July 2008 Archives

Shareholder Litigation Not Yet Extinct

Once feared class-action lawyers Melvyn Weiss and William Lerach have been disgraced after pleading guilty to charges of paying off plaintiffs, but the type of lawsuit they promoted—the shareholder derivative action—is not extinct. It has just come to light that the Coca-Cola Company recently agreed to pay $137 million to settle such a suit in which plaintiffs led by two union pension funds accused the soft-drink company of artificially inflating sales figures to boost its stock price.

The case, in which Lerach (photo) was originally one of many lawyers involved, was filed in October 2000 in federal court in Atlanta (Northern District of Georgia, Case No. 00-cv-02838-WBH; later consolidated with another action). The lead plaintiff, the Carpenters Health & Welfare Fund of Philadelphia, held about $80 million in Coca-Cola stock at the time. The company dismissed the charges as “ridiculous” in a press release and later claimed in its 10-K filing that it “has meritorious legal and factual defenses and intends to defend the consolidated action vigorously.”

At the center of the case were allegations of “channel stuffing” (pressuring bottlers to make large purchases of concentrate beyond their needs) and failing to write down the value of impaired assets in places such as Russia and Japan.

Coca-Cola has not made it clear why it decided to settle a case it had fought for nearly eight years. The capitulation was all the more surprising in that it occurred shortly after the company prevailed in Delaware Supreme Court in another derivative suit brought by the Teamsters in 2006. In that case, the union charged that Coca-Cola used its control (35%) over its largest bottler, Coca-Cola Enterprises (CCE), to maximize its own profits at the expense of CCE’s shareholders.

The company also faced a lawsuit brought against it and several affiliates in federal court in Miami concerning the murder of trade unionists at Coca-Cola bottling plants in Colombia. The company got the case dismissed, but it is still being challenged by the tenacious Campaign to Stop Killer Coke (which uses the provocative photo above on its website), the aim of which is to pressure Coca-Cola to get the bottling plants to end their alleged cooperation with Colombian paramilitary groups believed to be behind the murders.

Disclosure Issues Bedevil Climate-Change Debate

Big business is talking more these days about the need to reduce greenhouse gas (GHG) emissions. Even long-time global warming denier Exxon Mobil feels the need to publicize what it is doing in this regard. Claims of reductions in GHG are not, however, meaningful unless those emissions are being estimated consistently to begin with.

A study issued yesterday by the Ethical Corporation Institute raises questions about how much we really know about the volume of GHG being generated by large corporations. According to a press release about the report (which is available only to those willing to fork over more than 1,000 euros), there are “staggering inconsistencies in how companies calculate and verify their greenhouse gas emissions.” The report found, for instance, that companies responding to the fifth annual Carbon Disclosure Project questionnaire used more than 30 different protocols or guidelines in preparing their emissions estimates. The report, it appears, surveys this potpourri of measurement techniques but does not attempt to resolve the differences.

The absence of consistency has not prevented the Carbon Disclosure Project from trying to use current reporting to understand the larger framework of GHG trends. In May, the Project issued the first results of its Supply Chain Leadership Collaboration, an initiative in which large companies such as Nestlé, Procter & Gamble and Unilever urge their suppliers to report on their own carbon footprint. It is unclear how much effort is made to ensure these results are reported in a uniform manner.

Along with the need for improved GHG reporting, there are growing calls for companies to disclose the liability risks (and opportunities, if any) associated with those emissions. Recently, a broad coalition of institutional investors and major environmental groups once again urged the U.S. Securities and Exchange Commission to clarify the obligations of publicly traded companies to assess and fully disclose the legal and financial consequences of climate change. The statement was aimed at reinforcing a petition filed with the SEC last year on climate-change disclosure.

Climate-change liability risks no longer exist just in the realm of the theoretical. Lawsuits have been filed against the major oil companies for conspiring to deceive the public about climate change—including one brought in the name of Eskimo villagers in Alaska who are being forced to relocate their homes because of flooding said to be caused by global warming. Famed climate scientist James Hansen recently declared at a Capitol Hill event that oil and coal company executives could be guilty of “crimes against humanity.” If that isn’t a risk worth reporting, what is?

Newly released RAND report on Iraq Misses the Boat on Contractors

A RAND Corporation report written in 2005 but withheld until this week paints an unflattering portrait of U.S. government planning for postwar Iraq. The Army, which commissioned the report, reportedly kept it under wraps to avoid antagonizing then-Defense Secretary Donald Rumsfeld.

The 273-page document also looks at the role of contractors in the initial period after the U.S. invasion (through June 2004), but for some reason it is much gentler in its treatment of the private-sector participants in the disastrous reconstruction effort. The report notes the slow progress in restoring Iraq’s oil industry and its output of electricity, but the contractors in charge of those efforts—KBR for oil and Bechtel for power, with additional work on electricity commissioned from Washington Group International, Fluor and Perini—are not directly blamed. Instead, the Coalition Provisional Authority and U.S. Agency for International Development come out looking bad, and delays are attributed to the poor security situation.

There is, however, one company that RAND does not handle with kid gloves—Bechtel, in connection with a school building contract. Military commanders, the report says, “complained that school reconstruction under the Bechtel contract was proceeding too slowly, that work was sometimes substandard, and that subcontractors were overpaid” (p.227).

RAND can perhaps be excused for largely missing the boat about contractor screw-ups in Iraq, given that the main revelations came to light after the study was drafted. It was right after RAND completed its research that Stuart W. Bowen Jr. (photo), the special inspector general for Iraq reconstruction, issued the first in a series of scathing audits about both the contractors and the agencies that were supposed to be overseeing their work.

The RAND report reinforces what we know about the shortcomings in the U.S. government’s handling of postwar Iraq, but it will take another account to tell the whole story of the role of contractors in that debacle.