Many of the new reforms look to make companies sitting ducks for more and costlier shareholders’ lawsuits. The federal statute of limitations on such cases has jumped from one year to two, and accounting fraud is now labeled a crime, which makes it uninsurable. So how can companies stem the tide of securities lawsuits?
At least one says the answer lies in playing chicken with plaintiffs’ lawyers.
“We have sent very strong signals to the attorneys that we don’t plan on settling,” says Pre-Paid Legal Services Inc. CFO Steve Williamson. “It just puts blood in the water.”
After settling 97 customer lawsuits for $1.5 million in January 2001, and seeing the ensuing copycat claims triggered by the settlement, the company decided to fight its current cases to the end, including a class-action securities suit related to the restatement of its 2000 earnings.
“Although it may make sense from a strict cash-flow perspective to write a check for less than what you would pay in future legal fees, the settlement itself brings on additional litigation,” argues Williamson.
So far, the strategy seems to be paying off for the Ada, Okla.-based provider of legal-expense plans. In March, an Oklahoma federal judge dismissed the securities suit with prejudice. Then in August, a major shareholder plaintiff conceded that there was no merit to the case and dropped its $30 million claim.
With an appeal pending, the case is far from over. If the dismissal is overturned, the company will have a hard time sticking to its “no settlement” vow, says Eric Benink, an attorney with Krause & Kalfayan, a San Diego law firm specializing in securities litigation. “I can’t remember the last time a case like this made it to trial,” he adds.
Still, Pre-Paid isn’t about to back down. Having eschewed directors’ and officers’ insurance for at least the past three years, the company is on the hook for legal fees and any cases it loses.
Says Williamson: “My contention is, you make better financial decisions if you don’t have a big wallet behind you.”
Lawyers as Cops?
The Sarbanes-Oxley Act of 2002 requires corporate lawyers to report evidence of misconduct to the CEO or independent directors. The new law also gives the Securities and Exchange Commission the obligation to set guidelines for company attorneys.
But the rules have provoked the ire of some lawyers. Many fear the regulations could tread on the sacred ground of attorney-client privilege.
“The American Bar Association isn’t happy about this,” says Ted Sonde of Washington, D.C., law firm Crowell & Moring. Sonde says there’s been a running debate between the ABA and the SEC over the role of lawyers at public firms. “The SEC has held the position that they should, in effect, be policemen,” he says. “Lawyers don’t think they should have that obligation.”
In an August speech, SEC chairman Harvey Pitt warned of the new responsibility. “Lawyers for public companies represent the company as a whole and its shareholder-owners,” he said, “not the managers who hire and fire them.”
For unscrupulous CFOs, that could be an important distinction. In the past, says Sonde, they have been able to keep things from the board. “They won’t be able to do that any longer.”