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08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 2 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 3 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 4 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 5 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 6 of 269 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 iv Case 0 08-md-01916-KAM I Document 202-4 Entered on FLSD Docket 02 25 2009 Page 7 of 269 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 1 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 8 of 269 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 2 Case 0 08-md-01916-KAM II Document 202-4 Entered on FLSD Docket 02 25 2009 Page 9 of 269 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 3 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 10 of 269 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 4 Case 0 08-md-01916-KAM 2 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 11 of 269 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 5 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 12 of 269 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 6 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 13 of 269 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 7 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 14 of 269 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 8 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 15 of 269 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 9 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 16 of 269 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 10 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 17 of 269 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 11 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 18 of 269 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 12 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 19 of 269 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 13 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 20 of 269 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 14 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 21 of 269 906 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 Case 0 08-md-01916-KAM III Document 202-4 Entered on FLSD Docket 02 25 2009 Page 22 of 269 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 17 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 24 of 269 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 Entered on FLSD Docket 02 25 2009 Page 26 of 269 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 Case 0 08-md-01916-KAM 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 Case 0 08-md-01916-KAM 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 23 Case 0 08-md-01916-KAM 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 31 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 32 of 269 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 Case 0 08-md-01916-KAM IV Document 202-4 Entered on FLSD Docket 02 25 2009 Page 33 of 269 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 27 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 34 of 269 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 28 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 35 of 269 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 29 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 36 of 269 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 30 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 37 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 38 of 269 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 32 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 39 of 269 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 33 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 40 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 41 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 42 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 43 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 44 of 269 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 38 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 45 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 46 of 269 #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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 47 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 48 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 49 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 50 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 51 of 269 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 45 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 52 of 269 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 46 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 53 of 269 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 ” 47 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 54 of 269 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 48 Case 0 08-md-01916-KAM 2 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 55 of 269 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 49 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 56 of 269 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 50 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 57 of 269 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 51 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 58 of 269 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 52 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 59 of 269 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 53 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 60 of 269 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 ” 54 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 61 of 269 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 55 Case 0 08-md-01916-KAM D Document 202-4 Entered on FLSD Docket 02 25 2009 Page 62 of 269 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 56 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 63 of 269 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 57 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 64 of 269 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 58 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 65 of 269 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 59 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 66 of 269 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 60 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 67 of 269 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 61 Case 0 08-md-01916-KAM F Document 202-4 Entered on FLSD Docket 02 25 2009 Page 68 of 269 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 62 Case 0 08-md-01916-KAM 2 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 69 of 269 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 63 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 70 of 269 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 64 Case 0 08-md-01916-KAM 4 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 71 of 269 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 65 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 72 of 269 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 66 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 73 of 269 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 67 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 74 of 269 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 68 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 75 of 269 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 69 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 76 of 269 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 70 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 77 of 269 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 71 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 78 of 269 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 72 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 79 of 269 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 73 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 80 of 269 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 74 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 81 of 269 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 75 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 82 of 269 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 76 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 83 of 269 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 77 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 84 of 269 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 78 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 85 of 269 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 79 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 86 of 269 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 ” 80 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 87 of 269 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 81 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 88 of 269 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 82 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 89 of 269 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 83 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 90 of 269 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 84 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 91 of 269 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 85 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 92 of 269 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 86 Case 0 08-md-01916-KAM 3 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 93 of 269 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 87 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 94 of 269 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 88 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 95 of 269 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 89 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 96 of 269 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 90 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 97 of 269 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 91 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 98 of 269 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 92 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 99 of 269 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 93 Case 0 08-md-01916-KAM 3 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 100 of 269 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 94 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 101 of 269 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 95 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 102 of 269 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 96 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 103 of 269 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 97 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 104 of 269 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 98 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 105 of 269 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 99 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 106 of 269 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 100 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 107 of 269 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 101 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 108 of 269 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 102 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 109 of 269 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 103 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 110 of 269 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 104 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 111 of 269 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 105 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 112 of 269 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 106 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 113 of 269 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 107 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 114 of 269 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 108 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 115 of 269 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 109 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 116 of 269 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 110 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 117 of 269 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 111 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 118 of 269 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 112 Case 0 08-md-01916-KAM Y Document 202-4 Entered on FLSD Docket 02 25 2009 Page 119 of 269 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 113 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 120 of 269 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 114 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 121 of 269 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 115 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 122 of 269 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 116 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 123 of 269 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 117 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 124 of 269 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 118 Case 0 08-md-01916-KAM Z Document 202-4 Entered on FLSD Docket 02 25 2009 Page 125 of 269 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 119 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 126 of 269 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 120 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 127 of 269 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 121 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 128 of 269 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 122 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 129 of 269 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 8 123 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 130 of 269 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 124 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 131 of 269 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 125 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 132 of 269 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 126 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 133 of 269 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 127 Case 0 08-md-01916-KAM 8 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 134 of 269 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 128 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 135 of 269 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 129 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 136 of 269 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 130 Case 0 08-md-01916-KAM 4 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 137 of 269 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 131 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 138 of 269 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 132 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 139 of 269 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 133 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 140 of 269 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 134 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 141 of 269 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 135 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 142 of 269 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- 136 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 143 of 269 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 137 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 144 of 269 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 138 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 145 of 269 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 139 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 