court examined the legal ramifications of a
director’s knowing violation of law. The Court stated that:
[B]y consciously causing the corporation to violate the law, a
director would be disloyal to the corporation and could be
forced to answer for the harm he has caused. Although
directors have wide authority to take lawful action on behalf
of the corporation, they have no authority knowingly to
cause the corporation to become a rogue, exposing the
corporation to penalties from criminal and civil regulators.
Delaware corporate law has long been clear on this rather
obvious notion; namely, that it is utterly inconsistent with
one’s duty of fidelity to the corporation to consciously cause
the corporation to act unlawfully. The knowing use of
illegal means to pursue profit for the corporation is director
misconduct.
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Id. at 934-35; see also Brehm, 906 A.2d at 67 (“A failure to act in good faith may be shown
. . . where [a] fiduciary acts with intent to violate applicable positive law”); Francis v.
United Jersey Bank, 432 A.2d 814, 823 (N.J. 1981) (“Upon discovery of an illegal course of
action, a director has a duty to object and, if the corporation does not correct the
conduct, to resign”).
The decision in Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs, Inc., 854
A.2d 121, 131 (Del. Ch. 2004), also illustrates this principle. In that case, a minority
member of a limited liability company (“LLC”) brought a breach of fiduciary duty
action against the LLC, other LLC members, and LLC managers related to a bribery
scandal. Id. at 129-30. The plaintiff alleged that certain of the LLC’s managers and
officers paid $2 million in bribes to Brazilian officials to obtain telecommunications
permits. Id. at 134. These allegedly illegal payments later became public, resulting in
adverse publicity and a DOJ investigation of the LLC for violations of the FCPA. Id. at
134-135.
The plaintiff alleged that the defendants either participated in, or had knowledge
of, the bribery and failed to disclose it in management reports that were “reviewed,
adopted and approved” by LLC management. Id. In denying the defendants’ motion
to dismiss certain of the claims, the Court of Chancery held that the plaintiffs had
successfully stated a common law fraud claim against the managers who knew of the
bribery and made misleading statements to conceal it. Id. at 130-31. The Court stated
that a “fiduciary may not choose to manage an entity in an illegal fashion, even if the
fiduciary believes that the illegal activity will result in profits for the entity.” Id. at 13132.
Finally, a case applying New York law provides further insight into the
circumstances under which directors may breach the duty of loyalty by knowingly
violating the law. In Roth v. Robertson, 118 N.Y.S. 351, 352 (N.Y. Sup. Ct., Erie County
1909), a shareholder brought an action to compel an officer of the company to reimburse
the Company funds that had been paid to a third party in an illegal transaction. The
company operated an amusement park and a substantial portion of its profits was
derived from business conducted on Sundays. Id. However, at that time, operation of
the amusement park on Sundays was in violation of New York law. Id. After a third
party threatened to take steps to prevent the company from operating on Sundays
unless it was paid off, the manager of the amusement park paid $800 in “hush money”
in the belief that the payment was being made in the best interests of the corporation.
Id. at 352.
In rejecting this argument, the Court found that the payment was an illegal
expenditure because it was made to buy silence about the corporation’s violation of the
law, and thus constituted an ultra vires, or unauthorized, transaction. See id. at 352-53.
The Court further stated that directors and officers of a corporation who engage in an
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unauthorized transaction that causes a loss to the corporation “must be held jointly and
severally liable for such damages.” Id. In the end, the Court held that the corporation
was entitled to recovery from the officer even if the plaintiff shareholder had originally
approved of the payment, because, as a matter of public policy, the court could not
condone the illegal expenditure. See id.; see also Miller v. AT&T, 507 F.2d 759, 762 (3d
Cir.1974) (applying New York law) (“[If the] plaintiffs’ complaint alleged only failure to
pursue a corporate claim, application of the sound business judgment rule would
support the district court’s ruling that a shareholder could not attack the directors’
decision. . . . Where, however, the decision not to collect a debt owed the corporation is
itself alleged to have been an illegal act, different rules apply”) (citations omitted).
While this line of authority is clear, the SLC has concluded that it is unclear how
this law would be applied to the facts developed during the SLC’s investigation, which
are entirely different from the underlying facts in these decided cases. Several
important features distinguish the facts developed by the SLC during its investigation
from these decided cases. First, these cases address decisions to violate the law
motivated solely by profit (i.e., paying a bribe to enable the amusement park to remain
open) or personal gain (i.e., backdating stock options), and do not address the primary
motivation the SLC found existed here, which was to protect the lives of employees.
While it is clear that operating in Colombia had continuing financial benefits for the
Company, it is also clear that the Board was prepared to abandon Colombia if it could
not operate there legally, as it ultimately did. Second, in none of the cases discussed
above did the defendants disclose the violations to, and seek guidance from, relevant
governmental authorities prior to committing the acts at issue, or as soon as the
illegality of the acts became known. Third, these cases do not address a situation where,
based on the guidance provided by the relevant governmental authorities, the
defendants, advised by competent in-house and outside counsel, held the reasonable
good faith belief that the Company would not be prosecuted for its actions. Fourth,
because the SLC saw, first hand, how deeply the defendants were concerned with the
safety of their Colombian employees, the SLC believes that any case it brought would
not be sympathetic to a trier of fact.218
Based on these facts, it is not at all clear whether the defendants’ conduct here
would constitute a violation of the duty of loyalty. Because the legal merit of this claim
218
Commentators have acknowledged potential exceptions to corporations’ obligations to comply
with the law, for example, “under the concept of necessity in extraordinary situations where
compliance would inflict substantial harm on third parties, and noncompliance would not.” THE
AMERICAN LAW INSTITUTE, PRINCIPLES OF CORPORATE GOVERNANCE: ANALYSIS AND
RECOMMENDATIONS § 2.01(b)(1) (1994 & Supp. 2008); see Melvin A. Eisenberg, The Duty of Good
Faith in Corporate Law, 31 DEL. J. CORP. L. 1, 33 (2006) (noting a potential exception to a
corporation’s obligation to obey the law “where the norm of obedience to law is conventionally
deemed inapplicable or counterbalanced by another norm, such as necessity”).
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is uncertain, because the SLC believes the defendants acted in good faith in continuing
to make the payments to the AUC after discovery of the FTO designation, and because,
as discussed further below, other considerations counsel against pursuing litigation, the
SLC has concluded, in the exercise of its business judgment, that the claim should be
dismissed.
2.
Analysis
a.
Outside Directors: Arntzen, Benjamin,
Fisher, Jager, Serra, and Stanbrook219
Although interviews and document review did not allow the SLC to pinpoint
exactly when each non-management director learned that the payments had resumed
after the April 24 Chertoff meeting, at some point, each of the directors learned that the
payments were continuing. Indeed, given that the Board was told repeatedly about the
need for the payments, and the risks that would be created if the payments were not
made, the SLC believes that the only reasonable conclusion to be drawn by the Board at
the time was that the payments would continue. Accordingly, the SLC found that each
of the directors caused, or allowed, the Company to make payments knowing that those
payments were in violation of federal law.
However, in causing or allowing the payments to be made, the SLC has
concluded that the directors acted in good faith and to advance the best interests of the
Company. Substantial evidence developed by the SLC supports this conclusion.
Decision to Disclose Payments to DOJ. At the April 3, 2003 Audit Committee
meeting, attended by all directors, at which the designation was first disclosed to the
full Board, Olson advised that, among other things, (i) the Company believed the
payments were necessary to protect the lives of Chiquita employees, and (ii) the
payments had been delayed while the Company determined the appropriate course of
action. The Board, at the recommendation of Olson and Hills, directed the Company to
disclose the fact of the Company’s payments to DOJ. At this point in time, the Audit
Committee, led by Hills, who, among other things, was formerly Chairman of the SEC,
took control of the process. The SLC found that (i) the decision to disclose was an
appropriate, reasonable, and responsible course of action, and (ii) that the members of
the Board appropriately and reasonably, given Hills’ background and experience, relied
on him to take the lead on behalf of the Board and the Audit Committee.
At the April 30, 2003 Audit Committee meeting, Hills and Olson reported on the
Chertoff meeting. While recollections vary, the message conveyed to the Audit
219
The SLC’s analysis of Hills’ conduct, as Chair of the Audit Committee, is discussed separately
below.
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Committee was that criminal liability for past payments was unlikely, and that the
government had, in effect, deferred a final answer on the question of continuing
payments pending consultations with other agencies in the federal government. Based
on the presentations provided by Olson and Hills, the Audit Committee reasonably
believed that DOJ had agreed to consider the Company’s situation, speak with other
governmental agencies, and get back to the Company.
In the SLC’s view, it would have been prudent for the Audit Committee
members to affirmatively address the issue of whether the payments should continue at
this time, but there is no evidence that this occurred. To the contrary, the Audit
Committee was not asked to, and did not, make a determination regarding continuing
the payments at this time, or at any time until March 2004. Because the continuation of
the payments was not presented as a decision to be made, and because no information
was presented on the status of the payments, the Audit Committee members had
conflicting views regarding whether the payments were in fact continuing. Arntzen
and Stanbrook assumed that the Company was continuing to delay the payments,
although it is not clear on what basis they believed the payments could be delayed
indefinitely; by contrast, Benjamin and Hills believed the payments were continuing.
Despite this range of views, the SLC found that the directors believed in good faith that
the Company, at the direction of Hills and Olson, was handling the situation
appropriately.
Continued Monitoring. The Audit Committee continued to receive regular
updates on relevant developments. The Audit Committee met on May 12, July 8, and
August 12.220 At one or more of those meetings, the Audit Committee (i) received
updates on the status of the investigation from Hills and Olson, including the fact that
the Company was actively pursuing further discussions with DOJ officials (including
having repeated contact with senior DOJ officials), (ii) discussed the adequacy of the
Company’s disclosures regarding Colombia, and (iii) discussed the possible sale of
Banadex. The SLC found that, early in the process, several directors determined that
the wisest and soundest course was for the Company to cease its operations in
Colombia, and also found that by early July 2003, that possibility began to be actively
explored. Accordingly, the SLC found that the Audit Committee continued to monitor
and control the Company’s response to the situation in an appropriate fashion.
Reliance on Experts. The Audit Committee sought advice and assistance from
numerous outside professionals, including outside counsel, forensic accountants, and
consultants. At the September 17, 2003 Audit Committee meeting, the Audit
220
The Audit Committee also met on May 22, 2003, July 29, 2003, and August 8, 2003. While the
directors told the SLC that Colombia was discussed, at least informally, at every meeting, there is
no record in the minutes or the notes of a formal discussion of the Colombia issue at these
meetings.
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Committee authorized the Company to retain K&E, and required that K&E report
directly to it (K&E had been working for the Company on the matter since late
February). At this meeting, Larry Urgenson of K&E reported that DOJ intended to
conduct an investigation to confirm the facts presented by the Company regarding the
payments. With respect to continuing the payments, Urgenson advised the Audit
Committee that DOJ had not told the Company to stop making the payments, but also
had not condoned the payments. The Audit Committee discussed the implications of
the investigation and directed the Company to cooperate fully with the authorities. In
addition, Hills reported on his recent meeting with Deputy Attorney General Larry
Thompson, including Thompson’s assurances that the Company was neither a subject
nor a target of the investigation. Shortly after this meeting, the Audit Committee
engaged KPMG, with a team led by a former FBI agent, to conduct a forensic analysis.
Reliance on Continued Communication with DOJ. The directors relied on the
fact that the Company had not received guidance from the government with respect to
continuing payments since the April 24 meeting. On September 4, 2003, K&E met with
DOJ, and Urgenson confirmed that the payments were continuing. He specifically
asked Taxay for a directive from DOJ with respect to the payments, and Taxay did not
provide one, nor did anyone from DOJ communicate such a directive to Chiquita
subsequent to the meeting. Urgenson communicated this to the Audit Committee at its
September 17 meeting.
Efforts to Exit Colombia. The Board as a whole continued to remain informed
about the status of the investigation, including at its next meeting on November 20 and
21, 2003, and at an Audit Committee meeting, attended by all directors, on December 4,
2003. At the December 4 Audit Committee meeting, a portion of which was attended
by the full Board as well as by Urgenson and KPMG representatives, the Board received
a report from [Chiquita Employee #1] who, among other things, described the range of
security issues the Company faced in Colombia. At the same meeting, Olson discussed
issues relating to the situation in Colombia and the DOJ investigation, including
pursuing the sale of Banadex. At this meeting, it was the consensus of the Board that,
having not heard back from DOJ, the Company should cease its operations in
Colombia.
Continued Cooperation Efforts. While there is evidence suggesting that Hills
learned in early December 2003 that DOJ had communicated, both directly and
indirectly, the message that the payments should stop, there is no evidence that Hills
communicated that message to the remainder of the Board at that time. However, Hills
did communicate to the Audit Committee by e-mail that (i) DOJ was dissatisfied with
the Company’s cooperation to date, and, in explaining why the Audit Committee rather
than management needed to be in charge of the matter, that (ii) the Company
“appeared to be committing a felony.” Hills then recommended the retention of an
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outside consultant, Ronald Goldstock, with expertise in dealing with terrorist and
violent organizations,221 to assist KPMG and K&E with the investigation. After
discussion of the issue, the Audit Committee agreed to retain Goldstock to address
some of the problems that had emerged in dealing with DOJ. Accordingly, by the end
of 2003, the Audit Committee had K&E, KPMG, and Goldstock advising it with respect
to the Colombia matter and had a basis for believing that Hills was closely monitoring
the situation and responding appropriately to information he was receiving.222
The End of the Payments. The Company made its last payment to the AUC on
January 24, 2004. On January 26, 2004, the Company publicly announced that it was
pursuing a sale of Banadex. Ultimately, on March 30, 2004, after considering whether a
final payment should be made as it left Colombia, the Board directed that no further
payments be made to the AUC. In total, Chiquita made 23 payments totaling $365,865
to the AUC from the late February 2003 discovery of the FTO designation through late
January 2004.
Conclusion. The SLC could not conclude that the non-management director
defendants breached their duty of loyalty to the Company by allowing the payments to
continue from approximately February 2003 to January 2004.
This conclusion is based on the fact that the non-management directors (i) were
informed with respect to the Colombia issue, having discussed it at a minimum of nine
meetings (and probably more), (ii) relied, in good faith, on Roderick Hills, as Chair of
the Audit Committee, to direct the Audit Committee’s response to DOJ investigation,
(iii) received and relied upon advice from outside counsel and outside consultants, (iv)
believed, in good faith, that the Company was acting appropriately under the
circumstances, including to protect the lives of the Company’s employees, (v) did not
believe that they were placing the Company in further jeopardy by continuing the
payments while they waited for a response from DOJ, and (vi) moved promptly to leave
Colombia, while protecting the Company’s interests, once it became apparent that it
would not receive a meaningful response from DOJ.
However, the SLC was troubled that the Audit Committee members, including
Roderick Hills, did not take additional steps to ensure that they were kept fully and
contemporaneously informed about the status of the continuing payments throughout
this period. Indeed, despite the fact that the Audit Committee met frequently and
received significant amounts of information through multiple formal and informal
221
Goldstock is the former Director of New York State Organized Crime Task Force, and has at
various times been a Professor at Cornell, Columbia, and NYU law schools.
222
As discussed below, the directors were also advised by the law firms of Skadden and Baker Botts
with respect to the Company’s disclosures regarding Colombia.
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briefings, about Colombia and many other issues, the Audit Committee did not receive
briefings regarding what was arguably the most important issue – whether and how the
Company was continuing to make the payments (since each additional payment was a
violation of federal law).
Even so, because of the efforts the outside directors made to be informed and to
direct the Company’s response, the SLC found that they acted in good faith and with
the best interests of the Company in mind. The SLC had no factual basis for finding
that the outside directors acted with disregard for the law or simply to enhance the
Company’s profitability. In the end, as discussed further below, the SLC found that the
Company and the Audit Committee placed too much faith for too long in the possibility
of obtaining a favorable answer from DOJ, and allowed the payments to continue rather
than more swiftly focusing on the urgency of leaving Colombia. But the fact that, in
retrospect, the Audit Committee relied too heavily on the comfort provided by senior
DOJ officials does not diminish the good faith that characterized the actions pursued by
the Audit Committee.
b.
Roderick Hills
While the SLC’s analysis of Hills’ conduct in many respects tracks the analysis of
the other outside directors, Hills played a far larger role in the Company’s response to
DOJ investigation and therefore warrants separate analysis. In many respects, Hills
provided exemplary service as an outside director. He took charge of the situation in
Colombia, which he had no role in creating, and provided active and thoughtful
direction of the Company’s response. Even though the SLC was troubled by some of
the actions that he took or failed to take on the Company’s behalf, the SLC found that
Hills at all times acted in good faith with the best interests of the Company in mind.
Continuing Payments. Hills provided several compelling reasons why he
allowed the payments to continue following the discovery of the FTO designation and
full disclosure to DOJ.
First, based on what he had been told by management, Hills held the good faith
belief that Banadex employees would be harmed if the payments were not made.
Second, at the April 24 meeting, Assistant Attorney General Chertoff stated that
the making of payments was illegal, but, very significantly, he also acknowledged that
the issue of future payments was “complicated,” which was exactly the message that
Hills and the other representatives of the Company sought to communicate. Although
neither Hills nor Olson explicitly asked whether Chiquita could continue to make the
payments, Chertoff did not explicitly state that the Company should stop. Finally, Hills
told Chertoff that Chiquita was prepared to sell its Colombian operations, but asked
that Chertoff first discuss with the NSC the issue of whether the Company’s forced and
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hasty departure from Colombia might cause other companies to consider doing the
same thing. Hills offered to contact the NSC himself, but Chertoff stated that DOJ
would do so. As a result of this meeting, and the way it ended, Hills (and Olson)
believed in good faith that based on the Company’s presentation DOJ understood that
the payments would continue while Chiquita waited for further guidance from DOJ.
That guidance was expected to come soon after the meeting.
Third, in June 2003, Hills spoke to Chertoff, who told him that Deputy Attorney
General Thompson had been briefed on the issue. This suggested to Hills that DOJ was
continuing to consider the issues raised at the April meeting.
Fourth, in late August, Hills took the initiative to set up a meeting with Deputy
Attorney General Thompson, who assured him that the Company had done the right
thing in disclosing the payments, and the Company was neither a subject nor a target of
the DOJ investigation.
Fifth, at the September 4, 2003 meeting with DOJ, Urgenson specifically
informed DOJ that the payments were continuing, and invited DOJ to give the
Company a directive to stop the payments, which DOJ declined to do, simply repeating
the phrases used by Chertoff at the April meeting without further elaboration.
