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Over the last 22 months more than 75 security class action lawsuits
were settled on behalf of investors. The value of the settlements
and awards was in excess of $4.3 Billion. That equates to more than
$56 Million per case. (The $4.3 Billion does not include the $2.65
Billion settlement in the Citigroup/Worldcom case).
76% of the class action lawsuits were based on allegations that the
defendants violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 by making a series of materially false and
misleading statements and/or omissions. That as a result of these
materially false and misleading statements and/or omissions the
price at which the securities were traded in the public market was
artificially inflated.
20% of the class action lawsuits are based on materially false and
misleading statements and omissions or failing to follow the terms
outlined in a Prospectus and/or Prospectus Supplements.
27% of the class action lawsuits named officers and directors as
defendants (some by name, others by position).
32 additional security class action lawsuits were pending at the
time of writing this report.
At a minimum, 7 legal firms are actively pursuing security class
action lawsuits. These firms are expending hundreds of thousands of
dollars searching through company press releases, financial reports
and prospectuses looking for potential areas of “wrong doing”. If
and when they believe they have identified a company that has
violated a section of the securities act they advertise for “lead
plaintiffs”. In other words, these law firms do not wait for someone
to come to them with a potential class action case, they create the
potential class action case and then look for lead plaintiffs. In my
opinion this is the new breed of “ambulance chaser” and it is
substantially more lucrative than medical claims.
Although the vast majority of companies carry insurance to protect
against these types of potential liabilities, including protection
for their officers and directors, there is no insurance
reimbursement that covers the time spent by staff, officers and
directors responding to the allegations, time spent in discovery,
and the fact that lawsuits are a major disruption to a company’s
ability to focus on doing business. Many of the aforementioned
lawsuits were in the system for more than 3 years. That’s 3 years of
continuous disruption.
Directors could be facing a much greater degree of personal
liability.
What can directors do to assist their respective companies in
avoiding lawsuits?
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A director’s committee be set up to approve all information
disseminated to the public. This includes yearend financial reports,
quarterly financial reports and any and all press releases that are
not oriented towards products or services. This committee should
also be responsible to ensure that all “material information” is
disseminated to the public. In many cases, it is not what was
disclosed, it is what was not disclosed that gets a company into
trouble.
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Individuals should limit the number of boards that they sit on
and for those boards that they choose to be a member of, limit the
number of special committees that they serve on.
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Minutes of board meetings should be well documented.
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Time and place,
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Who was present and who was not,
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Venue – telephone, in person,
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All voting should indicate who the dissenting voters, if any,
were,
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Questions to management and their answers should be documented in
detail.
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Every board meeting should have an agenda item called
“disclosure”. Whereby the board asks management specifically if
there are any items that should be made public. One of the major
problems with the dissemination of “material information” is of
course the timing. As board meetings generally do not take place
more often than every quarter a method to ensure that “material
information” is disseminated immediately must be implemented. It is
highly unusual, if management is doing its job that directors would
not be aware of material items taking place within a company that
should be disseminated to the public.
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Committees should make formal reports to the other directors,
which become part of the minutes, at every board meeting. It would
be advantageous if reports were distributed with the agenda to allow
directors sufficient time to absorb the information contained within
the reports.
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Compensation committees must detail and record all parts of
remuneration packages given to senior management and ensure that
they are placed in the minutes of board meetings.
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The minutes of the previous board meeting should be approved at
the next board meeting, but it should be sent to directors within 3
days from the time the meeting took place. Speed is important, if it
takes to long for minutes of a previous meeting to arrive Directors
cannot be expected to remember and comment on what was said.
Directors should scrutinize the minutes to make sure that they are
accurate, not only in what they do say, but what may have been
inadvertently left out.
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The agenda for a board meeting should be sent out in advance and
should allow directors enough time to add items.
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A pre board meeting package should be sent to directors allowing
them sufficient time and information so that they can be fully
prepared to discuss agenda items. Management should not “spring”
important items to be dealt with at board meetings and then require
immediate decisions by directors.
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There are numerous items that directors should make themselves
aware of to ensure that their corporations are not subject to
lawsuits.
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Directors should ensure that the company has and follows
guidelines for equal pay and promotion opportunities across sectors
of age, religion, sex, marital status, sexual orientation and race.
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Directors should be aware of local, state and federal regulations
pertaining to handicapped access.
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Directors should be aware of local, state and federal regulations
pertaining to environmental and biological hazard and disposal
concerns.
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Directors should be aware of how the company sets its prices.
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Directors should be aware of any and all predatory sales and
marketing practices.
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Directors should scrutinize any and all loans or special benefits
given to employees, especially senior management.
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Directors should make themselves aware of their fiduciary
responsibilities with respect to takeovers and mergers. In that
regard they may wish to read a document by Arthur Fleisher, Jr. and
Alexander R. Sussman titled “Directors’ Fiduciary Duties In
Takeovers And Mergers”. The document can be found at
http://www.ffhsj.com/
Note: All statements made in this article are general in nature, not
legal advice and not warranted or guaranteed. Readers are cautioned
not to rely on this information. Because laws change over time and
in different jurisdictions, it is imperative that you consult an
attorney in your area regarding specific legal matters. |
