Bribery doesn’t necessarily add up to securities fraud.

What happens to a company that pays $420,000 in unlawful consulting fees to a state senator whose legislative committees oversees the company’s activities?  Good government?

What about when the truth outs?  Can you say plunge in price per share?

A 42-month series of $10,000 payments to a Tennessee lawmaker lay at the heart of a putative class action against a healthcare company for securities fraud.  The complaint alleged that the bribery resulted in scandal, which produced regulatory action, which gave Wall Street heartburn, which generated a big drop in the market value of United American Healthcare’s stock. Zaluski v. United American Healthcare Corp., No. 07-1298 (6th Cir. May 27, 2008).

The concatenation of events gives a clue as to why the district court dismissed and the Sixth Circuit affirmed:  bribery generally doesn’t violate section 10(b) of the Securities Exchange Act.  And, because it doesn’t, you wouldn’t expect a public company to make representations about whether or not greasing the palm of an overseeing solon has gone on.

The Sixth Circuit did a nice job of dissecting the complaint.  Reminding Blawgletter of a grand old common law case — in which one of the 19th-century English judges pronounced a statement "a mere puff" — the court deemed a happy assurance (that the state counted the company among "viable" managed care organizations) to constitute "immaterial puffery".

But the guts of the decision emphasized the indirectness of the connection between paying bribes and a plummeting share price.  The jump off a cliff doesn’t kill you, the court reasoned; the sudden stop at the bottom does.  Quod erat demonstrandum.

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