Sixth, beginning in June 2003, the Company began the process of exploring the
sale of Banadex.
Finally, K&E, which had strongly counseled the Company to stop the payments
before the April 24 meeting, did not repeat the advice in the months that immediately
followed it.
Based on this evidence, Hills believed in good faith that the Company was not
exposing itself to additional risk by continuing the payments after the April 24 meeting,
but rather was acting to protect the lives of the Company’s employees and its property.
While the SLC questioned whether Hills placed too much faith in the assurances he
received from government officials regarding Chiquita’s status, it nonetheless found
Hills’ reliance on all the facts and circumstances to be reasonable and in good faith.
Further, the SLC found that Hills was not primarily motivated to increase or maintain
Chiquita’s profitability and found no evidence that his actions were motivated by
potential personal gain.
Hills’ Management of DOJ Investigation. The SLC also considered that Hills
was actively involved in coordinating the Company’s cooperation with DOJ’s
investigation. He took that responsibility seriously and devoted much time and effort
to it. Among other things, Hills caused the Audit Committee to retain KPMG to assist
with the investigation and act as an independent fact finder. He also contacted DOJ
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officials directly to ensure that DOJ was satisfied with the Company’s cooperation, and
met with DOJ officials to discuss Chiquita’s cooperation and disclose the whistleblower
e-mails received by the Company in November 2003.
However, the SLC was sufficiently concerned by a sequence of events involving
Hills’ actions in December 2003 and early January 2004, that it directed counsel to
conduct additional interviews of, among others, Hills and Olson, on the issue of
whether DOJ had issued a stop-payments directive to Hills.
For many months after the April 24 meeting, the Company had continued to seek
guidance from DOJ as to whether it could continue making the payments; in the
meantime, the Company had continued to make them in the good faith belief that a
response was forthcoming.
By the end of December 2003, Hills had been informed, directly by AUSA John
Beasley in a telephone conversation, and indirectly through outside counsel for a
Banadex employee, that DOJ wanted Chiquita to stop making the payments. Although
the message may not have been conveyed as clearly or directly as it could have been, in
the SLC’s view, this statement from the government signaled a shift in DOJ’s view of
the situation and the guidance it was giving the Company. Yet, Hills failed to inform
the Audit Committee about either of the messages that suggested that DOJ wanted the
payments to stop and did nothing to gather additional information on the status of the
payments. The SLC concluded that Hills failed to attach sufficient significance to these
communications and should have, at a minimum, sought clarification from DOJ on the
issue of continuing the payments.
Despite the concerns raised by the events of December and early January, the
SLC found that Hills’ actions were still taken in good faith during this period. Hills was
focused primarily on the Company’s cooperation with DOJ, and viewed the comment
from AUSA Beasley about stopping the payments, which Hills did not even recall with
any clarity when questioned about it, as collateral to the focus of their discussion, which
was centered on DOJ’s criticism of the Company’s cooperation. In any event, Hills did
not take the statement as a directive to stop the payments but instead as stating the
obvious point that the payments could not continue indefinitely. As a direct result of
his concerns about the cooperation issue, Hills hired Goldstock as an outside advisor to
the Company, and directed K&E, KPMG, and Goldstock to determine how to address
this perception. In addition, there is substantial evidence that, by December, the Board,
including Hills, was looking carefully at Chiquita’s withdrawal from Colombia through
the sale of Banadex to Banacol. Finally, the SLC could not identify any additional harm
to the Company caused by the five additional payments made in December 2003 and
January 2004, after the statements to Hills about stopping the payments: the
Company’s guilty plea encompassed all payments made after the discovery of the FTO
designation.
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Conclusion. The SLC could not conclude that Hills breached his duty of loyalty
to the Company by allowing the payments to continue from approximately February
2003 to January 2004. This conclusion is based on the fact that Hills (i) believed that the
payments were necessary to protect the Company’s employees and property; (ii)
believed, in good faith, that the Company could continue to make the payments while
DOJ considered the issue, (iii) directed the Company’s response to the DOJ
investigation and kept substantially informed about it, and (iv) sought and received
guidance from K&E, KPMG, and Goldstock, none of whom advised Hills that the
Company should stop making the payments prior to January 2004.
c.
Robert Olson
While the SLC found problems with certain aspects of Olson’s performance
during this period, for the reasons discussed below, it could not conclude that Olson
breached his duty of loyalty to the Company.
Initial Response. The SLC found that, upon learning of the designation from [a
Chiquita lawyer], Olson instructed [the Chiquita lawyer] to consult outside counsel,
Larry Urgenson at K&E. Urgenson advised the Company that, among other things, the
Company had to either stop making the payments or seek guidance from the
government.
As a result, Olson immediately suspended payments being made directly to the
AUC in Santa Marta, pending the Company’s review of the situation. Olson did not,
however, explicitly order that payments to the convivir be suspended, because, as he
told the SLC, he forgot the connection between the Turbo convivir and the AUC he had
learned about more than two years earlier. As a result, Banadex made two payments to
the convivir, one in February and one in March 2003, before Olson recalled the
convivir/AUC relationship. As soon as Olson was reminded about the relationship, he
suspended those payments as well.
The SLC was troubled by the fact that Olson allowed these two payments to be
made. In the SLC’s view, Olson should have been more thorough about ensuring that
all payments to the AUC, whether directly or indirectly through the convivir, were
suspended pending disclosure to DOJ. He should have spoken with the Company’s
personnel in Cincinnati and Colombia who were knowledgeable about the payments to
make sure that the Company was reacting fully and appropriately to the discovery that
the AUC was on the FTO list; the fact that he did not do so unnecessarily delayed the
suspension of the second stream of payments. However, the SLC viewed this as an
honest mistake because Olson immediately suspended the direct payments; there is no
reason to have suspended one stream of payments but not the other; and he suspended
the convivir payments immediately upon realizing his error. In response to the SLC’s
criticism, Olson said he was distracted during this time period by various other
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pressing issues, including negotiating the sale of Chiquita’s processed food group,
completing the acquisition of Atlanta, and drafting the Company’s proxy statement.
The SLC found that although this provided an explanation for his lack of focus on the
payment issue, it did not excuse it.
In addition to the brief delay in shutting off the second payment stream, the SLC
was also troubled by Olson’s failure to inform the Audit Committee about the
designation for almost five weeks. Olson attributed the delay to a number of factors,
including his desire to be fully informed prior to raising the issue with the Audit
Committee; the fact that his predecessor had been criticized for presenting issues to the
Board without having solutions; and that he hired experienced outside counsel and was
working through the issues with counsel. Whatever his overall views and experiences,
the SLC concluded that an issue of the magnitude of the AUC’s FTO designation should
have been brought to the Audit Committee earlier.
At the April 3 Audit Committee meeting, Olson, like Hills, advocated that the
Company should approach DOJ regarding the payments, and the Audit Committee
agreed. The record is clear that, at this time, Olson was becoming increasingly
unsettled about the safety of Chiquita’s employees in Colombia. Indeed, the factual
proffer cites to a statement attributed to Olson on April 4, the day after the April 3
Audit Committee meeting: “BO thinks it will be impossible to clear this before making
next payment. His and Rod’s opinion is just let them sue us, come after us. This is also
CEO’s opinion.” DOJ used this statement to suggest that the Company was determined
to make the payments no matter what DOJ’s views on the issue ultimately turned out to
be.
However, the SLC credited Olson’s explanation that this statement, which he
claimed was recorded in a somewhat misleading way, did not show lack of concern for
the illegality of the payments – or a disregard for DOJ’s authority – but instead reflected
his determination to protect the safety and well-being of the Company’s employees. If
that meant an increased risk that DOJ would pursue the Company, Olson believed that
this might be an unavoidable cost of protecting the Company’s personnel. Olson knew
that the Company was going to self-disclose to DOJ and did not believe that one further
payment would substantially affect DOJ’s response one way or the other.
The SLC fully appreciates the pressure that Olson was under at that time to
balance the risks of continuing to violate the criminal law against the welfare of the
Company’s personnel. The SLC did not find that Olson displayed a cavalier attitude
towards continuing the payments; he took the issue extremely seriously, as reflected in
the heated discussion that occurred on this April 4 call when he hung up on Urgenson,
and in numerous other conversations.
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The Payments Resume. Like Hills, Olson provided several reasons why he
allowed the payments to continue following the Chertoff meeting, including Chertoff’s
assurance that DOJ would get back to Chiquita, Deputy Attorney General Thompson’s
encouraging statements at the August 26 meeting, DOJ’s failure to give a directive to
the Company at the September 4 meeting, and the Company’s efforts to sell Banadex.
Above all else, the SLC found that Olson held the sincere belief that Banadex employees
would be physically harmed if the payments stopped. Faced with this dilemma, and
for the reasons enumerated above, Olson chose to allow the Company to continue to
make the payments.
Conclusion. For these reasons, the SLC could not conclude that Olson breached
his duty of loyalty to the Company by allowing the payments to continue from
approximately February 2003 to January 2004. The SLC believes that Olson made two
errors in judgment – failing to stop the convivir payments immediately after learning of
the FTO designation, thereby allowing additional payments to be made, and waiting
five weeks to bring the issue to the attention of the Audit Committee. However, the
SLC also concluded that Olson, like Hills, believed, in good faith, that the payments
were necessary to protect the Company’s employees and that the Company could
continue to make the payments while DOJ considered the issue. In addition, Olson
sought and received guidance from K&E, KPMG, and Goldstock, none of whom
advised Olson that the Company should stop making the payments after the Chertoff
meeting but prior to January 2004.
d.
Management: Aguirre, Freidheim,
Kistinger, Riley, Tsacalis, Zalla
Freidheim. The SLC found that Cyrus Freidheim, who was CEO through most of
this period, reasonably and appropriately relied upon the Audit Committee to direct the
Company’s response to the DOJ investigation. Freidheim learned of the issue from
Olson in mid-March, and he directed Olson to disclose the issue to the Audit
Committee. At the April 3 Audit Committee meeting, and from that point forward, the
Audit Committee took control of the issue. Indeed, Hills wrote to Freidheim in
September 2003 and expressly stated that he had asked Olson to allow the Audit
Committee to conduct an investigation of the payments “to provide independent
confirmation of the facts.” Freidheim continued to receive regular updates at Board
meetings, and through informal discussions with Hills and Olson. The SLC found
Freidheim’s reliance on the Audit Committee, and Hills in particular, to be reasonable
and appropriate under the circumstances given Hills’ extensive governmental
experience, and active role in overseeing the situation, including his regular contact
with DOJ officials, outside counsel, and Olson.
Kistinger. Robert Kistinger, President and COO, had a minimal role in making
the decision about the payments and in determining the Company’s position in its
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dealings with DOJ. Kistinger was the senior management official most knowledgeable
about the Company’s operations in Colombia and the history of the payments. He was
involved in high-level discussions among senior management about continuing the
payments after the discovery of the designation, including the April and August 2003
discussions documented by [Banadex Employee #10] but he did not have the authority
to unilaterally authorize the payments to resume. Indeed, the record reflects that
Kistinger deferred to Olson and the Audit Committee on this issue because of its legal
implications.
Riley, Tsacalis, & Zalla. James Riley, CFO, and William Tsacalis, Controller,
had no role in the decision-making process with respect to continuing payments. While
both Riley and Tsacalis knew of the designation shortly after it was discovered, neither
was significantly involved in the regular discussions about continuing the payments
that followed. Both Riley and Tsacalis received regular updates at Board and Audit
Committee meetings regarding the Colombia matter, but were not involved in advising
the Board on the matter.
Jeffrey Zalla, VP and Corporate Responsibility Officer during this time, was not
informed of the discovery of the FTO designation until the late spring or summer of
2003, and was not involved in the initial decision to continue making the payments.
There is no evidence that, once made aware of the designation, Zalla played any role in
the Company’s decision-making process with respect to the payments. Zalla did not
have regular access to the Board during this time, and thus had limited ability to affect
the Company’s decision on whether to continue the payments.
Aguirre. Aguirre joined the Company as CEO on January 12, 2004, replacing
Freidheim. Only one payment – the January 24 payment – was made during his tenure,
and he learned about it only after the fact. Aguirre recalled directing that no further
payments be made without his authorization, though other key participants in the
process do not recall any such directive from Aguirre; in any event, no such payments
were made thereafter.
*
*
*
Accordingly, in the exercise of its business judgment, the SLC has concluded to
seek dismissal of this claim with respect to this period. In exercising that judgment, the
SLC took account of the following factors.
First, as discussed at length above, this decision is based on the fact that the SLC
could not conclude that a breach of the duty of loyalty by any defendant occurred. The
SLC found that those who were directly involved in the decision-making process,
principally Olson and Hills, acted in good faith and in the honest belief that their
actions were in the best interests of the Company, and consulted outside counsel and
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outside consultants to ensure the Company acted appropriately in dealing with the
many challenges it faced with respect to the situation in Colombia.
The Board, as a whole, also acted in good faith in relying upon Olson and Hills to
direct the Company’s response. Members of senior management – Freidheim,
Kistinger, Riley, Tsacalis, and Zalla – also acted in good faith in relying upon Olson and
Hills. Given the role of the Audit Committee, none of these individuals was responsible
for, or had the authority to make, the decision to continue the payments during this
time. After Aguirre became CEO, there was only one additional payment and he had
no knowledge of the payment before it was made.223
Second, as discussed below (see Business Judgment Considerations), the SLC
took into account additional factors apart from the legal and factual merits of the claims
that are relevant to the analysis of whether to bring litigation.
E.
Analysis of Olson’s Performance as General Counsel
As described at length above, the SLC looked critically at individual judgments
made by Olson at various points during the events investigated by the SLC. In addition
to evaluating Olson’s individual judgments and decisions relating to the issues under
investigation, the SLC concluded that it was appropriate to consider whether, taking
Olson’s performance as General Counsel as a whole, Olson breached his duty of care to
the Company, even though the Amended Complaint does not allege such a claim. See
Disney, 907 A.2d at 749 (directors and officers owe a duty of care to the corporation that
requires officers and directors to “use that amount of care which ordinarily careful and
prudent men would use in similar circumstances” and “consider all material
information reasonably available in making business decisions”) (internal quotes and
citation omitted).
As discussed above, the SLC identified several instances when it believed that
Olson could have taken additional steps to protect the Company, including:
223
•
Olson did not install a system to ensure that the Company was in
compliance with laws affecting countries in which the Company did
business, and specifically anti-terrorism laws, particularly after September
11, 2001.
•
Olson did not shut off the payment stream to the convivir in February
2003, despite having suspended all payments to “paramilitaries.”
As is set forth at length above, because the defendants acted on an informed basis, without fraud,
conflict of interest, or gross negligence, and for a rational business purpose, the SLC also could
not find that they breached their duty of care during this period.
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•
Olson delayed five weeks in informing the Audit Committee of the
discovery of the FTO designation in February 2003.
•
Olson did not make clear to the Board (i) that the payments had resumed
after the Chertoff meeting, and (ii) the risk to the Company in continuing
the payments.
Taken individually, the SLC found that none of these issues rose to the level of a breach
of duty. Similarly, the SLC concluded that Olson’s performance, while in certain
respects deficient, did not fall below the standard of care, and thus, it is not in the
Company’s best interests to pursue a claim against him.
In considering Olson’s performance, the SLC considered several factors,
including, among other things, (i) whether Olson acted in good faith, (ii) the advice
Olson received from outside counsel and Roderick Hills, and (iii) whether the
Company’s actions would have been affected if Olson made different decisions or
behaved differently.
First, the SLC found that Olson at all times chose courses of action that he,
rightly or wrongly, believed to be in the best interests of the Company. There is no
evidence to suggest that Olson was motivated by anything other than the Company’s
best interests at any time, and certainly nothing to suggest that he was motivated by his
own personal interests. The SLC found no evidence that Olson acted in bad faith or
intended to cause harm to the Company.
Second, Olson sought and received advice from outside counsel when
appropriate. Throughout the period the Company made payments to guerrilla and
paramilitary groups, the Legal Department in Cincinnati, at Olson’s direction, obtained
legal opinions from local counsel, both in-house and outside law firms, regarding the
legality of the payments under local law.224 Upon discovering the FTO designation,
Olson immediately sought Larry Urgenson’s counsel. Accordingly, the SLC found that
Olson in good faith sought the advice of experts to ensure Chiquita acted appropriately.
Third, the SLC found that, even if Olson had made different decisions or acted
differently at various points, this would not have changed the outcome or materially
affected the decisions made by either the Company or the government. For example,
with respect to the two payments the Company mistakenly made to the convivir in
February and March 2003, the impact of that mistake was significantly diminished by
224
Several of those opinions were obtained as a result of the two investigations Chiquita’s Legal
Department conducted regarding the payments – David Hills’ investigation into the convivir
payments in 1997 and Robert Thomas’s investigation into the convivir-AUC link in 2000.
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the fact that the Company resumed making payments to the convivir and AUC in May
2003. Thus, no additional harm resulted from those payments.
As to the delay in advising the Audit Committee of the FTO designation, the SLC
concluded that it was unlikely that the Board would have acted any differently had it
been informed of the issue in February 2003 rather than April 2003. Further, the SLC
found that although Olson should have more closely monitored the payments and
made sure that the Board knew that the payments had resumed in May 2003, by that
time Hills had assumed responsibility for dealing with the investigation and DOJ; in
any event, once it became clear to the Board that the payments had continued, the
Board had no objection. Accordingly, the SLC found that the deficiencies in Olson’s
actions identified by the SLC were not so significant that they would have changed the
course of conduct the Company chose to engage in, nor is there any evidence that they
would have affected the government’s decision to charge the Company.
The SLC found, though, that a more significant failing that might, in fact, have
changed the course of events was the failure of Olson to put in place a more
comprehensive system for ensuring Chiquita’s compliance with all U.S. laws affecting
the Company’s worldwide activities and operations. If such a system had been
implemented, the Company may have discovered the FTO designation shortly after it
was made and quite possibly avoided much if not all of the harm that ultimately
occurred.
However, as noted above, the SLC found that Olson, on the whole, diligently
worked to ensure that the Company had compliance systems in place. While the SLC
believes that, in retrospect, the compliance programs implemented and overseen by
Olson were too narrow, such systems existed and Olson, in good faith, believed that
they were sufficient. It took the discovery of the FTO designation to demonstrate that
they were not.
