Western Union Taken to Task in Scorching Derivative Complaint

DENVER (CN) - Western Union's board of directors recklessly abdicated their duties to prevent money laundering, drug trafficking and human trafficking, then lied about the costs of its fines, penalties and complying with consent orders -- all to prop up its stock price, an investment fund claims in a derivative complaint.

The Mayar Fund LTD, of the Cayman Islands, sued Western Union's 11-member board on behalf of the company, in Federal Court.

The company paid lead defendants CEO Hikmet Ersek $27 million in salary, bonuses, stock options and other compensation from 2009 to 2012, and $9.5 million to CFO Scott Scheirman from 2009 until he resigned in late 2013, according to the lawsuit. The nine other defendant directors received a total of more than $2 million a year since 2012, the complaint states.

And what did the company and its shareholders get for this, according to the complaint: "conscious and reckless abdication of their oversight responsibilities to ensure that Western Union's services were not used to facilitate national or cross-border illicit and illegal activities, including money laundering, drug trafficking, and human trafficking. Under defendants' direction, since 2003, the company has been subject to investigations, fines, penalties, and consent orders with a number of federal and state regulators. Each successive investigation and settlement has resulted in yet another penalty and yet another solemn promise by defendants to ensure that the business of the company - including through its agents scattered across the country and in Mexico and other countries - is not used to facilitate money laundering and other illicit activities."

Complying with a money-laundering agreement with Arizona alone cost the company nearly twice the $23 million it told shareholders it would cost, Western Union had to close 40 percent of its Mexican outlets because it could not guarantee they would comply with the "heightened standards," and all along, the defendant directors had the company repurchase "millions" of its own shares, at prices inflated by their omissions and misrepresentations, to keep the share price propped up, according to the 65-page lawsuit.

It states: "On February 11, 2010, Western Union entered into a settlement agreement with the State of Arizona ('Arizona') to resolve Arizona's longstanding charges against Western Union that the company's services were being used to illegally launder money and facilitate other criminal activity (the 'Arizona Settlement Agreement' the 'Southwest Border Agreement' or the 'Agreement'). Arizona's prosecution of Western Union was the culmination of a prolonged investigation concerning the defendants' refusal to meaningfully prevent the company's services from being used to facilitate, not only money laundering, but also drug trafficking and even human trafficking. It came on the heels of the company repeatedly having been accused of, and having settled, charges by various state and federal regulators that Western Union agents had knowingly violated anti-money-laundering laws or otherwise facilitated money laundering, including for human trafficking and drug trafficking.

"The Arizona Settlement Agreement provided that Western Union would reimburse Arizona up to $21 million for certain of its costs associated with the investigation and pay up to $50 million to fund a multi-state not-for-profit organization promoting safety and security along the U.S. and Mexico border. Additionally, Western Union was required to make specific upgrades to its compliance program along the U.S. and Mexico border and to engage a monitor of that process, which defendants stated were expected to cost up to $23 million through 2013.

"In order to comply with the Southwest Border Agreement, the company was forced to enact sweeping changes to its business and compliance program, particularly in its operations in Mexico. These changes have caused the company to lose a significant amount of business and, even worse, have cost almost double of what Defendants represented to shareholders that it would cost - over $40 million compared to the $23 million estimated in 2010 - and have yet to be fully implemented, putting the company at risk of being held in breach of the Arizona Settlement Agreement and likely to expend a substantial amount more on complying with its terms. Only a last-minute reprieve in the form of an extension of the term of the Agreement on January 31, 2014 prevented the company from facing immediate sanctions by the State of Arizona. At the same time, however, this amended Agreement imposed significant new costs and risks on Western Union.

In an effort to conceal the full ramifications of the Arizona Settlement Agreement from shareholders, defendants made material misrepresentation to shareholders concerning the company's actual financial condition, causing Western Union's stock price to be artificially inflated during the relevant period and subject the company to liability and damages to shareholders, including in class actions filed under the federal securities laws. In addition, defendants, knowing the true financial condition of the company, caused Western Union to repurchase hundreds of millions of shares of its common stock on the open market, at the same artificially inflated prices, directly injuring the company to the extent of such price inflation.

Among other things defendants caused the company to report increasing revenues from the Consumer-to-Consumer segment during the relevant period. In addition, defendants repeatedly affirmed that such revenue increases would continue. Defendants even boasted that the company's ability to prevent money laundering was one of its particular 'strengths' and 'competitive advantages.'"

But by February this year the company had had to reveal the true costs of complying with consent orders, the closings of two out of every five of its Mexican outlets, the fact that it still was not complying with all the court orders, and the additional costs all this was imposing on the company and its stockholders.

All these allegations are taken from a 7-page Introduction, which concludes: "As shown in its current share price, at the hands of defendants Western Union's reputation for honesty and integrity has been ruined. The company will face increased costs of borrowing or raising equity capital in the future and will trade at a 'liar's discount' in the public stock market for the foreseeable future.

"Finally, defendant Scheirman took advantage of the concealment of the true facts about the company, and sold approximately 26,916 shares of company stock - for proceeds of over $481,000 - based on material non-public information during the last year alone. In so doing, he misappropriated confidential information of Western Union and must account for all profits on the ill-gotten proceeds of these sales."

The Mayar Fund seeks disgorgement and restitution, injunctions, damages for securities violations, breach of fiduciary duty, corporate waste, and unjust enrichment (against Ersek and Scheirman), reformation of and strengthening of corporate governance, and costs of suit.

They are represented by Jeffrey Berens in Denver.

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