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Over the last few years 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?

1. 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.
2. 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.
3. Minutes of board meetings should be well documented.

• Time and place,
• Who was present and who was not,
• Venue – telephone, in person,
• All voting should indicate who the dissenting voters, if any, were,
• Questions to management and their answers should be documented in detail.
• 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.
• 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.
• 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.

• The agenda for a board meeting should be sent out in advance and should allow directors enough time to add items.
• 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.

4. There are numerous items that directors should make themselves aware of to ensure that their corporations are not subject to lawsuits.

• 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.
• Directors should be aware of local, state and federal regulations pertaining to handicapped access.
• Directors should be aware of local, state and federal regulations pertaining to environmental and biological hazard and disposal concerns.
• Directors should be aware of how the company sets its prices.
• Directors should be aware of any and all predatory sales and marketing practices.
• Directors should scrutinize any and all loans or special benefits given to employees, especially senior management.
• 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.

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