*
*
*
Accordingly, in the exercise of its business judgment, the SLC has concluded that
it will not assert a claim for breach of the duty of care against Olson. In exercising that
judgment, the SLC took account of the following factors. First, the SLC concluded that
Olson at all times believed that he was acting in the Company’s best interests, had
reasonable and rational justifications for the choices he made, and that his conduct was
not so deficient as to support a legal claim against him for breach of duty. Second, as
discussed below (see Business Judgment Considerations), the SLC took into account
additional factors apart from the legal and factual merits of the claims that are relevant
to the analysis of whether to bring litigation.
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Allegations Concerning Drugs and Arms Smuggling
In the Amended Complaint, the plaintiffs allege that the defendants caused or
allowed the Company to “provid[e] or facilitate[e] the provision of arms and other
weapons to the AUC. In particular, Chiquita is the subject of civil litigation that alleges,
among other things, that the Company facilitated the illegal transport of arms
shipments and narcotics to the AUC through use of its boats and port facilities located
in Turbo, Col[o]mbia.” Am. Compl. ¶ 1. In support of this claim, plaintiffs point to (i)
statements made by Carlos Castanõ that the AUC smuggled 13,000 rifles into Colombia,
even though the statements do not mention Banadex, and (ii) an incident in 2001 in
which 3,000 AK-47s were smuggled through Banadex’s shipping facility in Turbo, an
incident that was later investigated by the OAS. See Am. Compl. ¶¶ 1, 7, 122.
However, the plaintiffs do not directly plead any facts suggesting that the defendants
“provided or facilitated” arms and drug smuggling – they simply incorporate the
allegations made in the ATA/ATS cases pending before this Court – and these
allegations are only tangentially related to the issue of the payments. Nonetheless, the
SLC examined this issue.
As an initial matter, the SLC found no evidence that any of the defendants –
either senior Chiquita management or the Board – authorized, allowed, or otherwise
condoned the use of Banadex’s shipping facilities for smuggling by the AUC. Likewise,
the SLC found no factual support for the allegation that Banadex provided the FARC
with “weapons, ammunition, and other supplies through its transportation
contractors.” Am. Compl. ¶ 100. Indeed, to investigate this issue, counsel for the SLC
contacted all six lead counsel for the plaintiffs in the ATA/ATS cases, whose allegations
are referred to in the Amended Complaint, and requested that they share with the SLC
any evidence they had gathered to support their claims that Chiquita was involved in
arms or drug smuggling; the SLC received no such evidence.
Rather, as described above (see Section IV.J.), the SLC identified three specific
incidents of smuggling by third parties that occurred at Banadex’s shipping facility in
Turbo, including (i) the April 2001 “Easter” incident, (ii) the November 2001 “Otterloo”
incident, and (iii) a June 2002 drug smuggling incident. As discussed below, the SLC
concluded that, in each instance, the event was reported internally, appropriately
investigated, and, if determined necessary, remedial steps were taken.225
225
This was consistent with senior management’s response to the discovery of the improper port
payments in 1997; upon identifying the issue, it promptly investigated and disciplined the
employees who engaged in wrongdoing. See Section IV.D.1.; Chiquita Brands International, Inc.,
Exchange Act Release No. 44,902 (Oct. 3, 2001) (“Chiquita had strict policies prohibiting
payments of the kind made to the customs officials. . . . After conducting an internal
investigation, Chiquita took corrective action, which included terminating the responsible
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The Easter Incident. In the spring of 2001, the Chiquita Legal Department was
advised by the Banadex Legal Department that false shipping documents had been
used to smuggle weapons through its shipping facilities. Olson was promptly
informed, and directed in-house counsel David Hills to investigate the Company’s legal
obligations in light of what had occurred. Hills hired a Colombian law firm to provide
advice regarding Chiquita’s obligations, and, after meeting with the Colombian lawyers
in Miami, was advised not to report the incident to Colombian authorities because of
the risk of retaliation. Indeed, the attorneys from the Colombian law firm refused to
discuss their opinions over the phone or to deliver a copy of their written opinion in
Colombia due to the danger that these activities posed, and would only meet in person
in the U.S. to discuss the matter.
The Otterloo Incident. Later that year, Banadex management learned that its
shipping facilities had again been used for smuggling arms. Senior Banadex
management then conducted an investigation that found no evidence of wrongdoing by
Company employees, and those findings were relayed to the Colombian and
international authorities, with whom the Company was cooperating (and who had
contacted Chiquita about the incident). As referenced in the Amended Complaint, the
OAS also conducted an investigation into this incident, and concluded that several
Colombian customs officials likely aided the AUC in smuggling the arms shipment into
Colombia, but did not mention Chiquita in its report, or otherwise signal that the
Company had any involvement in the incident. Nonetheless, a Banadex employee was
wrongfully detained by Colombian authorities for a year in connection with the event.
June Drug Smuggling Incident. In June 2002, a substantial quantity of cocaine
was smuggled aboard a Chiquita vessel by a third party that had purchased cargo space
on the vessel. To prevent retaliation, senior Banadex management did not alert
Colombian authorities, but instead, during a previously scheduled trip to Belgium, the
ship’s destination, [Banadex Employee #10] reported details of the drug shipment to
local Belgian authorities, who then seized the smuggled drugs. Following this incident,
the Company stopped allowing third parties to purchase cargo space on its vessels and
the SLC learned of no subsequent smuggling incidents involving drugs or arms. The
SLC was further advised that Banadex management established a lengthy and
constructive relationship with the U.S. Drug Enforcement Administration (“DEA”),
which resulted in substantial information being exchanged between the Company and
DEA.
These incidents suggest the following to the SLC. First, given the political,
social, and security environment in Colombia, they were not unprecedented or unusual.
Banadex employees and reinforcing its internal controls with respect to its Colombian
operations”).
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Second, there is no evidence that Chiquita employees were involved in the smuggling.
Third, no member of senior Banadex management, Chiquita management, or the Board
had prior knowledge of or involvement in any of the incidents. Fourth, management
took steps in response to each incident that it believed were reasonable under the
circumstances, including, with regard to the June 2002 drug smuggling incident,
informing the Board promptly about what had occurred. Fifth, the Company
collaborated and cooperated with the DEA on various matters relating to narcotics
enforcement efforts, a relationship that would not have existed if the Company was
involved in drug smuggling. Accordingly, the SLC found that the Company’s response
to these incidents does not suggest that the defendants “completely abdicate[d] their
duties and fail[ed] to exercise any judgment.” Classica Group, 2006 WL 2818820 at *7.
G.
Breach of Duty in Connection with Conducting an Alleged
“Fire Sale” of Chiquita’s Colombian Operations
The plaintiffs allege that the defendants breached their fiduciary duties by
conducting a “fire sale” of the Company’s Colombian operations, Banadex, in June
2004. Am. Compl. ¶ 127. Based on their dates of employment, and the facts developed
during the SLC’s investigation, this claim applies to the following defendants: (i)
management: Fernando Aguirre, Robert Kistinger, Robert Olson, James Riley, William
Tsacalis, and Jeffrey Zalla; (ii) directors: Morten Arntzen, Jeffrey Benjamin, Robert
Fisher, Cyrus Freidheim, Roderick Hills, Durk Jager, Jamie Serra, and Steven Stanbrook.
Specifically, the Amended Complaint alleges:
In 2004, due to the problems created in its Colombia
operations due to the illegal activities the Chiquita
Defendants had caused Chiquita to engage in there, and
hoping to avoid extradition of Chiquita insiders to Colombia
for their criminal conduct, the Chiquita Defendants caused
Chiquita to sell Chiquita’s Colombian banana-producing
operations. Due to these circumstances, this was, in essence,
a “fire sale” – even though those Colombian operations had
been Chiquita’s most profitable operations.
Am. Compl. ¶ 127.226 For the reasons discussed below, the SLC has concluded that this
claim should be dismissed.
226
The SLC has noted that the plaintiffs’ claims appear to be at odds with each other. On the one
hand, the plaintiffs allege that the Company should not have made the payments (see Am.
Compl. ¶ 110), and on the other hand, the plaintiffs allege that the Company should not have
sold Banadex because it was its most profitable banana producing operation (see Am. Compl. ¶
17). The plaintiffs cannot have it both ways. As set forth at length above, the choice was between
continuing to make the payments, or leaving Colombia. Continuing to do business in Colombia
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As discussed above, the decision to sell Banadex to Banacol will be protected by
the business judgment rule unless it can be shown that the defendants acted with fraud,
illegality, a conflict of interest, or gross negligence. Absent any of these conditions, the
decision “will be upheld unless it cannot be ‘attributed to any rational business
purpose.’” Disney, 907 A.2d at 747; see also PSE&G, 718 A.2d at 257 (“Unless they
engage in conduct in which no reasonable owner would be likely to engage, the
directors should not expect to be monetarily liable”).
1.
The SLC Found No Evidence of Fraud,
Illegality, or Conflict of Interest
The SLC has found no evidence to suggest that the decision to authorize the sale
of Banadex was tainted by fraud, illegality, or a conflict of interest.
The only potential conflict raised in the Amended Complaint is the allegation
that the defendants authorized the sale in order to avoid extradition of Chiquita insiders
to Colombia for their criminal conduct. See Am. Compl. ¶ 129. This allegation is not
supported by any facts in the Amended Complaint. The SLC found no evidence,
documentary or testimonial, to support this allegation.
To the contrary, the evidence overwhelmingly supports the conclusion that the
defendants authorized the sale of Banadex based on several considerations, including,
the DOJ investigation and Chiquita’s inability to obtain guidance from DOJ that would
permit it to continue to do business in Colombia lawfully, which was their primary
motivation. The SLC has found no evidence to suggest that the defendants ever
discussed the issue of extradition in connection with the sale of Banadex, nor is there
any evidence that Colombian authorities were considering, or that the defendants knew
Colombian authorities were considering, extradition of Chiquita executives in
connection with the payments. Indeed, the possibility of extradition was first publicly
reported following the guilty plea in March 2007, nearly three years after the sale had
been completed. See, e.g., Simon Romero, Colombia May Extradite Chiquita Officials, N.Y.
TIMES, Mar. 19, 2007, at A1; Malia Rulon and Cliff Peale, Chiquita Enters Guilty Plea,
CINCINNATI ENQUIRER, Mar. 20, 2007, at 7A.227
Therefore, the business judgment rule protects the defendants from liability for
their decision to authorize the sale unless that decision was (i) the result of gross
negligence, or (ii) the decision wholly lacked a rational business purpose.
without making the payments was not an available option. Accordingly, the Company chose to
stop making the payments and exit Colombia.
227
Given these findings regarding the motivations for the sale, the SLC concluded that there was no
support for a claim for a breach of the duty of loyalty in connection with the sale of Banadex.
220
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The SLC Found No Evidence of Gross Negligence
The SLC has concluded that the facts surrounding the Board’s decision to
authorize the sale of Banadex fail to support a finding of gross negligence. See Disney,
907 A.2d at 750 (citation omitted) (defining gross negligence as “reckless indifference to
or deliberate disregard of the whole body of stockholders or actions which are without
the bounds of reason”); Guttman, 823 A.2d at 507 n.39 (to show gross negligence, there
must be facts suggesting a “wide disparity” between the decision-making process
employed by the board, and a process that would be rational).
The SLC found that the sale process was rational and orderly and reflected a
sustained effort to produce the best value for Chiquita’s shareholders under the
circumstances. Indeed, for most of the negotiations, which went on for almost a year,
Banacol was not aware of the DOJ investigation; thus, it did not have a material impact
on the sale process. The SLC found the key events relevant to the sale of Banadex to be
the following:
First, the idea of selling Banadex did not arise as a result of the government
investigation. One of the first acts the new Board took in 2002 was to engage Booz
Allen to perform an analysis of the Company’s entire operations and evaluate what
changes, if any, should be made, including the sale of some or all of the Company. In
addition, the Board began a broad strategic review of the benefits of owning farms,
which was its dominant strategy in Colombia, versus purchasing fruit. This review
included a discussion of divesting farms not only in Colombia, but throughout Central
America. It was consistent with the views of a number of the Board members regarding
the most promising business model for the Company.
Second, Banacol raised the idea of a sale with Chiquita, not the other way
around. In late 2002, Banacol approached Chiquita, on an unsolicited basis, through
director Robert Fisher, to discuss a sale of Banadex. CEO Cyrus Freidheim met with
Banacol representatives, but was not interested in pursuing a transaction at that time.
Third, once the DOJ investigation began, certain of Chiquita’s outside directors
were in favor of immediately exploring a sale, while others believed that, having begun
the dialogue with DOJ, the Company should wait to hear its response. The Board
decided to do both, and, in June 2003, Chiquita initiated negotiations with Banacol.
[Chiquita Employee #2] with decades of experience in Central and South America, was
put in charge of the negotiations. By mid-June, Chiquita had received from Banacol a
framework for discussing a potential transaction.
Fourth, through the summer and into the fall of 2003, Chiquita engaged in
negotiations for a deal. On August 23, 2003, Chiquita received an initial proposal from
Banacol. Banacol offered to purchase Banadex’s farms for $76 million (comprised of $54
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million cash and $21.6 million from a preferential discount on a very desirable type of
pineapple). The offer also provided for the parties to enter into an eight-year purchase
contract for bananas and pineapples. Reactions were initially mixed, but overall the
proposal was considered reasonable and workable. A team, headed by [Chiquita
Employee #2], was assembled to analyze the deal and pursue negotiations, which
continued for several months.
Fifth, at a November 20, 2003 Board meeting, the Board received another
presentation regarding owned versus purchased fruit models. The Board also received
an update on the status of negotiations with Banacol. At the time, the deal consisted of
a $54 million cash payment, $25 million (NPV) in preferential discount on pineapples,
and an eight-year purchasing contract for bananas and pineapples, with an abovemarket price for bananas (NPV $42 million) and a preferential discount for pineapples
(NPV $25 million).
Sixth, at a December 4, 2003 Audit Committee meeting, Olson reported that the
Company was nearing a deal with Banacol. Jaime Serra made an impassioned speech
in favor of departing Colombia and going forward with the transaction. The
Committee members pushed for the Company to close the deal, and questioned
whether the Company needed to open the process up to other bidders.
Seventh, on January 26, 2004, Chiquita issued a press release announcing the
potential sale of Banadex. This served as market check to determine whether any
additional bidders were interested in Banadex. No additional bidders came forward.
Eighth, in February and March, the Board received several updates on the status
of the negotiations:
•
At a February 9, 2004 Audit Committee meeting, Kistinger presented the
latest deal terms and the status of the due diligence and negotiations, and
Fernando Aguirre advised the Audit Committee that he believed the
Company should go forward with the deal. At that time, the terms of
Banacol’s proposal included (i) a $33 million cash payment, (ii) an $8
million pension liability assumption, (iii) $8 million (NPV) of seller’s
financing, (iv) $25 million (NPV) in preferential discount for pineapple
purchasing, and (v) an eight-year purchasing contract for bananas and
pineapples.
•
At a March 4, 2004 Audit Committee Meeting, the directors received
another report on the status of the Banacol sale.
•
At a March 30, 2004 Board Meeting, the Board received an update on
negotiations with Banacol, learned that DOJ had concerns with respect to
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the sale, and decided to postpone approval of the transaction in light of
those concerns. At this point, Banacol’s proposal to Chiquita included (i)
a $31 million cash payment, (ii) an $8 million pension assumption, (iii) $12
million (NPV) of seller’s financing, (iv) a $25 million preferential discount
on pineapples, and (v) an eight-year purchase contract for bananas and
pineapples.
Ninth, it was not until early April that Banacol became aware of the DOJ
investigation. The principal terms of the deal were not modified as a result of this
disclosure, but Banacol insisted on the inclusion of a break-up fee and a rescission
provision in the event DOJ prevented the sale from closing.
Tenth, nearly a year after negotiations had begun, in May 2004, the Board
authorized the sale of Banadex to Banacol. At a May 7, 2004 Joint Board and Audit
Committee Meeting, Olson reported to the Board that the deal with Banacol was almost
final. The Board authorized the addition of a rescission provision, including a break-up
fee, in light of Banacol’s concerns about the DOJ investigation. The Board further
authorized the Company to enter into a definitive agreement with Banacol on the terms
presented.
The Board authorized the Company to sell Banacol for the following
consideration, (i) approximately $27 million in cash, (ii) approximately $4 million in
notes of ninety days or less, (iii) longer-term notes and deferred payments having a net
present value of $12 million, and (iv) the assumption of an $8 million pension liability.
In addition, the Board authorized the Company to enter into eight-year purchase
contracts with Banacol for bananas and pineapples, with a preferential discount on the
pineapples. However, several directors were absent from this meeting, and the Board
determined that the transaction should be reexamined at the following meeting. At a
May 13, 2004 Board Meeting, the full Board reaffirmed its authorization of the
transaction. The deal was signed on June 10, 2004 and closed on June 28, 2004.
Thus, as a result of its investigation, the SLC found, among other things, that
Banacol approached Chiquita about a sale before the DOJ investigation had begun, the
Company negotiated with Banacol for nearly a year, trying to obtain the best terms
possible, the Board received regular updates on the status of the negotiations, Banacol
was not aware of the DOJ investigation during the majority of the negotiations, and the
deal was subject to a market-check through the January press release. Further, the SLC
was told by every witness it interviewed on the issue, including members of
management and the Board who were originally opposed to or unenthusiastic about the
deal, that, overall, management and the Board believed in good faith that Chiquita had
obtained the best possible value for Banadex. Finally, while there is no question that
the defendants were motivated to sell Banadex as a result of the DOJ investigation, the
SLC found that the sale was also driven by a broader shift in the Company’s strategy
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from owned farms to purchased fruit, and a desire to leave Colombia’s dangerous
environment, regardless of whether the payments could continue.
The SLC has concluded that these facts do not suggest gross negligence on the
part of the defendants, but rather, demonstrate that they used a rational process
designed to ensure that the Board acted on an informed and adequate basis in making
its decision. The SLC found that the directors did not act with “reckless indifference to
or a deliberate disregard of the whole body of stockholders.” Disney, 907 A.2d at 750;
see also Albert, 2005 WL 2130607, at * 4 (“Gross negligence . . . involves a devil-may-care
attitude or indifference to duty amounting to recklessness”) (citation omitted); Smith v.
Van Gorkom, 488 A.2d 858, 874-75 (Del. 1985) (finding breach of fiduciary duty where
Board authorized sale of company after a twenty-minute presentation and two-hour
deliberation, without any supporting documentation, prior notice, or input from
counsel or management); Hollinger, Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 388 (Del. Ch.
2004) (finding that Board did not breach its duty of care in connection with the sale of a
wholly owned subsidiary due to a “mountain of evidence that refutes the proposition
that the CRC acted in a grotesquely deficient way”).