146 of 269 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 140 Case 0 08-md-01916-KAM 3 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 147 of 269 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 141 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 148 of 269 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 142 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 149 of 269 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 143 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 150 of 269 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 144 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 151 of 269 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 145 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 152 of 269 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 146 Case 0 08-md-01916-KAM 1 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 153 of 269 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 147 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 154 of 269 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 148 Case 0 08-md-01916-KAM 4 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 155 of 269 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 149 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 156 of 269 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 150 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 157 of 269 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 151 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 158 of 269 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 152 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 159 of 269 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 153 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 160 of 269 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 154 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 161 of 269 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 155 Case 0 08-md-01916-KAM V Document 202-4 Entered on FLSD Docket 02 25 2009 Page 162 of 269 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 156 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 163 of 269 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 157 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 164 of 269 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 747 158 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 165 of 269 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” 159 Case 0 08-md-01916-KAM Document 202-4 a Entered on FLSD Docket 02 25 2009 Page 166 of 269 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 160 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 167 of 269 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 161 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 168 of 269 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 162 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 169 of 269 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 163 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 170 of 269 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 164 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 171 of 269 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 165 Case 0 08-md-01916-KAM 1 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 172 of 269 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 166 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 173 of 269 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 167 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 174 of 269 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 168 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 175 of 269 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 169 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 176 of 269 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 170 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 177 of 269 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 171 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 178 of 269 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 172 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 179 of 269 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” 173 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 180 of 269 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” 174 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 181 of 269 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 175 Case 0 08-md-01916-KAM Document 202-4 a Entered on FLSD Docket 02 25 2009 Page 182 of 269 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 176 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 183 of 269 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 177 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 184 of 269 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 178 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 185 of 269 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 179 Case 0 08-md-01916-KAM Document 202-4 c Entered on FLSD Docket 02 25 2009 Page 186 of 269 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 180 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 187 of 269 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 181 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 188 of 269 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 182 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 189 of 269 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 183 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 190 of 269 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 184 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 191 of 269 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 185 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 192 of 269 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 186 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 193 of 269 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 187 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 194 of 269 #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 188 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 195 of 269 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 189 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 196 of 269 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 190 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 197 of 269 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 191 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 198 of 269 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 192 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 199 of 269 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 193 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 200 of 269 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 194 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 201 of 269 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 195 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 202 of 269 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 196 Case 0 08-md-01916-KAM Document 202-4 b Entered on FLSD Docket 02 25 2009 Page 203 of 269 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 197 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 204 of 269 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 819-2 198 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 205 of 269 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 199 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 206 of 269 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 200 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 207 of 269 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 201 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 208 of 269 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” 202 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 209 of 269 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 203 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 210 of 269 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 204 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 211 of 269 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 205 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 212 of 269 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 206 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 213 of 269 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 207 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 214 of 269 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 208 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 215 of 269 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 209 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 216 of 269 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 210 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 217 of 269 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 211 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 218 of 269 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 212 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 219 of 269 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 213 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 220 of 269 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 214 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 221 of 269 • 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 215 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 222 of 269 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 216 Case 0 08-md-01916-KAM F Document 202-4 Entered on FLSD Docket 02 25 2009 Page 223 of 269 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 217 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 224 of 269 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” 218 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 225 of 269 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 219 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 226 of 269 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 Case 0 08-md-01916-KAM 2 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 227 of 269 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 $54 221 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 228 of 269 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 222 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 229 of 269 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 223 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 230 of 269 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 224 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 231 of 269 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 225 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 232 of 269 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 226 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 233 of 269 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 227 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 234 of 269 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 228 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 235 of 269 • 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 229 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 236 of 269 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 230 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 237 of 269 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 231 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 238 of 269 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 232 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 239 of 269 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 233 Case 0 08-md-01916-KAM 2 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 240 of 269 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 234 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 241 of 269 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 235 Case 0 08-md-01916-KAM J Document 202-4 Entered on FLSD Docket 02 25 2009 Page 242 of 269 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 236 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 243 of 269 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 237 Case 0 08-md-01916-KAM 2 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 244 of 269 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 238 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 245 of 269 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 239 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 246 of 269 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 240 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 247 of 269 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 241 Case 0 08-md-01916-KAM Document 202-4 b Entered on FLSD Docket 02 25 2009 Page 248 of 269 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 242 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 249 of 269 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 243 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 250 of 269 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 ¶ 87 244 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 251 of 269 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 ” 245 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 252 of 269 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 246 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 253 of 269 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 247 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 254 of 269 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 248 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 255 of 269 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 97 249 Case 0 08-md-01916-KAM 3 Document 202-4 Entered on FLSD Docket 02 25 2009 Page 256 of 269 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 250 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 257 of 269 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 251 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 258 of 269 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 249 252 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 259 of 269 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 253 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 260 of 269 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 254 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 261 of 269 “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- 255 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 262 of 269 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 256 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 263 of 269 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 257 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 264 of 269 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 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 265 of 269 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 259 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 266 of 269 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 Case 0 08-md-01916-KAM VI Document 202-4 Entered on FLSD Docket 02 25 2009 Page 267 of 269 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 261 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 268 of 269 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 262 Case 0 08-md-01916-KAM Document 202-4 Entered on FLSD Docket 02 25 2009 Page 269 of 269 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 Page 1 of 4 Case 0 08-md-01916-KAM Document 202-5 Entered on FLSD Docket 02 25 2009 Page 2 of 4 Case 0 08-md-01916-KAM Document 202-5 Entered on FLSD Docket 02 25 2009 Page 3 of 4 Case 0 08-md-01916-KAM Document 202-5 Entered on FLSD Docket 02 25 2009 Page 4 of 4 Case 0 08-md-01916-KAM Document 202-6 Entered on FLSD Docket 02 25 2009 Page 1 of 3 Case 0 08-md-01916-KAM Document 202-6 Entered on FLSD Docket 02 25 2009 Page 2 of 3 Case 0 08-md-01916-KAM Document 202-6 Entered on FLSD Docket 02 25 2009 Page 3 of 3                     National Security Archive    Suite 701  Gelman Library  The George Washington University    2130 H Street  NW  Washington  D C  20037    Phone  202 994‐7000  Fax  202 994‐7005 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