Shares in the Brazilian based airplane manufacturer, Embraer S.A. have declined substantially since the US Securities Exchange Commission recently announced its investigation into Embraer for possible violations of the US Foreign Corrupt Practices Act.

Embraer is listed in San Paolo, on Brazil’s benchmark Bovespa index as well as on the New York Stock Exchange.

The FCPA prohibits companies which are listed in the United States from bribing foreign government officials or making other illegal payments to obtain or retain business.  Sanctions include criminal fines, civil disgorgement and possible debarment from public procurement contracts with the US government.  In addition, executives may be sentenced to 5 years in prison.

Embraer itself has revealed that it has hired external lawyers to conduct an internal investigation into transactions in several countries. Embraer is quoted as saying:

“The company is unable to foresee the duration, the scope or the results of the investigation”.

This statement is very telling and, in our view, accurate: once you are being investigated by prosecutors you need to be prepared for a very long haul (possibly several years), high legal costs and a great deal of management time will be incurred, not to mention the intense media interest and damaging headlines.  Further, you will be totally unable to predict the end of the investigation.  It can take many years for it to be completed, especially if it involves investigations and prosecutions in other jurisdictions.

In addition, of course, a company’s share price may become depressed, because the market and especially the analysts fear that large and costly fines may be imposed on the company by different regulators or courts around the world.