3.
The Decision to Sell Was Supported by
a Rational Business Purpose
Moreover, the decision to sell Banadex was supported by a rational business
purpose. As stated above, the SLC found that the sale of Banadex was motivated by the
DOJ investigation, Chiquita’s desire to move from an owned farm to a purchased fruit
business model, and the dangerous conditions in Colombia. The SLC concluded that
each of these reasons serves an appropriately rational business purpose. Thus, the SLC
concludes that, based on the entire factual record, the “board has acted in a deliberate
and knowledgeable way,” and therefore deserves the protection of the business
judgment rule. Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 66 (Del.
1989).228
*
*
*
Accordingly, in the exercise of its business judgment, the SLC has concluded to
seek dismissal of this claim. In exercising that judgment, the SLC considered the
following factors.
First, as discussed above, this decision is based on the fact that the SLC found no
breach of duty on the part of any of the defendants. The SLC has concluded that the
Board was fully informed about the decision prior to authorizing the sale, and that the
228
Because the decision was made by the Board and not management, there is no basis for a claim
against the management defendants.
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decision-making process employed by the Board on the whole was reasonable and
appropriate. Moreover, the SLC found that the decision to sell Banadex was based on
valid, objective business considerations and that there is no evidence that the
defendants were motivated by self-interest or otherwise acted in bad faith in connection
with the sale. Second, as is also discussed at length above, the SLC found that various
considerations create, at a minimum, substantial uncertainty as to whether a viable
claim exists and therefore raise serious questions whether bringing such a claim is in the
best interests of the Company. These considerations are Chiquita’s exculpatory clause
and Chiquita’s advancement and indemnity obligations. Third, as discussed below (see
Business Judgment Considerations), the SLC took into account additional factors apart
from the legal and factual merits of the claims that are relevant to the analysis of
whether to bring litigation.
H.
Breach of Duty in Connection with the Guilty Plea
The plaintiffs also allege that the defendants breached their fiduciary duties by
causing the Company to enter into the plea agreement in March 2007, pursuant to
which the Company agreed to pay a $25 million fine. Based on their dates of
employment and the facts developed by the SLC’s investigation, this claim applies to
the following defendants: (i) management: Fernando Aguirre, Robert Kistinger, William
Tsacalis, and Jeffrey Zalla; (ii) directors: Morten Arntzen, Robert Fisher, Clare Hasler,
Roderick Hills, Durk Jager, Jamie Serra, and Steven Stanbrook.229
Specifically, the Amended Complaint alleges:
Not only did the Chiquita Defendants engage in illegal
and/or improper conduct for their own economic benefit
while in control of Chiquita, but when the DOJ threatened a
criminal prosecution against them and Chiquita, the
Chiquita Defendants further breached their fiduciary duties
and continued to protect themselves and aggrandize their
own interests at the expense – and to the damage – of
Chiquita. The Chiquita Defendants did this by causing
Chiquita to plead guilty and pay a huge fine in return for a
promise from the government not to prosecute the Chiquita
executives involved in the illegal conduct – even though the
government’s
Sentencing
Memorandum
specifically
identified 10 present and former officers of Chiquita as being
actively involved in the illegal payments. This action
229
As noted above, SLC member Hasler recused herself from deliberations and decision-making
with respect to this claim.
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protected those executives and the Chiquita Defendants,
while damaging the Company . . .
When the DOJ threatened the Chiquita Defendants and
Chiquita with criminal prosecution, the Chiquita Defendants
abused their continuing control of Chiquita by causing it to
plead guilty and pay a huge fine in return for a promise
from the government not to prosecute the Chiquita
executives involved in the illegal conduct, thus damaging
the Company to protect themselves and their allies and
friends.
Am. Compl. ¶¶ 16, 119 (emphasis in original). For the reasons discussed below, the
SLC has concluded that this claim should be dismissed.
Like the decision to authorize the sale of Banadex, the decision to authorize the
Company to enter into the guilty plea will be protected by the business judgment rule
unless there is evidence the defendants acted with fraud, illegality, a conflict of interest,
gross negligence, or lack of a rational business purpose.
1.
The SLC Found No Evidence of Fraud,
Illegality, or Conflict of Interest
The SLC has found no evidence that the decision to authorize the guilty plea was
tainted by fraud, illegality, or a conflict of interest. As noted above, the plaintiffs allege
that the defendants caused Chiquita to plead guilty in exchange for a promise from DOJ
not to prosecute individual Chiquita officers and directors. The SLC examined this
issue and found that while the Board initially sought to avoid the prosecution of
individual officers and directors, its motivation for doing so was not self-interest.
Rather, the Board believed that such prosecutions would be harmful to the Company
because: the Company would have to pay the substantial legal fees for the continued
investigation and possible prosecution of those individuals, the Company’s reputation
would be damaged further as a result of ongoing legal proceedings against any of the
individuals, the indicted individuals would be unable to perform their duties for the
Company, and individual prosecutions could put certain of the Company’s credit
facilities in jeopardy.
Indeed, as a general matter, the SLC found that, contrary to the allegations in the
Amended Complaint, the defendants sought to protect the best interests of the
Company in negotiating the guilty plea and ultimately sacrificed the interests of the
individual officers and directors in order to reach a satisfactory settlement with DOJ. In
fact, the allegations in the Amended Complaint are directly contrary to the terms of the
plea agreement, which specifically required the Company to cooperate in any
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continuing investigation of the individuals. See Letter from Jeffrey A. Taylor to Eric H.
Holder, Jr., (Mar. 6, 2007) (Chiquita “agrees to cooperate fully, completely and
truthfully with all investigators and attorneys of the government, by truthfully
providing all information in your client’s possession relating directly or indirectly to all
criminal activity and related matters which concern the subject matter of this
investigation”).
Consistent with that agreement, following the Company’s guilty plea, DOJ
continued its investigation of individuals for several months. As part of that
investigation, the Company made Larry Urgenson and Audrey Harris of K&E available
to DOJ, and DOJ required Urgenson to undergo multiple interviews and testify before
the grand jury. Ultimately, five of the Company’s then-current and former officers and
directors submitted memoranda in opposition to prosecution in an effort to dissuade
DOJ from bringing charges against them. Thus, the SLC found that, regardless of any
alleged improper motives, the Board did not in fact enter into a deal that protected
individual officers and directors – it entered into a plea agreement that provided
absolutely no protection for any of the individuals.
Specifically, in reviewing the facts and circumstances surrounding the decision
to enter into the plea agreement, the SLC found that:
First, the Board authorized counsel to enter into plea negotiations at a November
16, 2006 Board meeting. As support for this decision, directors cited the risk and cost
associated with a criminal trial. For example, director Jaime Serra recalled that Eric
Holder of Covington, who by then had taken over from Larry Urgenson as the principal
point of contact with DOJ, gave a presentation to the Board in which he put Chiquita’s
odds of winning a criminal trial at 50%, and estimated that pursuing litigation could
cost Chiquita as much as $180 million, including costs of litigation and the size of the
potential fine that could be imposed if it lost at trial.
Second, the Company then engaged in a period of substantial back and forth
with DOJ regarding a plea agreement. The primary issues to be negotiated were the
statute under which the Company would plead,230 the amount of the fine, and the
prosecution of individuals. It was clear from the discussions that although the statute
230
As discussed above, the Company sought to enter a plea pursuant to 50 U.S.C § 1705 (knowingly
Engaging in Transactions with a Specially-Designated Global Terrorist without a license), while
DOJ demanded that Chiquita plead under 18 U.S.C. § 2339B (providing material support to an
FTO), a much more serious offense. Section 2339B carried with it the implication that the
offender (in this case the Company) was an active and knowing supporter of the terrorist
organization and advanced its objectives. Understandably, the Company was concerned that a
plea under § 2339B could cause serious global public relations issues, as well as expose the
Company to devastating collateral consequences.
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under which the Company pled guilty and the size of the fine were considered dealbreakers by the Board because either could potentially put the Company out of
business, the Company understood that it might not be able to ensure the nonprosecution of individuals and accepted that as something that might need to be
sacrificed.
Third, formal plea negotiations began in early December. On December 5, 2006,
the Company submitted its initial plea offer to DOJ. The Company offered to (i) plead
to one count under § 1705 (knowingly Engaging in Transactions with a Specially
Designated Global Terrorist without a license), and (ii) pay a $1 million fine, while the
government would agree to end its investigation, including any investigation of
individuals. On December 18, DOJ rejected that proposal and countered with a demand
that the Company (i) plead guilty to two counts under § 2339B (knowingly providing
material support to an FTO), (ii) pay a $79 million fine, and (iii) continue to cooperate
with DOJ’s investigation of individuals.
Fourth, negotiations continued into January 2007. At a January 5, 2007 Board
meeting, the Board authorized the Company to make a revised offer to DOJ, which was
made on January 17. The key aspects of the Company’s offer were to (i) plead guilty to
three counts of § 1705 for payments made between October 2001 and April 2003, (ii) pay
a $5 million fine, and (iii) to agree to cooperate in investigations for “pre-disclosure
conduct or improper conduct during the course of the government’s investigation.”
DOJ did not counter this offer. Instead, after receiving an update on the investigation at
a February 2 Board meeting, the Board authorized and directed the Company to offer a
plea agreement which included, among other things, a financial penalty not to exceed
$12.5 million. In the interim, Roderick Hills voluntarily recused himself from all
matters related to Colombia and from his role as Chair of the Audit Committee on these
issues, as a result of specific DOJ interest in Hills as an individual.
Fifth, during February, the parties moved closer to a deal, and the Company
dropped its demand that DOJ end its investigation into individual officers and
directors:
•
On February 6, the Company submitted a revised offer to DOJ, in which it
offered to (i) plead guilty to one count of § 1705 for payments made from
2001 through 2004, (ii) pay a $12.5 million fine, and (iii) agree to cooperate
in the continuing investigation of individuals. On the same day, DOJ
responded that the parties were still “far apart” and proposed that the
Company (i) plead to one count of conspiracy to violate § 2339B and one
count of conspiracy to violate § 1705, and (ii) pay a $70 million fine.
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•
At a February 8 Board meeting, the Board discussed DOJ’s latest offer and
authorized Zalla to conduct a financial analysis to determine if the
Company could pay a fine greater than $12.5 million.
•
At a February 15 Board meeting, Zalla provided the analyses requested by
the Board. The Board then discussed and approved a plea offer to consist
of (i) a plea to one count of a violation of § 1705, (ii) a $25 million fine, and
(iii) continued cooperation in any ongoing investigation. The proposal
was made to DOJ the next day.
•
On February 20, DOJ agreed to a $25 million fine.
Sixth, as the negotiations neared completion, the Company, at the insistence of
the Audit Committee, held firm on the issue of which statute it would plead guilty to,
and, in early March, DOJ agreed to accept a plea to a violation of § 1705. At a March 11,
2007 Board meeting, the Board authorized the Company to enter into the plea
agreement, which included pleading to (i) one count of violating § 1705, (ii) a $25
million fine, paid over five years, and (iii) an agreement to cooperate in DOJ’s
investigation of individuals. On March 17, 2007, the Company entered into the plea
agreement.
Seventh, during the summer of 2007, DOJ continued to investigate the conduct of
officers and directors of the Company, and five individuals made submissions to DOJ
setting forth the reasons why DOJ should not prosecute them. Shortly before the
sentencing hearing on September 17, 2007, AUSA Jonathan Malis informed Covington
that DOJ would not prosecute any individuals in connection with its investigation.
Based on the fact that the government did not make any assurances with respect
to the prosecution of individuals, and, in fact, insisted on the Company’s cooperation in
the continued investigation of individuals as part of its plea agreement, the SLC found
that the facts do not support a claim that the decision making process employed by the
Board in authorizing the Company to enter into the plea agreement was tainted by a
conflict of interest. 231
2.
The SLC Found No Evidence of Gross Negligence
Based on the facts described above, the SLC has concluded that the Board’s
decision to enter into the guilty plea does not “suggest a wide disparity between the
process the directors used . . . and that which would have been rational,” amounting to
gross negligence. Guttman, 823 A.2d at 507 n.39 (emphasis in original). Instead, these
231
Given these findings, the SLC concluded that there was no support for a claim for a breach of the
duty of loyalty in connection with the guilty plea.
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facts demonstrate that the Board used a rational process designed to ensure that it acted
on an informed and adequate basis in making its decision. The SLC found that, over a
five-month period, the Board (i) met repeatedly to consider and analyze offers and
counter offers, (ii) engaged in numerous offline conversations, and (iii) were advised by
experienced counsel, including the current U.S. Attorney General Eric Holder and
former U.S. Attorney General Dick Thornburgh. Ultimately, the Board was able to
reduce the amount of the fine from $70 million to $25 million, paid over five years, and
plead to a lesser statutory offense.
3.
The Decision to Enter Into the Plea Agreement Was
Supported by a Rational Business Purpose
Because the Company had made payments to an FTO in violation of a federal
statute, and DOJ had advised counsel of its intent to prosecute the Company, the
Company’s only choice was to enter into a plea agreement or proceed with indictment
and a criminal trial. As described above, the SLC found that the defendants determined
to enter into plea negotiations based primarily upon the consequences of losing at trial,
as described by Holder, including extended negative publicity and the potential for a
crippling and potentially catastrophic criminal fine. The SLC concluded that this reason
constitutes a rational business purpose.
4.
Reliance on Expert Advice
The SLC also concludes that the director defendants are also protected by NJBCL
§ 14A:6-14(2), which relieves directors from liability if they relied in good faith upon
experts who have been selected with reasonable care by or on behalf of the corporation.
See also Francis, 432 A.2d at 822-23 (“Generally, directors are immune from liability if”
their reliance is in “good faith”); Casey v. Brennan, 780 A.2d 553, 576 (N.J. Super. Ct.
App. Div. 2001) (affirming dismissal of breach of fiduciary duty claims against directors
who relied on a banking advisory group regarding valuation and disclosure issues).
Here, the Board and the Audit Committee were each advised by experienced and
qualified lawyers from Covington and K&L Gates with respect to the plea negotiations.
Indeed, outside counsel was present, and advised the Board regarding the negotiations,
during at least eight Board meetings between November 2006, when plea negotiations
began, and March 2007, when the Board authorized the Company to enter into the plea.
The SLC credited the testimony of the director defendants interviewed by the SLC, who
cited the advice of Holder and Thornburgh regarding the risks of going to trial as the
basis for their decision to pursue the plea. At no point in time did any outside counsel
advise the Company not to enter into the plea agreement.
Further, the SLC found no facts to rebut the presumption that the directors’
reliance on outside counsel was reasonable and in good faith. To the contrary, the SLC
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found that the directors actually and reasonably relied in good faith on the advice of
counsel in making their decision, and that the directors reasonably believed that
counsel were qualified based upon their counsels’ reputations and the presentations
made by the attorneys themselves.
Finally, as noted above, the decision to authorize the Company to enter into the
plea agreement was not so unconscionable as to be considered wasteful or fraudulent,
which would render the Board’s reliance on counsel’s advice unreasonable. To the
contrary, as evidenced by the months of discussions among counsel and the Board
regarding the benefits and potential risks of entering into the plea deal, the decision
required the Board to weigh multiple factors, including the substantial benefits a plea
agreement would provide to the Company, which included avoiding a criminal fine
that was potentially in the hundreds of millions of dollars, avoiding a conviction under
a statute that they were advised would have potentially ruinous public relations
consequences, and avoiding the significant distraction to management that would have
resulted from a criminal trial.
Accordingly, the SLC has concluded that the defendants are entitled to the
protection of NJBCL § 14A:6-14(2).
*
*
*
Accordingly, in the exercise of its business judgment, the SLC has concluded to
seek dismissal of this claim. In exercising that judgment, the SLC considered the
following factors. First, as discussed above, this decision is based on the fact that the
SLC found no breach of duty on the part of any of the defendants. The SLC concluded
that the Board was fully informed about the decision prior to authorizing the plea, and
that the decision-making process employed by the Board on the whole was reasonable
and appropriate. Moreover, the SLC found that the decision to enter into the plea
agreement was based on valid, objective business considerations and that there is no
evidence that the defendants were motivated by self-interest or otherwise acted in bad
faith in connection with the plea.232 In addition, the SLC found that, in authorizing the
plea, the directors reasonably and in good faith relied upon experienced counsel.
Further, with respect to Kistinger, Tsacalis, and Zalla, the SLC found that these
individuals did not have the authority to authorize the Company to enter into the plea
232
On January 26, 2007, once DOJ had named Hills as a co-conspirator in DOJ’s draft indictment,
and thereby made clear that he was a subject of continuing prosecutive interest, Hills recused
himself from all discussions and decisions relating to the DOJ investigation and thus did not
participate in the decision to authorize the Company to enter the guilty plea. In addition to the
reasons provided above for the other director-defendants, this further supports the dismissal of
the claim as to Hills.
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agreement. Indeed, Kistinger and Tsacalis did not advise the Board with respect to any
aspect of the decision to enter into the guilty plea. While Zalla performed certain
financial analyses for the Board regarding the Company’s ability to pay varying levels
of fines in connection with a plea, he did not participate in, and was not present for, the
Board’s deliberations on this issue. Finally, with respect to Aguirre, the SLC found that
he devoted a substantial amount of time and attention to a matter of critical importance
to the Company, and at all times acted in good faith and on an informed basis. These
reasons, in addition to the reasons set forth above, provide additional support for the
SLC’s decision to seek dismissal of this claim as against these individuals.
Second, as is also discussed at length above, the SLC found that various
considerations create, at a minimum, substantial uncertainty as to whether a viable
claim exists and therefore raise serious questions whether bringing such a claim is in the
best interests of the Company. These considerations are Chiquita’s exculpatory clause
and Chiquita’s advancement and indemnity obligations.
Third, as discussed below (see Business Judgment Considerations), the SLC took
into account additional factors apart from the legal and factual merits of the claims that
are relevant to the analysis of whether to bring litigation.
I.
Breach of Duty in Connection with the
Acquisition of Atlanta AG
The plaintiffs allege that the defendants breached their fiduciary duties by
acquiring Atlanta AG in March 2003, which allegedly turned out to be an unprofitable
transaction, to offset a potential sale of the Company’s Colombian business. See Am.
Compl. ¶¶ 129-134. Based on their dates of employment, and the facts developed by
the SLC’s investigation, this claim applies to the following defendants: (i) management:
Cyrus Freidheim, Robert Kistinger, Robert Olson, James Riley, William Tsacalis, and
Jeffrey Zalla; (ii) directors: Morten Arntzen, Jeffrey Benjamin, Robert Fisher, Roderick
Hills, Durk Jager, and Jaime Serra.
