An unfortunate issue for publicly traded companies that file voluntary disclosures is what seems to be an increasing trend: plaintiffs’ lawyers specializing in derivative shareholder suits circling the company looking for a kill. This seems to be particularly true if there is a whiff of Iran in the voluntary disclosure, something that attracts plaintiffs’ lawyers like buckets of chum in the water, the lawyers well knowing that once they can ominously whisper Iran in front of jury, their contingent fee award and that new Ferrari are a done deal.

Here’s a particularly instructive example of a plaintiffs’ firm called Harwood Feffer LLP trolling for plaintiffs in a press release on PR Newswire on the heels of a company’s voluntary disclosure to OFAC and BIS:

Harwood Feffer LLP … is investigating potential claims against the board of directors of VASCO Data Security International, Inc. … concerning whether the board has breached its fiduciary duties to shareholders.

On July 21, 2015, VASCO disclosed that certain of its products may have been illegally sold to parties in Iran subject to economic sanctions. The Company has notified the U.S. Department of the Treasury, Office of Foreign Assets Control and the U.S. Department of Commerce, Bureau of Industry and Security and will report to them the full extent of the violations once an internal review has been completed.

…

If you own VASCO shares and wish to discuss this matter with us, or have any questions concerning your rights and interests with regard to this matter, please contact [us].

Oh dear. That sounds grim. The company’s products sold “to parties in Iran subject to economic sanctions.” Somebody better get out their checkbooks so that Mr. Harwood and Mr. Feffer can make the down payment on that Ferrari. (Nevermind, of course, the misunderstanding of U.S. sanctions evinced by “sold to parties in Iran subject to economic sanctions” . . . as if there were parties in Iran not subject to sanctions.)

But, of course, this frightening scenario cooked up by Harwood Feffer loses most, if not all, of its steam when you look at the SEC filing that prompted the Harwood Feffer “investigation.”

VASCO regularly sells products through third party distributors, resellers and integrators (collectively “Resellers”). VASCO’s standard terms and conditions of sale and template agreements that are in general use prohibit sales and exports of any VASCO products contrary to applicable laws and regulations, including United States export control and economic sanctions laws and regulations. VASCO, however, does not always have visibility over its Reseller’s ultimate customers.

VASCO management has recently become aware that certain of its products which were sold by a VASCO European subsidiary to a third-party distributor may have been resold by the distributor to parties in Iran … .

The Audit Committee of the Company’s Board of Direc.tors has initiated an internal investigation to review this matter with the assistance of outside counsel. VASCO has stopped all shipments to such distributor pending the outcome of the investigation which will include a review and recommendations to improve, if necessary, VASCO’s applicable compliance procedures regarding these matters. As a precautionary matter, concurrent initial notices of voluntary disclosure were submitted on June 25, 2015 with each of the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), and the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”). The Company will file a further report with each of OFAC and BIS after completing its review and fully intends to cooperate with both agencies.

Regular readers of this blog will, no doubt, find risible claims that the actions by VASCO management described above are a breach of fiduciary duty. The products were not sold by VASCO but by a distributor under a contractual obligation not to resell the products to Iran. VASCO, once it learned of the sales, halted all sales to the distributor, commenced an internal investigation, and filed precautionary initial notifications with BIS and OFAC. In other words, they followed what appear to have been best practices in such a situation. And now, they have to deal with the likes of Messrs. Harwood and Feffer.

There are two lessons here. First, the potential discovery requests from plaintiff’s lawyers in search of contingent fee awards mean that companies must be particularly careful to assure that the internal investigation is covered, to the extent possible, by attorney-client privilege. Second, I think publicly traded companies will begin to re-evaluate filing precautionary initial notices of voluntary disclosure with respect to sales made, without the company’s knowledge or consent, to embargoed countries. Rather, I think we’ll see companies decide to conduct a robust internal investigation and then file an initial notification only if that investigation turns up evidence that the company or its employees knew of, or consented to, the sales in question.

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