What happened
Shares of European telecom equipment maker Ericsson (ERIC -1.49%) were plunging on Wednesday, down roughly 10% as of this writing.
Ericsson delivered its fourth-quarter earnings report in January, and there wasn't any material operating news out of the company today. However, there was troubling news on another front.
On Wednesday, the U.S. Department of Justice laid some damning allegations, accusing Ericsson of violating terms of a 2019 corruption settlement, with particularly troubling allegations over the company's conduct in Iraq.
So what
Back in 2019, Ericsson signed a deferred prosecution agreement (DPA) with the Department of Justice (DOJ) and paid a $1 billion fine to settle bribery charges having to do with five separate countries over the past decade. A DPA is essentially like a probationary settlement, whereby the DOJ could bring charges again if it finds the terms of the DPA have been violated.
In October of 2021, the DOJ accused Ericsson of violating the DPA by failing to provide documents regarding its actions in Iraq. And on Wednesday, the DOJ found that the company had violated that agreement for a second time.
The company claimed a month ago that its internal 2019 investigation and associated disclosure were sufficient, even laying out potential bribes to members of ISIS in Iraq. However, it appears even that internal investigation didn't reveal enough to satisfy the DOJ, which claims the company is still withholding information.
Image source: Getty Images.
Now what
Ericsson is one of only a handful of vendors of equipment necessary for implementing 5G networks, and one of its other major competitors is Chinese telecom giant Huawei, which has also come under the spotlight of U.S. sanctions. That puts Ericsson somewhat in a position of power, as many global telecom companies are dependent on its equipment.
Disturbingly, that position of power may have led to hubris on the part of management, which appears to be, or at least appeared to have been in the past, very ready to use bribes and other corrupt practices to win contracts around the world. In certain countries, it's possible Ericsson would have had to match favors or lower costs offered by Huawei.
Still, it appears that the DOJ believes top executives still aren't being forthcoming with all information, which means there could be more damning allegations to come in the future, and more potential fines. While it's impossible for investors to know exactly where the truth lies, and to what extent there may be further monetary damages, it's pretty difficult to invest in Ericsson at this point, even with today's discount.