Specifically, the Amended Complaint alleges that,
By 2002, Chiquita’s insiders knew that they would have to
cause Chiquita to sell off its Colombian banana operations
due to the longstanding illegal conduct they had caused or
permitted there, in part to try to avoid the extradition of
several Chiquita insiders to Colombia for their criminal
conduct . . . to try to make up for the lost revenues and
profits Chiquita would soon suffer, the Chiquita Defendants
in haste, and without adequate research, investigation,
evaluation or due diligence, acquired a German fruit
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distribution business, known as Atlanta AG, at a grossly
excessive price. Because of the excessive price the Chiquita
Defendants caused Chiquita to pay for Atlanta in this hastily
arranged acquisition, almost $43 million dollars in goodwill
went onto Chiquita’s balance sheet.
Am. Compl. ¶ 129. For the reasons discussed below, the SLC has concluded that this
claim should be dismissed.
1.
The SLC Found No Evidence of Fraud,
Illegality, or Conflict of Interest
Like the decision to authorize the guilty plea, the decision to authorize the
Company’s acquisition of Atlanta will be protected by the business judgment rule
unless there is evidence the defendants acted with fraud, illegality, a conflict of interest,
gross negligence, or lack of a rational business purpose.
The SLC has found no evidence that the decision to authorize the acquisition of
Atlanta was tainted by fraud, illegality, or a conflict of interest. The plaintiffs allege that
the defendants acted with a conflict of interest in authorizing the acquisition, because
the acquisition was motivated by their desire to compensate for losses from the
anticipated sale of Banadex. However, the SLC examined this issue and found no
evidence to support this claim. Instead, the SLC found that the Company was
interested in acquiring Atlanta for two primary reasons, namely: (i) Roderick Hills’
concern about formalizing the Company’s interest in Atlanta in order to eliminate
potential disclosure and antitrust issues created by the structure of the loan agreements
between the entities and (ii) a desire to turn around Atlanta’s failing business given the
importance of Atlanta’s distribution services to Chiquita.
More fundamentally, the SLC found no evidence, either in testimony or
documents, linking the acquisition to the situation in Colombia. To the contrary, even
though the deal was not completed until March 2003, the Board authorized the
acquisition of Atlanta in September 2002, nearly six months before the Board was
alerted to the FTO designation. Therefore, the business judgment rule protects the
defendants from liability for their decision to acquire Atlanta unless that decision was
(i) the result of gross negligence, or (ii) it lacked a rational business purpose. 233
233
Given these findings, the SLC concluded that there was no support for a claim for a breach of the
duty of loyalty in connection with the acquisition of Atlanta.
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The SLC Found No Evidence of Gross Negligence
As stated above, gross negligence has been defined as “reckless indifference to or
deliberate disregard of the whole body of stockholders or actions which are without the
bounds of reason.” Disney, 907 A.2d at 750 (citation omitted). Here, the plaintiffs allege
that the Board authorized the acquisition “in haste, and without adequate research,
investigation, evaluation or due diligence,” amounting to gross negligence. Am.
Compl. ¶ 129. The SLC found no evidence to support this allegation. To the contrary,
and as discussed above, the SLC found that:
•
Dating back to the late 1980s/early 1990s, the Company essentially owned
substantially all of the economic interest in Atlanta (its largest European
distributor), principally through a series of loans made to enable other
entities to buy all of the limited partnership interests in Atlanta’s parent
company. While Chiquita did not control Atlanta, substantially all of the
partnership interests in Atlanta’s parent were pledged to secure Chiquita’s
loans. This arrangement, which was disclosed to E&Y, was recorded as an
investment on Chiquita’s books, but Atlanta’s results were not
consolidated in Chiquita’s financial statements.
•
Shortly after the new Board was seated in March 2002, it focused on how
the Company’s interest in Atlanta, its largest distributor in Europe (based
in Germany), was reflected on the Company’s financial statements.
•
At the May 23-24, 2002 Board meeting, Kistinger, Riley, and Olson made
presentations focused on the possible acquisition of Atlanta and the Board
discussed the issue.
•
At the July 3, 2002 Board meeting, Kistinger, Riley, and Olson again
discussed the Company’s potential acquisition of Atlanta. Booz Allen,
which the Company had engaged to perform a review of the Company’s
options with respect to Atlanta, gave an update presentation on the due
diligence relating to Atlanta. The presentation identified three options to
the Board, (i) acquire Atlanta, (ii) sell Chiquita’s interest in Atlanta, or (iii)
walk away from Atlanta.
•
At the September 4, 2002 Board meeting, the Board received another
presentation from Booz Allen and decided to acquire 100% of the equity in
Scipio, the parent company of Atlanta.
Thus, over the course of six months, the Board received at multiple formal
presentations from management regarding Atlanta, and sought and received advice
from Booz Allen. The acquisition was not “hastily arranged,” as alleged by the
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plaintiffs, but was the product of a process that was designed to ensure that the
Company took steps to ensure that its interests in Atlanta were protected. Based on
these facts, the SLC concluded that the defendants were adequately informed regarding
the acquisition of Atlanta and the acquisition was not the product of gross negligence,
but was instead a valid exercise of their business judgment.
3.
The Decision to Acquire Atlanta was
Supported by a Rational Business Purpose
As described above, the SLC found that the acquisition of Atlanta arose out of a
desire to (i) restructure Chiquita’s relationship with Atlanta on its financial statements,
and (ii) protect Chiquita’s investment in Atlanta. The SLC concluded that both of these
reasons constitute a rational business purpose.
*
*
*
Accordingly, in the exercise of its business judgment, the SLC has concluded to
seek dismissal of this claim. In exercising that judgment, the SLC considered the
following factors. First, as discussed above, this decision is based on the fact that the
SLC found no breach of duty on the part of any of the defendants. The SLC, in
reviewing the facts and circumstances of this decision, has concluded that the Board
was adequately informed prior to authorizing the acquisition, and that the decisionmaking process employed by the Board on the whole was reasonable and appropriate.
The SLC also found that the decision to acquire Atlanta was based on valid, objective
business considerations and that there is no evidence that the defendants were
motivated by self-interest or otherwise acted in bad faith in connection with the
acquisition, as the acquisition had nothing whatsoever to do with the situation in
Colombia.
Second, as is also discussed at length above, the SLC found that various
considerations create, at a minimum, substantial uncertainty as to whether a viable
claim exists and therefore raise serious questions whether bringing such a claim is in the
best interests of the Company. These considerations are Chiquita’s exculpatory clause
and Chiquita’s advancement and indemnity obligations.
Third, as discussed below (see Business Judgment Considerations), the SLC took
into account additional factors apart from the legal and factual merits of the claims that
are relevant to the analysis of whether to bring litigation.
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Breach of Duty For Causing or Allowing Chiquita to
Make False Statements in its Public Filings
Plaintiffs next allege that the defendants breached their fiduciary duties by
causing, or allowing, the Company to make false and misleading statements from 1997
through 2005 in various annual reports, corporate responsibility reports, and other
public filings. See Am. Compl. ¶¶ 69-99. Plaintiffs also allege that the Company’s
financial statements from 1997 through 2005 were false and misleading by “failing to
disclose the Chiquita Defendants’ improper, wasteful and ultra vires payments (and the
continuation thereof after DOJ found out about them), as well as the huge contingent
liabilities those payments exposed Chiquita to, including large criminal or civil
penalties and the diminution of the value of Chiquita’s Colombian operations.” Am.
Compl. ¶ 99. Because the designation of the AUC as an FTO on September 10, 2001 is a
seminal event for the purposes of analyzing these claims, the SLC divided its analysis of
the Company’s public statements into two periods – first, from 1997 through 2000, and
second, from 2001 through 2005.
1.
Legal Standards
As discussed above, New Jersey law mandates that directors and officers
“discharge their duties in good faith and with that degree of diligence, care and skill
which ordinarily prudent people would exercise under similar circumstances in like
positions.” N.J.S.A. § 14A:6-14. In the disclosure context, courts have held that
“directors that knowingly disseminate false information that results in a corporate
injury [ ] violate their fiduciary duty.” Malone v. Brincat, 722 A.2d 5, 9-10 (Del. 1998); see
also Metro Commc’n Corp., 854 A.2d at 130; In re Triarc Cos. Class & Deriv. Litig., 791 A.2d
872, 877 n.14 (Del. Ch. 2001) (a “knowing dissemination of materially false information in
regular public filings and reports may result in finding of breach of fiduciary duty by
corporate directors”) (emphasis added).234
234
As an initial matter, the Amended Complaint alleges that, by making false and misleading
statements, the defendants “violated their duty of candor by lying to Chiquita’s public
shareholders.” Am. Compl. ¶ 100(c). However, under Delaware law, the term “duty of candor”
is often conflated with the term “duty to disclose,” and “represents nothing more than the wellrecognized proposition that directors of Delaware corporations are under a fiduciary duty to
disclose fully and fairly all material information within the board’s control when it seeks
shareholder action.” Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992) (emphasis added). A duty of
candor claim is thus inapplicable here because the challenged disclosures were not made in
connection with a request for shareholder action, such as a proxy statement. For those reasons,
the SLC analyzed the disclosure claims within the legal framework for breach of the duty of
loyalty, which requires intentional conduct. While the SLC has found no cases arising under
New Jersey law that permit a breach of fiduciary duty claim for improper disclosure where no
corporate action is sought, the SLC has nonetheless considered the claim as if it would be
recognized by a New Jersey court.
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Liability may occur in this context because:
[t]he shareholder constituents of a [ ] corporation are entitled
to rely upon their elected directors to discharge their
fiduciary duties at all times.
Whenever directors
communicate publicly or directly with shareholders about
the corporation’s affairs, with or without a request for
shareholder action, directors have a fiduciary duty to
shareholders to exercise due care, good faith and loyalty. It
follows a fortiori that when directors communicate publicly
or directly with shareholders about corporate matters the
sine qua non of directors’ fiduciary duty to shareholders is
honesty . . . . Inaccurate information in these contexts may
be the result of violation of the fiduciary duties of care,
loyalty or good faith.
Malone, 722 A.2d at 10-11 (affirming dismissal of claim alleging that directors caused the
company to disseminate false information regarding the company’s financial
performance). A breach of duty in this context may be also premised on the intentional
omission of material information from a communication with shareholders. See Jackson
Nat’l Life Ins. Co. v. Kennedy, 741 A.2d 377, 389 (Del. Ch. 1999) (“one who pleads that
directors deliberately omitted information from a communication [ ] under
circumstances that suggest an intent to mislead the stockholders has set forth a violation
of the fiduciary duty of loyalty”).
For liability to attach, any alleged misstatement or omission must be material. In
this context, materiality is defined as information that “a reasonably prudent [ ]
stockholder [ ] would have found . . . to be important to its consideration of its rights . . .
and that the communicating director or directors could not have reasonably concluded
otherwise.” Jackson, 741 A.2d at 389. Finally, reliance, causation, and damages must
also be shown. See Metro Commc’n Corp., 854 A.2d at 158 n.89 (internal citations
omitted).
In the disclosure context, courts recognize that directors and officers must be
granted wide latitude in corporate decision-making, including decisions about when
and how much information to disclose. As a result, the law imposes an exacting
standard for breach of fiduciary duty claims based on disclosures: “Because fiduciaries
of business entities must take risks and make difficult decisions about what is material
to disclose, they are exposed to liability for breach of fiduciary duty only if their breach of
the duty of care is extreme.” Metro Commc’n Corp., 854 A.2d at 157 (plaintiffs stated breach
of fiduciary duty claim where management reports stated that the company was
securing necessary government permits, but failed to disclose that they were obtained
through bribery known to defendants) (emphasis added).
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Analysis
a.
1997 – 2000 Annual Reports235
The SLC first considered the allegations that statements issued by Chiquita in its
annual reports from 1997 to 2000 were false and misleading because they erroneously
gave the appearance that the Company was operating in an ethical and legal manner.
The following statements from Chiquita’s 1997 annual report, issued on March 31, 1998,
among others, are cited in the Amended Complaint:
•
“We firmly believe in the strength of the Chiquita brand and remain
committed to achieving the Company’s full earnings potential. . . . We
continue to make measurable progress toward objectives which further
the realization of Chiquita’s earnings capacity.” Am. Compl. ¶ 72.
•
“Chiquita’s corporate values balance good citizenship and social
responsibility with profitable business growth. . . . The Company has a
strong commitment to ethical [and] social . . . standards. . . .” Id. ¶ 72.
•
“Consumers worldwide are concerned about . . . social issues. They
expect companies to fulfill their responsibilities of global citizenship . . .
Chiquita welcomes the interest in ethical standards and pledges to
continue improving . . . social conditions where the Company operates.”
Id. ¶ 72.
The Amended Complaint further alleges that the “Statement of Management
Responsibility” contained in the Company’s 1997 annual report was similarly
misleading:
The Company’s system of internal accounting controls,
which is supported by formal and financial administrative
policies, is designed to provide reasonable assurance that the
financial records are reliable for preparation of financial
statements and that assets are safeguarded against losses
from unauthorized use or disposition.
Management
reviews, modifies and improves these systems and controls
as changes occur in business conditions and operations. The
Company’s worldwide internal audit function reviews the
235
Plaintiffs’ claim as it relates to the Company’s 1997 to 2000 annual reports applies to the
following defendants: Kistinger, C. Lindner, K. Lindner, Olson, Riley, Tsacalis, Warshaw and
Zalla (Management), and Manocha, Runk, Verity, Thomas and Waddell (Directors).
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adequacy and effectiveness of controls and compliance with
policies.
Id. ¶ 73. Plaintiffs also allege that the financial statements contained in the 1997 annual
report were false and misleading because they did not disclose the existence of illegal
and improper payments and failed to “make provision for” the monetary fines and
penalties that “would inevitably result from those payments.” Id. ¶ 71.
The Amended Complaint alleges that Chiquita’s annual reports for the years
1998 (issued on March 31, 1999), 1999 (issued on March 28, 2000), and 2000 (issued on
April 2, 2001) contained the same false and misleading statement of management
responsibility and that the Company’s financial statements were similarly misleading.
Id. ¶¶ 77, 78.
Further, the Amended Complaint alleges that the Company made misleading
statements regarding the risks associated with its Central and South American
operations. The Company’s statement was:
Chiquita’s earnings are heavily dependent upon products
grown and purchased in Central and South America. These
activities, a significant factor in the economies of the
countries where Chiquita produces bananas and related
products, are subject to the risks that are inherent in
operating in such foreign countries, including government
regulation, currency restrictions and other restraints, risk of
expropriation and burdensome taxes.
Id. ¶ 74. This statement was published in the 1997, 1998, 1999, and 2000 annual reports.
Id. ¶¶ 75-77. Plaintiffs allege that it was false and misleading because it did not disclose
the “existence and nature of the Colombia payments.” Id. ¶ 70.
Finally, plaintiffs allege that the following statements in the Company’s 1998
annual report were false and misleading:
•
“Chiquita is a responsible corporate citizen to a broad community of our
customers, consumers, employees and neighbors.” Id. ¶ 75.
•
“Chiquita Brands International’s 1998 operating results reflect continuing
progress. . . . Higher banana farm productivity has contributed
significantly to recent cost improvements.” Id. ¶ 76.
Applying these standards, the SLC concluded that, during the period from 1997
to 2000, there was no evidence that the defendants knowingly made false statements in
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the Company’s public filings. The SLC also found that the defendants employed a
rational process by which they attempted, in good faith, to make legally adequate
disclosures.
First, the SLC concluded that none of the statements challenged in the Amended
Complaint from 1997 to 2000 were, in fact, false or misleading. As discussed above,
with respect to the guerrilla payments, senior management had been repeatedly told by
the Legal Department that they did not violate Colombian law or the FCPA. Moreover,
the SLC found no compelling probative evidence that the Company made payments to
guerrilla groups after October 8, 1997, the date on which the FARC and the ELN were
designated as FTOs. Further, the evidence shows that the SEC and federal prosecutors
were aware of the guerrilla payments during the SEC investigation of the Company
from 1998 to 2001 and did not raise any issues concerning the Company’s disclosures
relating to the payments, about which they had learned a great deal during the
investigation, or any other disclosure-related issue.
Moreover, the SLC found no evidence to support the allegation that the financial
statements contained in the Company’s annual reports failed to “make provision for”
the monetary fines and penalties that “would inevitably result from those payments.”
Am. Compl. ¶ 71. Simply put, the Company has never incurred a monetary penalty
relating to the guerrilla payments, so the defendants could not have failed to account
for them. Nor is there any allegation, or evidence, that the payments were not properly
recorded as an expense in the Company’s books and records.
Similarly, prior to the AUC’s designation as an FTO on September 10, 2001,
payments to the convivir and the AUC were not prohibited under U.S. or Colombian
law. During this period, as during the FARC period, senior management and the Board
were repeatedly assured by the Legal Department that the payments were legal, the
Company has never been penalized for convivir or AUC payments occurring before
September 10, 2001, and the defendants did not fail to properly account for those
payments or fail to properly record them. Accordingly, because the payments to the
FARC and the AUC were not unlawful during this period, the SLC has concluded that
the Company’s public filings were not false or misleading.
Second, the SLC found no evidence that the defendants knew or believed that
any of the Company’s public statements during this period were false or misleading.
There is no evidence to suggest that any of the defendants intentionally made false
statements with regard to the “existence or nature” of the guerrilla payments. See Am.
Compl. ¶ 70. To the contrary, the Legal Department viewed the payments as legal, and
senior management had the same understanding. Similarly, the SLC found no evidence
that the annual reports from 1998 to 2000 contained any intentionally false or
misleading statements with regard to the payments to the convivir or the AUC. As
with the guerrilla payments, the Legal Department concluded that the payments to the
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convivir and the AUC were legal, and communicated that view to senior management
and the Board, which therefore had the same understanding.
Third, neither the guerrilla payments nor the payments to the convivir and/or
the AUC were material, and therefore did not need to be disclosed. The SLC found no
evidence that the total amount of guerrilla payments ever exceeded approximately
$200,000 per year. Similarly, the SLC found no evidence that the total amount of
payments to the convivir and/or the AUC ever exceeded approximately $300,000 per
year. E&Y, the Company’s long-standing external auditor, concluded that Banadex’s
“sensitive payments,” which included guerrilla payments, were not quantitatively
material and later reached the same conclusion as to the convivir and/or the AUC
payments. Given that the payments were legal during this period, the SLC believes that
they were not qualitatively material either.
