A Hypothetical? - It Could Be Your Company!

Friday, July 1, 2005 - 01:00

You are the general counsel of International Consolidated. At 3:30 p.m. Monday, you get a call from a reporter who tells you that your company has just been sued by 50 people who purchased pencils manufactured by it. The reporter had just obtained a medical report that the yellow paint used on pencils when chewed causes injury. Specifically, middle-age males lose some of their hair and gain weight. Cases are filed in Madison County, Illinois, and West Virginia. The reporter has a 4 p.m. deadline to file his story.

Investor relations alerts you to the fact that your stock is down 15 percent on short selling following an analysts' briefing by plaintiffs' lawyers. You cobble together a statement to meet that 4 p.m. deadline. You haven't seen the complaint yet, but you are certain it is without merit and the statement reflects that. Then, you get another call. Your 10Q is due tomorrow.

By the time you filed the 10Q on Tuesday, you have seen the complaint. You then issue a new statement to the press that modifies Monday's statement. The new statement is a brief statement of the theory of the case, the fact that you intend to defend it vigorously and that you have no basis on which to quantify any potential loss. You then get inquiries from state attorneys general based on documents provided by plaintiffs' lawyers showing that you failed to warn the public and demanding immediate warnings.

The SEC complains that on Monday you thought this suit was without merit, but the 10Q filed on Tuesday did not contain that statement. Therefore, they want corrective disclosure and are threatening sanctions if the corrective disclosure is not forthcoming. Shareholder suits are filed hoping to capitalize if the securities regulators get a retraction and charging the directors with mismanaging the pencil distribution business.

A few months later, you have developed a good defense and you are persuaded that the plaintiffs can never prove the injury. However, two of the 15 studies you have done suggest that there could be a link. A number of the state attorneys general and the SEC tell you that you will be deemed non-cooperative unless you waive the attorney-client and work product privileges on all of your studies, reports of internal investigations and legal memoranda. Your outside counsel tells you that if you provide the information, the plaintiff's bar will have full access to all of your analyses of the strengths and weakness of your case. No doubt the newspapers will as well.

Outside counsel also insists that, at enormous expense, you no longer recycle any of your backup tapes and no longer destroy any documents until they all can be searched to discover if there are any e-mails or other documents that refer to pencils or financial disclosures of reserve calculations or decisions about what to disclose. An important and strategic merger that your corporation was considering is now unraveling as the other company gets concerned about your stock price and the potential liability. Plaintiffs come to you and offer to settle the matter for a mere $50 million.

What next? Can you extricate yourself and your client? See Index on page 35 for articles/interviews that can help.