Fighter Planes, Kickbacks, and the Shareholder's Power to Stop

In September 2007,the City of Harper Woods Employees Retirement System filed a derivative suit on behalf of BAE Systems, LLC, against, among others, the entire current BAE board of directors, several officers and directors, and the Saudi Crown Prince and former Saudi Ambassador to the United States, Bandar Bin Sultan.  BAE Systems (BAE) is a UK based defense contractor that generates approximately 40% of its annual revenues from sales of military equipment and technology in the United States. BAE is a public company that has American Depository Receipts (ADRs) registered with United States Securities and Exchange Commission (SEC) and traded over-the-counter market.

Plaintiff claims that the defendant board of directors and officers collectively breached their "fiduciary duties of care, control, and candor" involving "improper and/or illegal bribes, kickbacks and other payments."  The payments and the false and misleading statements used to conceal them were alleged to have violated the Foreign Corrupt Practices Act and the OECD anti-corruption convention. 

Much of the lawsuit centers around a contract obtained from Saudi Arabia, involving the sale of 120 fighter/bomber aircraft over a period of more than two decades.  According to the complaint:

• To advance their own positions with BAE by winning the Al-Yamamah contract, the then officers and directors of BAE . . . undertook illegal and improper conduct . . . including paying bribes or kickbacks (a/k/a "backhanders") to Bandar and making other improper payments for his (and his family's benefit, which have amounted to over $2 billon over the last 20 years . . . These illegal or improper payments were secretly bargained for at the outset of the Al-Yamamah contract."

Thecomplaint contends that Bandar spent "over $100 million to build one of the largest and most lavish personal residences in the U.S., located in Aspen, Colorado" and that BAE paid for other expenses, including "his fantastically outfitted Airbus private aircraft, which cost over $100 million, and expenses for members of his family, including millions of dollars paid for a lavish multi-week, multi-country honeymoon for Bandar's daughter and new son-in-law."  The complaint also asserted that the payments are under investigation by the Department of Justice and the SEC. 

The complaint also contends that the Washington D.C. based Riggs Bank (ultimately acquired by PNC) played a crucial role in furthering the mismanagement by helping defendant directors funnel a total of nearly two billion dollars into an account at Riggs controlled by Prince Bandar.  The complaint asserted that Riggs was also used "to route Saudi money to 9/11 hijackers" and to assist Augusto Pinochet, among other things.  See Complaint, at 5 n. 3.  

As a foreign company, the complaint alleges fiduciary violations under the UK Companies Act.  See paragraph 67.  As for demand excusal, the complaint asserts that the "misconduct herein is so egregious that it has created a substantial fear of criminal or civil liability."

This case is currently pending before Judge Rosemary M. Collyer in the United States District Court for the District of Columbia. The Race to the Bottom will continue to monitor this case and provide updates. The primary materials for this case may be found on the DU Corporate Governance website.