Fourth, the evidence developed by the SLC shows that the Company relied on
competent advisors with regard to its disclosures. In-house counsel, including but not
limited to Olson, who had significant disclosure law experience, advised the Company
in connection with its disclosures. Where necessary, outside disclosure counsel at Taft
Stettinius & Hollister LLP was consulted. Moreover, the Company’s disclosures were
reviewed regularly by the directors at Audit Committee meetings.236 Based on these
facts, the SLC concluded that the defendants reasonably and in good faith believed that
the Company’s disclosures were adequate and appropriate and that the defendants
actually, and in good faith, relied on the advice of counsel in discharging their duties.
Conclusion. As discussed above, the SLC found that (i) the Company did not
make false or misleading statements in its public filings because the payments were not
illegal under Colombian or U.S. law during this period; (ii) therefore, the defendants
did not knowingly cause the Company to make false or misleading public statements
about the legality of the Company’s behavior; (iii) the payments were neither
quantitatively nor qualitatively material during this period, and therefore there was no
affirmative obligation to disclose them; and (iv) the defendants reasonably, and in good
faith, reviewed the disclosures and relied on the advice of counsel in issuing its public
filings. For all these reasons, the SLC has determined that there was no breach of
fiduciary duty with respect to the Company’s disclosures for the period 1997 to 2000.
236
For example, during this period, the Audit Committee reviewed and approved the draft
consolidated financial statements, which allegedly failed to account for the liabilities to occur
from these payments, at meetings held on March 4, 1998, March 15, 1999, March 10, 2000, and
March 7, 2001.
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2001 – 2005 Disclosures and Corporate Responsibility Reports237
The SLC next considered whether the Company’s disclosures for the years 2001
to 2005 and corporate responsibility reports, issued after the AUC’s FTO designation,
were false or misleading, as alleged in the Amended Complaint.
(i)
Corporate Responsibility Reports
The Plaintiffs allege that the Company made false and misleading statements in
its corporate responsibility reports. Am. Compl. ¶¶ 79-81, 84-85. As discussed above,
in 2000, under the direction of Jeffrey Zalla, the Company launched its Corporate
Responsibility Initiative, which included, among other things, the preparation and
publication of corporate responsibility reports. The Amended Complaint alleges that
these reports contained false and misleading statements with regard to the Company’s
“series of controls, committees and procedures that ensured compliance with these core
values.” Id. ¶ 81. For example, the following excerpts, among others, from the 2000
corporate responsibility report, which was issued on September 24, 2001, are alleged to
be false and misleading:
•
“Times have changed. And so has our Company. . . . Three years
ago, in the wake of particularly damaging media coverage, we
embarked on a disciplined path toward Corporate Responsibility
. . . . This was not to be a public relations exercise, but a
management discipline. . . .” Id. ¶ 79.
•
“We live by our core values. We communicate in an open, honest
and straightforward manner. We conduct business ethically and
lawfully.” Id. ¶ 80.
•
“For decades, Chiquita has had a Code of Conduct that dealt with
ethical and legal behavior and compliance with Company policies
. . . . Our Code of Conduct now embodies standards in the areas of
. . . ethical behavior . . . and legal compliance.” Id. ¶ 81.
The Amended Complaint alleges that the Company’s 2001 corporate
responsibility report, which was issued on November 14, 2002, contained the same false
and misleading statements that were contained in the 2000 corporate responsibility
report. Id. ¶ 83.
237
Plaintiffs’ claim as it relates to the Company’s 2001 to 2005 disclosures and corporate
responsibility reports applies to the following defendants: Aguirre, Freidheim, Kistinger, Olson,
Riley, Tsacalis and Zalla (Management), and Arntzen, Benjamin, Fisher, Hills, Jager, Serra and
Stanbrook (Directors).
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Analysis. The SLC found no evidence to suggest that the defendants knowingly
caused the Company to make any false statements in the 2000 and 2001 corporate
responsibility reports, which were both issued after the FTO designation, but before it
was discovered. The Plaintiffs may question whether it was ethical and socially
responsible to make payments to groups such as the FARC and the AUC, but the SLC
has found that the payments were made in the reasonable and good faith belief that
they were both legal and necessary to prevent serious harm to the Company’s
employees and infrastructure. The SLC found that these statements were not false and
therefore by definition were not intentionally false.
(ii)
Annual Reports and Other Disclosures
2001 Annual Report. Plaintiffs allege that the Company’s 2001 annual report,
issued on March 20, 2002, contained the same false and misleading statements of
management responsibility and risks associated with its Central and South American
operations as the prior annual reports, as described above, and that the Company’s
financial statements were similarly false and misleading. See Am. Compl. ¶ 83.
Analysis. When the Company issued its 2001 annual report on March 20, 2002,
none of its officers or directors (or any Company employees) were aware of the AUC’s
designation as an FTO on September 10, 2001. The SLC concluded, therefore, that none
of the defendants knowingly caused the Company to make any false or misleading
statements in that filing.
2002 Annual Report. Plaintiffs also allege that the following passage from a letter
to shareholders contained in the Company’s 2002 annual report (which contained the
same statements of risks and management responsibility as the 1997 annual report),
issued on March 31, 2003, was false and misleading:
Our corporate responsibility reports also continue to earn
recognition for their honesty, transparency and clear
performance measurement. . . . We are committed to
managing Chiquita to the highest standards of integrity and
propriety in all of our affairs, from our farms to our
boardroom. Our achievements are a great source of pride
among our employees.
Id. ¶ 84.
Analysis. When the Company issued its 2002 annual report on March 31, 2003,
and made the statement alleged to be false – “[w]e are committed to managing Chiquita
to the highest levels of integrity and propriety” – only Robert Olson and Cyrus
Freidheim, and perhaps Robert Kistinger, were aware of the AUC’s FTO designation
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that had been discovered in February by [a Chiquita lawyer]; that fact had not yet been
shared with the Board. Therefore, they are the only defendants who were even
theoretically capable of making a statement that was knowingly false and misleading.
However, the SLC does not believe that the statement was rendered false by the mere
fact of the FTO designation – since, after all, the payments were not made in knowing
violation of the law – and therefore found no evidence that Olson and Freidheim
knowingly caused the Company to issue a false statement in that report. In the same
way, Chiquita’s professed commitment to “the highest levels of integrity and propriety”
was not rendered false by its failure to discover the FTO violation.
Nor was the statement of management responsibility quoted above knowingly
false. Nothing about the FTO designation, or the failure to disclose it, affected the fact
that the Company’s internal accounting controls were “designed to provide reasonable
assurance that the financial records are reliable.” Finally, the statement of risk was not
false merely because it omitted any reference to the payments – after all, it said,
“products grown and purchased in . . . South America” were “subject to the risks that
are inherent in operating in such foreign countries.” To the extent that the list of
specifically identified risk factors did not explicitly identify the payments, the SLC
concluded that the payments were nonetheless covered by the general statement quoted
above.
2003 Disclosures. Plaintiffs further allege that the Company’s 2003 annual
report, issued on March 11, 2004, and other public filings issued in that year were false
and misleading. Am. Compl. ¶¶ 87-92. First, Plaintiffs allege that a letter from
Fernando Aguirre and Cyrus Freidheim, published in the 2003 annual report, was false
and misleading because it suggested that the Company was dedicated to high ethical
standards and reassured shareholders of Chiquita’s compliance with certain laws,
controls and procedures.238 Second, the 2003 annual report contained the same
statements of management responsibility and risks that are contained in the Company’s
annual reports from 1997 to 2001, which Plaintiffs allege are false and misleading. Id. ¶
90. Third, Plaintiffs challenge the Company’s 2003 annual report for failure to disclose
“illegal bribery payments or arms-providing activities relating to the AUC or Chiquita’s
other illicit and/or illegal activities or the tremendous risks they posed with regard to
legal violations. . . .” Id. ¶ 92. Fourth, Plaintiffs allege that the following language in the
2003 annual report was inadequate because it failed to specifically identify (i) Chiquita’s
payments to the AUC and (ii) Chiquita’s violation of U.S. law in making the payments:
238
The Amended Complaint alleges that the Annual Report stated: “2003 was an excellent year for
Chiquita. . . . The turnaround of Chiquita is well underway. . . . We are very pleased with
Chiquita’s achievements in 2003.” Id. ¶ 87.
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The Company has international operations in many foreign
countries, including those in Central and South America, the
Philippines and La Côte d’Ivoire. The Company must
continually evaluate the risks in these countries, including
Colombia, where an unstable environment has made it
increasingly difficult to do business.
The Company’s
activities are subject to risks inherent in operating in these
countries, including government regulation, currency
restrictions and other restraints, burdensome taxes, risks of
expropriation, threats to employees, political instability and
terrorist activities, including extortion, and risks of action by
U.S. and foreign governmental entities in relation to the
Company. Should such circumstances occur, the Company
might need to curtail, cease or alter its activities in a
particular region or country. Chiquita’s ability to deal with
these issues may be affected by applicable U.S. laws. The Company
is currently dealing with one such issue, which it has brought to
the attention of the appropriate U.S. authorities who are reviewing
the matter. Management currently believes that the matter can be
resolved in a manner that is not material to the Company,
although there can be no assurance in this regard.
Id. ¶ 92 (emphasis in original).
Plaintiffs also cite to a Q&A section of the 2003 annual report, which they allege
was false and misleading, including the following statement by Aguirre, among others:
I am impressed by Chiquita’s Core Values and the
company’s accomplishments in corporate responsibility. . . .
Id. ¶ 88.
Analysis. By the time that Chiquita issued its 2003 annual report, on March 11,
2004, it had been more than a year since the FTO designation had been discovered.
During this period, the Company repeatedly and in good faith updated its disclosures.
For example, the Company added new language to the risk factors section of the
financial statements, which specifically referred, for the first time, to “the potential
impact of political instability and terrorist activities.” This new language was adopted
after a discussion at the May 12, 2003 Audit Committee meeting, during which Olson,
according to notes taken at the meeting, commented on the new language: “reference to
terrorist activities is new [and] intended to highlight risks.”
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The disclosures reflecting the Company’s activities in Colombia were further
supplemented in August 2003 when the Company filed its quarterly report for the
second quarter. In the section on “Risks of International Operations” after the warning
language about “the potential impact of political instability and terrorist activities,” the
following new language was added:
The Company is currently dealing with one such issue,
which it has brought to the attention of the appropriate U.S.
authorities. Management does not currently believe that this
matter will have a material effect on the Company.239
This language was added after the issue was considered during the August 12, 2003
Audit Committee meeting.
Four months later, the Company again supplemented its disclosures and issued a
press release, on December 16, 2003, specifically identifying Colombia as follows: “The
company must continually evaluate the risks in these countries, including Colombia,
where an unstable environment has made it increasingly difficult to do business.” Press
Release, Chiquita Brands Int’l, Inc., Chiquita Brands International Presents
“Turnaround and Transformation” to Investors and Analysts (Dec. 16, 2003). That
expanded disclosure followed a December 12 Audit Committee meeting during which
the issue was discussed. One week after the December 16 press release was issued, the
SEC requested that the Company explain the statement made in its “Risks of
International Operations” section of the Form 10-Q filing for the period ending
September 30, 2003 – that the Company was “currently dealing with one such issue” –
and advised the Company “to avoid vague references to risks in the future.” Chiquita
Brands Int’l, Inc., Quarterly Report (Form 10-Q) (Nov. 13, 2003). In January 2004, the
Company and its counsel met with the SEC to explain its third quarter disclosure,
which had already been made more specific in its December 16, 2003 press release.
After meeting with the Company and counsel, the SEC withdrew its comment.
After many months of increasingly more specific and detailed disclosures about
its situation in Colombia, ending with the December 16 press release, the Company
issued its 2003 annual report on March 11, 2004. Plaintiffs allege that the following
239
The Company’s third quarter Form 10-Q contained nearly identical language except for the last
line, which read, “Management does not currently believe that this matter will have a material
effect on the Company, although there can be no assurance in this regard.” Chiquita Brands Int’l, Inc.,
Quarterly Report (Form 10-Q) (Nov. 13, 2003) (emphasis added). The Company’s 2003 annual
report, as excerpted above, also contained nearly identical language, but the corresponding
paragraph in that filing ended with, “Management currently believes that the matter can be resolved in
a manner that is not material to the Company, although there can be no assurance in this regard.”
Chiquita Brands Int’l, Inc., Annual Report (Form 10-K) (Mar. 31, 2003) (emphasis added).
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statements, among others, were false and misleading: (i) a letter from Freidheim and
Aguirre stating that the Company “accomplished new milestones in corporate
responsibility”; (ii) a statement of management responsibility noting that “[t]he
Company’s system of internal accounting controls . . . was designed to provide
reasonable assurance that the financial records are reliable”; (iii) a statement of risk that,
among other things, noted that the Company’s Central and South American operations
were subject to “political instability and terrorist activities, including extortion, and
risks of action by U.S. and foreign governmental entities in relation to the Company”
and that “[t]he Company is currently dealing with one such issue”; and (iv) a “Q&A” in
which Aguirre stated that he was “impressed by Chiquita’s Core Values and the
company’s accomplishments in corporate responsibility.” Am. Compl. ¶¶ 87-92.
Plaintiffs also allege that the 2003 annual report failed to disclose alleged bribery
payments, the payments to the AUC, “arms-providing activities” related to the AUC,
and the “tremendous risks they posed with regard to legal violations.” Am. Compl. ¶
92.
The SLC found that none of these statements was false or misleading, or
contained material omissions. First, the SLC found that the Company was in fact
committed to its corporate responsibility goals and worked to accomplish those goals;
there is no better proof of that commitment than its prompt and voluntary disclosure of
those payments to DOJ in April 2003. Second, no Chiquita employee knowingly made
“illegal bribery payments” and no Chiquita employee was involved in “arms-providing
activities” during this time period. Third, the Company clearly and adequately
disclosed that it operated in areas, such as Colombia, in which it was subject to risks
such as “threats to employees” and “political instability and terrorist activities,
including extortion.” See Am. Compl. ¶ 92. Fourth, the SEC’s withdrawal of its
comment letter seeking clarification as to the Company’s disclosure in its third quarter
Form 10-Q filing that it was “currently dealing with one such issue,” conveyed its tacit
approval of the disclosure, which the Company then appropriately included in its 2003
annual report and supplemented with a specific reference to Colombia. Finally, the
defendants, actually and in good faith, relied on the Company’s disclosure counsel,
Skadden and Baker Botts, in drafting Chiquita’s disclosures, which they believed to be
both adequate and appropriate.
2004 and 2005 Disclosures. Plaintiffs also allege that the Company’s disclosures
in 2004 and 2005 contained false and misleading statements. The Amended Complaint
alleges that a May 10, 2004 press release, which disclosed the DOJ investigation,
contained the false and misleading statement that the Company’s “sole” reason for
making the payments was to protect employees’ lives. Id. ¶ 93. This statement is
repeated in the Company’s 2004 and 2005 Annual Reports, issued on March 16, 2005
and March 1, 2006, respectively. Id. ¶¶ 94, 97. Plaintiffs also allege that, in its 2004
annual report, the Company falsely described the DOJ investigation as set forth in its
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May 2004 press release, when it stated, “[t]he Company intends to continue its
cooperation with this investigation, but it cannot predict the outcome or any possible
adverse effect on the Company, which could include the imposition of fines.” Am.
Compl. ¶ 94.
The Amended Complaint also alleges that the Company’s 2005 annual report,
issued on March 1, 2006, contains a false and misleading description of the DOJ
investigation, by stating, among other things:
In March 2004, the Justice Department advised that, as part
of its criminal investigation, it will be evaluating the role and
conduct of the company and some of its officers in the
matter. In September-October 2005, the company was
advised that the investigation is continuing and that the
conduct of the company and some of its officers and
directors remains within the scope of the investigation.
Am. Compl. ¶ 97.
In addition, the Plaintiffs allege that the corporate responsibility statement in the
2005 annual report failed to disclose “continuing illegal bribery payments or armsproviding activities relating to the AUC or Chiquita’s other illicit and/or illegal
activities or the tremendous risks they posed with regard to legal violations in the
United States and Colombia and the viability and value of Chiquita’s Colombian
operations.” Id. ¶¶ 94-96, 98.
Analysis of May 10, 2004 Press Release. It was not until a meeting on March 23,
2004 with DOJ attorneys that the Company learned that the DOJ’s view of the Company
had materially changed. At that meeting, among other things, David Nahmias said that
the DOJ considered Chiquita and some of its officers and former officers subjects of the
investigation, but did not identify which officers. Shortly thereafter, on May 10, 2004,
the Company issued a press release that disclosed the DOJ investigation and stated, in
part, that “[t]he Company’s sole reason for submitting to these payment demands has
been to protect its employees from the risks to their safety if payments were not made.”
Press Release, Chiquita Brands Int’l, Inc., Chiquita Reports Net Income of $20 Million,
$0.46 EPS, in the First Quarter of 2004 (May 10, 2004).240
240
Plaintiffs do not allege that the existence of the investigation should have been disclosed earlier,
and until the Company became a subject of the DOJ’s investigation, it was not required to be
disclosed under Item 103 of regulation S-K (17. C.F.R. § 229.103) (“Describe briefly any material
pending legal proceedings, other than ordinary routine litigation incidental to the business, to
which the registrant or any of its subsidiaries is a party or of which any of their property is the
subject. . . . Include similar information as to any such proceedings known to be contemplated by
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Plaintiffs allege that the word “sole” renders this statement false and misleading,
because the defendants made the payments in order to “control labor conditions in
Colombia and to boost [their] bonuses.” See Am. Compl. ¶ 94. However, the SLC
found that this statement was not false or misleading because the evidence shows that
concern for the safety of the Company’s employees was, at a minimum, the defendants’
predominant reason for making the payments to the AUC, and had nothing to do with
labor conditions or bonuses. The SLC found that any difference between “sole” and
“predominant” is simply not material in this context. In the absence of extortion and
the credible threat of AUC violence, the payments would not have been made.241 The
statement was made in good faith and was not knowingly false, and was reviewed and
approved by Skadden and Baker Botts.
Analysis of 2004 and 2005 Annual Reports. In its 2004 annual report, issued on
March 16, 2005, the Company reprinted the language from its May 2004 press release
concerning the DOJ investigation, including the uncertainty regarding the resolution of
that investigation. In its 2005 annual report, issued on March 1, 2006, the Company
described the DOJ investigation, including the developments with regard to the
investigation of individual officers and directors. The SLC found no evidence to
suggest that these statements were false or misleading. Instead, the evidence shows
that the Company’s statements were consistent with the unfolding events during this
period. Finally, the SLC concluded that Plaintiffs’ allegation that the defendants
wrongfully failed to disclose information regarding, among other things, the
Company’s “continuing illegal bribery payments or arms-providing activities relating
to the AUC” in the 2005 annual report (Am. Compl. ¶ 98) lacks merit for multiple
reasons, including the fact that the SLC is aware of no such incidents in this time period.
Conclusion. Based on the foregoing, (i) the SLC found no evidence that the
Company made false or misleading statements in its disclosures and public filings or
(ii) that the defendants knowingly caused the Company to do so; and (iii) the
defendants reasonably, and in good faith, relied on the advice of counsel in making its
disclosures and public filings. For all these reasons, the SLC has determined that there
was no breach of fiduciary duty with respect to the Company’s disclosures for the
period 2001 to 2005.
governmental authorities”) (emphasis added). See United States v. Crop Growers Corp., 954 F. Supp.
335, 347 (D.D.C. 1997) (holding that Item 103 does not require disclosure of uncharged illegal
conduct); In re Browning-Ferris S’holders Deriv. Litig., 830 F. Supp. 361, 369 (S.D. Tex. 1993)
(holding that a company need not disclose the fact that a nominee director had received a
criminal “target” letter), aff'd mem., 20 F.3d 465 (5th Cir. 1994).
241
For the reasons stated above, the SLC concluded that this statement was not false or misleading
as contained in the Company’s 2004 and 2005 Annual Reports, issued on March 16, 2005 and
March 1, 2006, respectively. See id. ¶¶ 94, 97.
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Additional Legal Considerations
The SLC also found no evidence – and the Plaintiffs allege none – that the
Company suffered any independent harm as a result of its allegedly false and
misleading disclosures regarding the payments it made from 1997 to January 2004.
Indeed, the only alleged harm to the Company in this regard, and the only harm
implicated by the Amended Complaint, stemmed from the Company’s payments to the
AUC after its designation as an FTO on September 10, 2001. As discussed at length
above, the SLC has concluded that it should not pursue claims based on the underlying
conduct involving the payments; it reaches the same conclusion as to the disclosures
stemming from that conduct, which caused no additional harm to the Company.
*
*
*
Accordingly, in the exercise of its business judgment, the SLC has concluded to
seek dismissal of this claim. In exercising that judgment, the SLC took account of the
following factors. First, as discussed at length above, this decision is based on the fact
that the SLC found no breach of duty on the part of any defendant. Second, as is also
discussed at length above, the SLC found that various considerations create, at a
minimum, substantial uncertainty as to whether a viable claim exists and therefore raise
serious questions whether bringing such a claim is in the best interests of the Company.
These considerations are the lack of independent harm, the bankruptcy release (which
covers any disclosure made prior to March 19, 2002), Chiquita’s exculpatory clause,
Chiquita’s advancement and indemnity obligations, and the statute of limitations
(which, absent the application of a tolling doctrine, may bar claims arising from
disclosures made prior to October 12, 2001). Third, as discussed below (see Business
Judgment Considerations), the SLC took into account additional factors apart from the
legal and factual merits of the claims that are relevant to the analysis of whether to
bring litigation.
K.
Breach of Duty in Connection with
Compensation and Severance Decisions
Finally, the SLC considered plaintiffs’ claim relating to the compensation and
severance paid to Chiquita’s officers and directors. This claim is tangential to the main
issue investigated by the SLC – whether the payments to the FARC and AUC were a
breach of duty. In general, plaintiffs allege that all the compensation decisions that
were made after the FTO designation was discovered on February 20, 2003 were
wrongful and excessive because all of the defendants engaged in wrongdoing. See Am.
Compl. ¶ 69. However, in this Report, the SLC has concluded that the defendants acted
in good faith and with the best interests of the Company in mind. Thus, in reviewing
these compensation decisions, which, in the SLC’s view, were made in the normal
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course of the Company’s business, the SLC sought to determine whether they were a
proper exercise of business judgment.242
In the Amended Complaint, the plaintiffs:
242
•
claim that the defendants breached their duties by “abus[ing] their control
of Chiquita for their own personal gain, aggrandizement and protection.”
(Am. Compl. ¶ 160(e));
•
claim that the defendants committed corporate waste by “award[ing]
themselves and their allies excessively lucrative compensation and
payments which have no reasonable basis, but instead are designed only
to enrich themselves.” (Id. ¶ 168);
•
claim that the defendants wrongfully “have continued to employ key
wrongdoers in important corporate positions, have paid off other
employees with generous severance packages and ‘confidentiality’
agreements and promises not to pursue them civilly for their involvement
in the activities which resulted in the criminal plea of Chiquita.” (Id. ¶
119; see also id. ¶ 16);
•
claim that the defendants wrongfully “decided to increase executive pay
following the Company’s March 2007 plea agreement, despite Chiquita’s
losses and massive exposure to criminal and civil liability.” (Id. ¶ 141(d))
(emphasis in original); and
•
request that Jeffrey Zalla and Robert Kistinger be terminated from
employment, along with “any other current member of Chiquita’s
management found to have been actively involved in the wrongdoing,”
and that the Company seek and obtain an accounting for all improperly
As noted above, while the Amended Complaint names SLC member Barker as a defendant (see
Am. Compl. ¶ 28), it contains no specific allegations against him. Nevertheless, since he was
included as a defendant, the SLC sought to determine what potential wrongdoing he could
possibly have committed. The only allegation that could conceivably apply to Barker, although
not specifically pleaded, is his involvement in the decision to grant a severance award to Robert
Kistinger at a Board meeting on October 25, 2007 (his first Board meeting as Chiquita director), at
which the Board considered and approved the award. Although Barker believes he could fairly
and appropriately judge this issue, out of an abundance of caution, he recused himself from the
SLC’s deliberation and decision-making with respect to the Kistinger severance. Likewise, given
the allegations against SLC member Hasler relating to decisions about compensation and
severance in which she participated as a member of the Compensation Committee (see, e.g., id. ¶¶
141(d), 151), Hasler, although she too believes that she could fairly and appropriately judge this
claim, recused herself from the SLC’s deliberation and decision-making with respect to this claim
in its entirety.
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paid salaries, bonuses, and stock awards and disgorgement of “all
directors’ fees and other compensation or reimbursement paid to any of
the Chiquita directors named as defendants.” Am. Compl. Prayer for
Relief (D-E).
However, with one exception, the Amended Complaint does not provide any
specific instances in which executives or directors are alleged to have received wrongful
compensation or severance or have been wrongfully permitted to continue their
employment with the Company. For clarity of presentation, the SLC has focused its
analysis of this claim solely on decisions made after the discovery of the FTO
designation because previously all compensation and severance decisions were made
without knowledge of any potential wrongdoing.
1.
Legal Standards
Compensation decisions are governed by traditional notions of business
judgment. In fact, “Courts have long recognized that the business judgment rule’s
presumption of good faith and regularity carries particular force when the challenged
decision concerns employee compensation.” Jannett v. Gilmartin, 2006 WL 2195819, at *7
(N.J. Super. Ct. Law Div. July 21, 2006); see also Eliasberg v. Standard Oil Co., 92 A.2d 862,
867 (N.J. Super. Ct. Ch. Div. 1953) (“Directors have the discretionary power to employ,
fix compensation and generally to use legitimate ends and means to retain employees or
induce them to continue in the corporation’s service, and in such matters the honest
exercise of business judgment is controlling”) (citation omitted).
In the widely reported Disney case, the Delaware Supreme Court addressed the
issue of breach of fiduciary duty and corporate waste in the compensation context.
According to the complaint, Disney’s board “committed waste [by permitting a]
lucrative severance payout to [its then-president], Michael Ovitz, under the no-fault
termination provision of his employment contract, when it allegedly could have
contested that issue in an attempt to avoid paying out the severance. See Brehm v.
Eisner, 746 A.2d 244, 265 (Del. 2000).
In rejecting this claim, the Court of Chancery found that the plaintiffs had failed
to “allege with particularity facts tending to show that no reasonable business person
would have made the decision that the . . . Board made under these circumstances.” Id.
at 266 (emphasis added). Despite expressing concerns about “lavish executive
compensation,” the Delaware Supreme Court upheld the dismissal and held that
compensation decisions are left to the business judgment of directors, and though we
may have “aspirations that boards of directors . . . live up to the highest standards of
good corporate practices,” failure to do so is not grounds for liability under Delaware
law. Id. at 249.
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Accordingly, compensation decisions made on an independent and informed
basis are entitled to the protection of the business judgment rule and will not be secondguessed by courts. See Prod. Res. Group L.L.C. v. NCT Group, Inc., 863 A.2d 772, 799 (Del.
Ch. 2004) (“Informed decisions regarding employee compensation by independent
boards are usually entitled to business judgment rule protection”); Litt v. Wycoff, 2003
WL 1794724, at *6 (Del. Ch. Mar. 28, 2003) (“employee compensation decisions made by
a fully informed, disinterested, and independent board of directors are usually entitled
to the protection of the business judgment rule”). Thus, the compensation decisions at
issue here will be protected by the business judgment rule unless there is evidence of
fraud, illegality, a conflict of interest, or gross negligence. In the absence of such facts,
those decisions will be upheld unless it can be shown “that no reasonable business person
would have made” them. Brehm, 746 A.2d at 266 (emphasis added). A review of the
Chiquita Board’s pertinent compensation decisions follows.
2.
Analysis
Cyrus Freidheim. On March 19, 2002, upon the Company’s emergence from
bankruptcy, Cyrus Freidheim became CEO on the understanding that the Company
would be seeking a permanent CEO in the near future. Pursuant to a July 23, 2003 letter
agreement, which was signed by Jeffrey Benjamin, then-Chair of the Compensation
Committee, Freidheim was granted certain compensation as “interim-CEO” to be
followed by normal director’s fees as non-executive chairman after the election of a new
CEO. This agreement reflected an arrangement that was approved by the
Compensation Committee at its March 11, 2003 meeting, including (i) salary at his thencurrent level of $700,000, (ii) an increased target bonus opportunity under a program
that was previously approved by the Compensation Committee, and (iii) certain stock
options and restricted stock units. Fernando Aguirre replaced Freidheim as CEO in
mid-January 2004, and Freidheim retired as Chairman in May 2004. Upon his
retirement, Freidheim’s previously granted stock options and restricted stock units
vested pursuant to the July 23, 2003 letter agreement.
The SLC found that the decision to enter into the July 23, 2003 agreement was not
unreasonable. It was approved by the Compensation Committee on March 11, before
the FTO designation was known to Freidheim or disclosed to the Board. It granted
Freidheim no new benefits upon his retirement, allowing only the vesting of previously
awarded stock and options. Moreover, the SLC found no evidence that Freidheim was
involved in any wrongdoing related to the payments; they began long before he joined
the Company and he deferred to the Audit Committee’s management of the
investigation after the FTO designation was disclosed. Thus, the SLC found no basis to
conclude that the approval of these retirement benefits was a breach of duty.
James Riley. Riley served as the Company’s CFO from January 2001 to August
2004. Soon after Aguirre became CEO, discussions began about replacing Riley as CFO.
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Ultimately, in August 2004, Riley left the Company after he and Aguirre made the
mutual decision that he should do so. Upon his departure from the Company, Riley
was awarded a severance package with certain Board-approved enhancements,
including pro rata vesting of his long term incentive plan restricted stock award and a
two-year life insurance policy.
The SLC found that the decision to grant Riley this severance award was not
unreasonable. This severance arrangement was initially considered by the
Compensation Committee at its February 9 and March 30, 2004 meetings. This
arrangement was then discussed and approved by the full Board at its July 26 and 27,
2004 meeting. The SLC found no evidence that Riley played any role in the Colombia
payments either before or after the discovery of the FTO designation, or was involved
in any wrongdoing, such that a severance award recognizing his service to the
Company was improper. Thus, the SLC found no basis to conclude that the approval of
this severance award was a breach of duty.
Jay Braukman. Braukman replaced Riley as CFO, and served in that position
from August 2004 to June 2005. At that time, Braukman was notified that the decision
had been made to terminate his employment based on his performance, but he was
allowed to remain at the Company until August 2005. Braukman received nine months
of severance pay, which corresponded to his nine-month tenure as CFO.
The SLC found that the decision to grant Braukman this severance award was
not unreasonable. The Compensation Committee members had multiple discussions
regarding Braukman’s severance and, ultimately, discussed and approved it via e-mail
on July 28, 2005. The SLC found no evidence that Braukman played any role in the DOJ
investigation during the nine months he was employed with the Company. Instead, the
SLC found evidence to suggest that Braukman was granted a modest severance award
in recognition of the disruption to his career caused by his brief tenure and his abrupt
termination by Chiquita, as well as the fact that he had moved to Cincinnati to take the
job. Thus, the SLC found no basis to conclude that the approval of this severance award
was a breach of duty.
Robert Olson. After eleven years as General Counsel for the Company, Robert
Olson retired in August 2006. The evidence developed by the SLC shows that Olson
retired for two reasons – as part of Aguirre’s attempts to bring in new management and
after questions were raised about his performance in late 2005. Olson received an
individually negotiated retirement award, which was approved by Aguirre after
discussion with certain directors, and was memorialized in a retirement agreement
dated August 31, 2006. Under this agreement, Olson received: (i) a cash benefit of
$622,500, (ii) a pro rata bonus of $138,333, (iii) twelve months of office space and
services, and (iv) accelerated vesting of stock options, among other things. Although
not technically conforming to the Company’s Executive Officer Severance Pay Plan (the
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“Plan”), which applies to severance but not retirement, the evidence shows that the Plan
provided a framework for Olson’s retirement agreement.
The SLC found that the decision to enter into this retirement agreement was not
unreasonable. Reasonable business purposes supported Olson’s retirement agreement,
including that (i) it was largely consistent with the terms of the Plan and Company
policy, and recognized his extended service to the Company, (ii) it allowed for
continued access to Olson’s substantial institutional knowledge resulting from that
service; and (iii) it helped secure Olson’s ongoing cooperation with the DOJ
investigation even after his departure from the Company, a valid consideration given
that the DOJ investigation was still ongoing. Moreover, Olson’s retirement agreement
did not contain any release of the Company’s rights to pursue possible claims against
him in the event that it became appropriate to do so. In any event, the SLC has now
investigated those claims and cannot conclude that Olson breached his duties to the
Company. Thus, the SLC found no basis to conclude that the approval of this
retirement agreement was a breach of duty.
Robert Kistinger. After approximately twenty-eight years of service to the
Company, Robert Kistinger was terminated from employment, effective December 31,
2007, in connection with an effort led by Aguirre to reduce the Company’s overhead
costs, including by eliminating the position of COO of Chiquita Fresh Group, which
Kistinger held. Kistinger received a severance package that was largely consistent with,
and deviated only slightly from, the terms of the Plan in effect at the time.
Under his severance agreement, Kistinger received, among other things, (i) a
cash benefit of $1,092,500 (equal to the sum of his then-current annual base salary and
then-current annual bonus target); (ii) a pro rata bonus for 2007 in amount of $517,500;
(iii) continuation of medical benefits under COBRA for twelve months; (iv) accelerated
vesting of all 69,478 of his shares of unvested restricted stock; (v) three years from the
date of separation in which to exercise stock options for the 450,000 shares granted
under the Company’s stock plan, all of which had already vested; (vi) reimbursement
for $10,000 in legal fees; (vii) continued D&O insurance coverage; and (viii) the full
amount of his deferred contribution account, payable pursuant to the terms of the
Company’s capital accumulation plan. The evidence shows that the Board refused to
enhance the monetary component of the severance award despite Kistinger’s requests
given his lengthy tenure at the Company. Kistinger’s severance was discussed and
approved at an October 25, 2007 Board meeting.
The SLC found that the decision to grant Kistinger this severance award was not
unreasonable. The SLC found no evidence that Kistinger was involved in any
wrongdoing with regard to the payments in Colombia, which might raise questions
about the propriety of his severance award, and which otherwise recognized his long-
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tenured service to the Company. Accordingly, the SLC found no basis to conclude that
the approval of this severance award was a breach of duty.
Aguirre’s Salary Increases. The SLC next considered the decisions to approve
certain enhancements to Aguirre’s compensation – salary increases and additional stock
option awards – in 2005, 2006, 2007, and 2008. As noted above, Aguirre joined the
Company on January 12, 2004, and was not aware of the only payment to the AUC that
occurred during his tenure until after it was made.
The SLC found that the decision to grant Aguirre these salary enhancements was
not unreasonable. The SLC found evidence that Aguirre’s compensation was set to
provide appropriate performance incentives to serve as CEO and to reflect the
substantial efforts required of him to deal with the significant legal issues created by the
DOJ investigation that were not fully anticipated at the time of his hiring. In addition,
by granting these increases, the Compensation Committee maintained Aguirre’s
compensation in the 75th percentile of peer companies, which the Compensation
Committee concluded was an appropriate benchmark.
This decision was reached with the advice of Michael Kesner, a consultant from
Deloitte, who was engaged by the Compensation Committee. All of these increases and
awards were discussed and approved by the Compensation Committee at meetings or
during discussions, which were held on February 16, 2005, February 15, 2006, April 15,
2007, and February 13, 2008. Finally, as noted above, the SLC found no evidence that
Aguirre was involved in any wrongdoing with regard to the payments; instead, he
helped guide the Company through a perilous period in its history and helped avoid a
potentially catastrophic outcome of the DOJ investigation. Accordingly, the SLC found
no basis to conclude that the approval of Aguirre’s compensation enhancements was a
breach of duty.
Other Salary Increases. Finally, the SLC considered certain salary increases
recommended by Aguirre for Kistinger ($25,000), Olson ($15,000), and Zalla ($10,000)
(among others) – his direct reports – which were approved by the Compensation
Committee at its February 16, 2005 meeting and that related to 2005, along with a salary
increase for Zalla in the amount of $30,000 that was approved by the Compensation
Committee at its July 9, 2007 meeting. The SLC also considered increases in director
compensation, including, among other things, an annual director fee of $80,000 and
shares of common stock having an aggregate fair market value of $80,000, which were
approved by the Board at its February 15, 2007 meeting.243
243
The plaintiffs allege that the increases in the amount of director compensation were granted at a
February 17, 2007 Board meeting, see Am. Compl. ¶ 27. Documents reviewed by the SLC show
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The SLC found that the decision to grant these modest salary increases to the
Company’s most senior executives and its directors was not unreasonable. Raises of
$10,000 to $30,000 were made in the ordinary course of business to senior corporate
officers. The Board had not increased the cash component of its own compensation
since 2002 and believed it was necessary to attract and retain qualified directors because
of the Company’s issues with DOJ and the time being devoted to Board service by the
directors. See Proxy Statement (Form Def 14-A) of Chiquita Brands International Inc.
(Apr. 23, 2007).244 Indeed, director Jeffrey Benjamin had recently resigned from the
Board because of complications to his other gaming-related business activities caused
by the DOJ investigation. Moreover, all of these increases were approved with the
advice of Michael Kesner from Deloitte, the Compensation Committee’s consultant.
Thus, the SLC found no basis to conclude that the approval of these compensation
awards was a breach of duty.
Conclusion. The SLC found no evidence to suggest that the defendants’
decisions to authorize compensation enhancements, severance pay, or retirement
awards, as described above, were tainted by fraud, illegality, or a conflict of interest, or
were grossly negligent. The SLC also found that each determination was made at a
Board or Compensation Committee meeting (sometimes with the advice of an outside
consultant), or following internal discussions, and that none of the awards were
unreasonable. Accordingly, the SLC found that none of these decisions was a breach of
duty.
*
*
*
Retention of Executives and Failure to Pursue Claims. In view of its decision that it
could not conclude that members of management breached their duties with respect to
the payments in Colombia, the SLC concludes that the Board did not breach its duties in
retaining those officers who the plaintiffs allege were involved in wrongdoing. See Am.
Compl. ¶ 119; Eliasberg, 92 A.2d 862 at 867 (“Directors have the discretionary power to
employ, fix compensation and generally to use legitimate ends and means to retain
employees or induce them to continue in the corporation’s service, and in such matters
the honest exercise of business judgment is controlling”) (citations omitted); see also
National Cash Register v. Riner, 424 A.2d 669, 673 (Del. Super. Ct. 1980) (“An employe[r]
that it occurred on February 15. See Proxy Statement (Form Def 14-A) of Chiquita Brands Int’l,
Inc. (Apr. 23, 2007).
244
While there were no increases in director fees from 2002 to 2007, the record shows that there were
changes in the structure of the equity component of director compensation. See Chiquita Brands
Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 23, 2007); Chiquita Brands Int’l Inc., Proxy
Statement (Form Def 14-A) (Apr. 19, 2006); Chiquita Brands Int’l Inc., Proxy Statement (Form Def
14-A) (Apr. 18, 2005); Chiquita Brands Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 20, 2004);
Chiquita Brands Int’l Inc., Proxy Statement (Form Def 14-A) (Apr. 22, 2003).
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is entitled to exercise his sound business judgment, and may fire even an adequate
employee, if the reason is to hire a new employee . . . as long as it is not a pretext for
discrimination”).
Moreover, the SLC found that the defendants did not breach their duties in
failing to pursue claims against the Company’s former and current officers and
directors: the SLC has now considered and rejected those very claims following its
investigation. The SLC found no evidence whatsoever of any “promises not to pursue
[the defendants] civilly for their involvement in the activities which resulted in the
criminal plea of Chiquita.” Am. Compl. ¶ 119. Indeed, as noted above, Olson’s
retirement agreement does not contain a release from liability from the Company.
Likewise, none of the defendants have asserted a promise by the Company not to
pursue claims as an impediment to the SLC’s investigation.
Finally, the SLC found that the plaintiffs’ request in the Amended Complaint for
the dismissal of Jeffrey Zalla likewise lacks merit (see Am. Compl. Prayer for Relief (D));
Zalla played no role whatsoever in the payments and only became CFO in May 2005.
The SLC found no evidence that Zalla, as Corporate Responsibility Officer from 2000 to
May 2005, had any knowledge of, let alone authority over, the payments. He played no
role in the DOJ investigation after the FTO designation was discovered, except to
perform some financial analyses regarding the Company’s ability to pay a fine. None of
the other members of senior management in Cincinnati who are alleged to have been
actively involved in the wrongdoing (see Am. Compl. ¶ 18) related to the payments
remain employed by the Company.245
*
*
*
Accordingly, in the exercise of its business judgment, the SLC has concluded to
seek dismissal of this claim. In exercising that judgment, the SLC took account of the
following factors. First, as discussed at length above, this decision is based on the fact
that the SLC found no breach of duty on the part of any defendant. Second, as is also
discussed at length above, the SLC found that various considerations create, at a
minimum, substantial uncertainty as to whether a viable claim exists and therefore raise
serious questions whether bringing such a claim is in the best interests of the Company.
These considerations are Chiquita’s exculpatory clause and advancement and
indemnity obligations. Third, as discussed below (see Business Judgment
Considerations), the SLC took into account additional factors apart from the legal and
245
The plaintiffs also seek the termination of Robert Kistinger who, as discussed above, is no longer
employed by the Company. The SLC saw no basis to examine the retirement of William Tsacalis,
the corporate controller, who retired from the Company on January 1, 2008 after twenty-eight
years of service; he had little, if any, role in the payments in Colombia and no role in the DOJ
investigation.
258
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Document 202-4
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factual merits of the claims that are relevant to the analysis of whether to bring
litigation.
L.
Business Judgment Considerations
As noted above, in making its determinations as to what course of action is in the
best interests of Chiquita and its shareholders, the SLC also took into account additional
factors apart from the legal and factual merits of the claims that are relevant to the
analysis.
Lack of Bad Faith. The fact that there was no evidence that any defendant, at any
time, acted in bad faith or was motivated by self-interest weighed heavily in the SLC’s
deliberations. While the SLC believes that, at times, the defendants made mistakes,
some more significant than others, those mistakes were made in the belief that the
actions being taken were in the best interests of the Company and were to protect the
lives of the Company’s employees.
Reputational Harm. The SLC concluded that the reputational harm associated
with prolonging what has already been six continuous years of investigation and
litigation, with continued emphasis on the Company’s actions in Colombia, would
inflict substantial further damage on the Company. Rather than pursuing these claims,
which the SLC found to be at best questionable and to have significant factual and legal
flaws, the SLC concluded that the Company’s interests are better served by moving
forward with efforts to restore its image as a leading seller of bananas, tropical fruit,
and other value-added produce.
Cost. The SLC concluded that the costs that will be incurred in connection with
these claims, including legal fees for the Company to pursue the claims effectively and
for counsel for the individual defendants – for whom, under its charter and New Jersey
law, the Company may be required to advance fees – outweigh any potential recovery
that may be obtained in the future, especially given the weaknesses of the claims.
Remedial Steps and Deterrence. As discussed above, the SLC found that
management and the Board appropriately focused on the adequacy of the Company’s
compliance measures and remedial actions implemented following this episode. As a
result, the SLC believes that an event of this nature is unlikely to recur, and therefore,
the deterrent effect of bringing a claim against former officers and directors, whom the
SLC concluded acted in good faith, is outweighed by the negative impact such claims
would have on the Company's current management. Moreover, the SLC, in a project
led by Mr. Barker, who also serves as the Chair of the Board’s Audit Committee, is in
the process of reviewing the improvements to the Company’s compliance program that
have already been made to determine whether any further enhancements are necessary,
and will make recommendations to management as the SLC concludes are appropriate.
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Distraction to Management. The SLC strongly considered the fact that, in its
view, continuing with this litigation would serve to further divert management from its
core mission, which is to increase shareholder value by expanding the profits of the
business.
Accordingly, the SLC, in the exercise of its business judgment, taking all of these
factors into account, is now seeking by motion filed February 25, 2009 to dismiss the
Amended Complaint in its entirety.
260
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VI.
Document 202-4
Entered on FLSD Docket 02/25/2009
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CONCLUSION
The SLC’s nine-month investigation into the plaintiffs’ allegations was wideranging, independent, and exhaustive. At all times, the SLC was guided by the
mandate it was given by the Company’s Board – “to consider and determine whether or
not the prosecution of the claims asserted in the Derivative Litigation . . . is in the best
interests of the Company and its shareholders.” The SLC believes that it has fulfilled
this mandate, and that the conclusions it has reached truly serve the best interests of
Chiquita and its shareholders.
To this end, the SLC is seeking to dismiss all claims as against all defendants, and
has determined that:
•
neither management nor the director defendants breached their fiduciary
duties to Chiquita by making, or allowing payments to be made, to
guerrilla and paramilitary groups from 1989 to September 10, 2001;
•
neither management nor the director defendants breached their fiduciary
duties to Chiquita by making, or allowing payments to be made, to the
AUC from September 10, 2001 (when the AUC was designated an FTO) to
February 20, 2003 (when the Company discovered that designation);
•
the SLC could not conclude that management or the director defendants
breached their fiduciary duties to Chiquita by making, or allowing
payments to be made, to the AUC from February 21, 2003 (after the
discovery of the designation) to January 2004 (when the last such payment
was made); and
•
neither management nor the director defendants breached their fiduciary
duties to Chiquita in connection with (i) any incident related to drug or
arms smuggling, (ii) the sale of Banadex, (iii) the decision to enter into the
guilty plea, (iv) the acquisition of Atlanta AG, (v) the Company’s public
disclosures regarding Colombia and the DOJ investigation, or (vi) the
compensation and severance awards it granted to certain individual
defendants or decisions to retain those individuals.
Because the reasons underlying these determinations are discussed above at
great length, it is unnecessary to reiterate them here. However, the SLC thinks that one
point in particular bears repeating: that, at the conclusion of its investigation, the SLC
found absolutely no evidence to suggest that either the Company’s initial decision to
make payments in Colombia, or its continued payments (even once they were in
knowing violation of the law), were influenced by any motivation other than the sincere
and abiding belief that these actions were necessary to protect the lives of its employees
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and the integrity of its infrastructure. To the contrary, the SLC determined that
Chiquita’s Board and management, faced with an untenable situation, struggled to act
in the best interests of the Company, and to do the right thing. In the SLC’s judgment,
pursuing litigation will only prolong the Company’s entanglement in matters that have
absorbed, distracted, and damaged it for close to six years. For the reasons stated in this
Report, the SLC believes that dismissing the Amended Complaint is plainly in the best
interests of the Company and its shareholders.
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Respectfully Submitted,
Special Litigation Committee
Board of Directors
Chiquita Brands International, Inc.
Howard W. Barker, Jr.
William H. Camp
Dr. Clare M. Hasler
Fried, Frank, Harris, Shriver & Jacobson LLP
Michael R. Bromwich
David B. Hennes
William G. McGuinness
Rachel L. Braunstein
Dianna W. Lamb
Elizabeth L. Fasse
Zachary R. Hall
Katherine A. Raimondo
Laura Israel Sinrod
February 25, 2009
Case 0:08-md-01916-KAM
Document 202-5
Entered on FLSD Docket 02/25/2009
EXHIBIT "B"
Page 1 of 4
Case 0:08-md-01916-KAM
Document 202-5
Entered on FLSD Docket 02/25/2009
Page 2 of 4
CHIQUITA BRANDS INTERNATIONAL, INC.
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected and qualified Senior Vice President, General
Counsel and Secretary of Chiquita Brands International; Inc., a New Jersey corporation (the
"Corporation"), hereby certifies as follows:
Attached as Exhibit A is a true, correct and complete copy of
resolutions adopted by the Board of Directors of the Corporation on
April 3, 2008, and these resolutions have not been rescinded or
modified and are in full force and effect.
IN WITNESS WHEREOF, I have executed this Certificate and affixed the corporate seal
([k:::
as of the J
~~ of May, 2008.
CHIQUITA BRANDS INTERNATIONAL, INC.
Cen-SLC 4-3-08
Case 0:08-md-01916-KAM
Document 202-5
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Page 3 of 4
EXHIBIT A
CHIQUITA BRANDS INTERNATIONAL, INC.
RESOLUTION OF THE BOARD OF DIRECTORS
FORMING SPECIAL LITIGATION COMMITTEE
WHEREAS, the Company, as nominal defendant, certain of its former and
present officers and directors, individually, and Ernst & Young LLP have been
sued in various derivative lawsuits, including Service Employees International
Union v. Hills et al., No. A07-l1383 (Ohio Common Pleas Ct. Hamilton County),
Hawaii Annuity Trust Fundfor Operating Engineers v. Hills et al., No. C-379-07
(N.J. Super. Ct. Ch. Div. Bergen County), and those actions centralized in the
multidistrict litigation proceeding captioned In re: Chiquita Brands International,
Inc., Alien Tort Statute and Shareholders Deriyative Litigation, No. 08-1916
(S.D. Fl.) (together, with any additional related derivative lawsuits that may be
filed in the future, the "Derivative Litigation"); and
WHEREAS, having considered the claims asserted in the Derivative
Litigation, the Board of Directors of the Company has determined that it would be
desirable and in the best interests of the Company and its shareholders to form a
special committee of the Board in response to the Derivative Litigation;
NOW THEREFORE, BE IT RESOLVED, that pursuant to Article II,
Section 2.5 of the Company's Bylaws and Section 14A:6-9 of the New Jersey
Business Corporation Act, the Board of Directors hereby creates a Special
Litigation Committee (the "SLC");
FURTHER RESOLVED, that the SLC shall initially consist of Howard
W. Barker, Jr., Clare M. Hasler, and William H. Camp;
FURTHER RESOLVED, that the SLC shall investigate, review, and
analyze the facts, allegations, and circumstances that are the subject of the
Derivative Litigation, as well as any additional facts, allegations, and
circumstances that may be at issue in any related inquiry, investigation, or
proceeding;
FURTHER RESOLVED, that the SLC shall have the full and exclusive
authority to consider and determine whether or not the prosecution of the claims
asserted in the Derivative Litigation or any other claims related to the facts,
allegations, and circumstances of the Derivative Litigation is in the best interests
of the Company and its shareholders, and what action the Company should take
with respect thereto, including what action the Company should take with respect
to the Derivative Litigation and any related inquiry, investigation, or proceeding;
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FURTHER RESOLVED, that the detenninations made by the SLC shall
be final, shall not be subject to review by the Board of Directors and shall in all
respects be bindingupon the Corporation; and
FURTHER RESOLVED, that the SLC is hereby authorized and directed
to continue in existence until such time as the SLC shall recommend its
dissolution to the Board of Directors;
FURTHER RESOLVED, that the SLC may retain such outside counsel
and other advisors, at the Company's expense, as the SLC may deem necessary or
appropriate to perform its duties hereunder;
FURTHER RESOLVED, that the directors, officers, employees, public
accountants, and advisors of the Company are, and each individually is, hereby
authorized and directed to assist the SLC and to provide it with any and all
documents and other information that the SLC deems necessary to carry out the
duties set forth in the foregoing resolution;
FURTHER RESOLVED, that the officers ofthe Company are authorized
to take all such actions and to perform any and all acts (including execution, filing
and delivery of any and all instruments and documents) that they deem necessary
and appropriate to effectuate the purpose and intent of the foregoing resolution;
and
FURTHER RESOLVED, that all actions heretofore taken by any officer,
employee, agent, or director of the Company in connection with the foregoing be,
and hereby are, ratified and approved in all respects.
Page 4 of 4
Case 0:08-md-01916-KAM
Document 202-6
Entered on FLSD Docket 02/25/2009
EXHIBIT "C"
Page 1 of 3
CaseDefi.nitive
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Proxy Statement Document 202-6
Entered on FLSD Docket 02/25/2009
Page 2 of 3
Page 10f66
DEF 14A 1 ddef14a.htm DEFINITIVE PROXY STATEMENT
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. _ )
Filed by the Registrant [gJ Filed by a Party other than the Registrant 0
Check the
o
o
appropriat~
box:
Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2»
[g]
Definitive Proxy Statement
o
o
Definitive Additional Materials
Soliciting Material Pursuant to §240.l4a-12
CIDQUITA BRANDS INTERNATIONAL
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[g]
No fee required.
o
Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-1 I.
(I) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
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Table of Contents
INFORMATION ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board Governance, Meetings, and Attendance at Meetings
The Board of Directors has adopted Board governance standards and policies, which together with the charters of
the Board committees, provide the framework for corporate governance at Chiquita. The company also has a Code of
Conduct that applies to all employees, including executive officers, as well as to directors to the extent relevant to their
service as directors. Chiquita's Board of Directors cun'ently has four standing committees: Audit, Compensation &
Organization Development, Food Innovation, Safety & Technology and Nominating & Governance. The Executive
Committee of the Board, which existed for many years but had not been used since 2000, was eliminated in May 2007. The
Board could reestablish the committee in the future should it identify a need to do so. Each current committee is comprised
solely of directors who are "independent" as defined by New York Stock Exchange ("NYSE") rules, and the Board has
adopted a charter for each. The Board governance policies, Code of Conduct, and committee charters are available on the
company's website at www.chiQuita.com by clicking on "Investors" and "Governance." You may request a copy of any of
these documents to be mailed to you as described on page 57 of this proxy statement. Any amendments to, or waivers from,
the Code of Conduct that apply to the company's principal executive and financial officers will be posted on the company's
website. At the date of this proxy statement, no such waivers have been requested or granted.
NYSE rules require a majority of the board of directors of a listed company to be "independent." The Board has
determined that the following directors are "independent" as defined by the NYSE; Mr. Arntzen, Mr. Barker, Mr.Camp,
Mr. Fisher, Dr. Hasler, Mr. Jager, Mr. Serra and Mr. Stanbrook. This determination was based on categorical standards
adopted by the Board that are consistent with the definition of "independent" contained in the NYSE rules. These standards
are available on the company's website at www.chiguita.com by clicking on "Investors" and "Governance."
Jeffrey D. Benjamin served as an independent director of the Board and as a member of the Audit and
Compensation & Organizational Development Committees until his resignation on February 6, 2007, and Roderick M. Hills
served as an independent director and as a member of the Audit Committee until his retirement on May 24, 2007. Mr. Barker
was appointed as a director and member of the Audit Committee on September 21,2007. Mr. Camp was appointed a director
on April 3, 2008. Both of them were determined to be independent on the dates of their appointments. Mr. Arntzen will retire
from service on the Board and its committees on May 22, 2008 immediately prior tathe Annual Meeting.
Under the Board's governance standards and policies, directors are expected to attend all scheduled Board and
committee meetings. During 2007, the Board of Directors held 14 meetings and took action by unanimous written consent
two times. Each director who served on the Board of Directors in 2007 being nominated for re-election attended at least 75%
of the meetings of the Board and of each committee on which he or she served.
.
The company's non-management directors, all ofwhom are also independent directors, generally meet in
conjunction with each regularly scheduled Board meeting in a separate "executive session." The Chair of the Nominating &
Governance Committee, currently Mr. Jager, presides at all of these sessions.
Directors are also expected to attend the Annual Meeting of Shareholders. Last year, all of the directors then
serving on the Board attended the Annual Meeting.
13
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