Litigation

Blurring the Bailouts

This is the time of year when most U.S. public companies file their 10-K annual reports with the Securities and Exchange Commission, which in turn makes them available to the public through its IDEA web page (formerly EDGAR). These reports include sections in which management discusses the firm’s performance over the past year and tries to put the best face on the financial results.

Many companies are, of course, reporting disappointing results this time around, but perhaps the most awkward filings are the ones being made by companies that had to get bailed out by the federal government to get through the year. Let’s take a look at how they are talking about being wards of the state.

We don’t yet know how General Motors is dealing with this challenge, since it notified the SEC that its 10-K will be late. So let’s focus on two of the other biggest supplicants: Citigroup and AIG. The first lesson, apparently, is not to use the term “bailout” when talking about being bailed out. The term appears nowhere in either firm’s 10-K.

Citi instead employs the bland statement that “the Company benefited from substantial U.S. government financial involvement.” Substantial, indeed. Citi matter-of-factly describes the capital infusions, loss-sharing agreements and loan guarantees through which the feds have made a commitment potentially costing several hundred billion dollars to keep the giant bank holding company afloat. With all the references to UST and USG, a casual reader might think Citi was referring to conventional investors rather than the U.S. Treasury and the U.S. Government.

AIG adopts a more narrative approach, writing that: “By early Tuesday afternoon on September 16, 2008, it was clear that AIG had no viable private sector solution to its liquidity issues. At this point, AIG received the terms of a secured lending agreement that the NY Fed was prepared to provide.” This does not quite capture the gravity of events that the New York Times, for example, reported on in a front-page story headlined: FED IN AN $85 BILLION RESCUE OF AN INSURER NEAR FAILURE; U.S. GETS CONTROL; POLICY REVERSAL ARISES FROM GROWING FEAR OF GLOBAL CRISIS.

Aside from downplaying the gravity of their bailouts, the Citi and AIG 10-Ks are less than lucid on what led up to their troubles. In describing conditions in 2008 that led to a $27 billion net loss, Citi takes no responsibility. The causes, instead, are said to have been “continued losses related to the disruption in the fixed income markets, higher consumer credit costs, and a deepening of the global economic slowdown.” Contrast this to its 10-K of two years ago, which stated: “We enter 2007 with good business momentum, as we expect to see our investment initiatives generate increasing revenues, and are well-positioned to gain from our balanced approach to growth and competitive advantages.” In other words, when things are going well, management strategy gets the credit; when the red ink begins to gush, impersonal market forces are to blame.

AIG, which reported an astounding $99 billion net loss for the year, also paints itself as a victim of conditions outside its control, saying “the 2008 business environment was one of the most difficult in recent decades.” The difference with Citi is that AIG’s management is blunter about the continuing dismal prospects for the company. The notes to its financial statements include a section entitled “Going Concern Considerations” that raises the possibility that the company may need yet more government assistance and that, even then, its survival is far from a sure thing.

Perhaps the most telling parts of the reports are the sections in which the companies have to disclose significant legal proceedings in which they are involved. It takes more than 7,000 words for AIG to summarize all of its legal problems, including about a dozen securities fraud class action cases. Citi engages in a similar recitation.

While the two companies are still in a state of denial about their responsibility both for their own circumstances and for the larger financial crisis (as illustrated in the image above from Citi’s website), the existence of these legal proceedings may see to it that they are eventually held accountable for their financial misdeeds.

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.

Fallen Crusaders Against Corporate Abuse

For more than 30 years, big business has whined about class-action lawsuits filed on behalf of consumers, workers and shareholders. The Republican Party made plaintiffs’ lawyers one of its favorite bogeymen and “tort reform” a centerpiece of its policy agenda. John McCain carries on this dubious tradition, suggesting for example that putting limits on medical malpractice suits is a key element of healthcare reform.

Whether or not there ever was a real plethora of frivolous lawsuits, one fact is now undeniable: the plaintiffs’ bar is in disarray. Part of the reason is that conservatives succeeded in getting numerous state legislatures to impose restrictions on class-action lawsuits and individual damage cases. Yet perhaps more dramatic has been the spectacular demise in recent months of the country’s leading trial lawyers through personal legal entanglements.

The conventional wisdom is that these super lawyers were victims of their own greed, while conspiracy theorists might wonder how these giant killers were brought down in such short order. In any event, there have certainly been sighs or relief—if not spasms of schadenfreude—in boardrooms across America.

The most recent crusader to fall was Melvyn Weiss, who built a career filing lawsuits charging that companies had defrauded investors. In March, Weiss agreed to plead guilty to federal criminal charges, acknowledging his role in making millions of dollars in secret side payments to plaintiffs in class actions filed by his firm Milberg Weiss. He consented to $10 million in fines and forfeiture, and last week prosecutors proposed that he spend up to 33 months in prison.

Weiss’s former partner, the even more flamboyant William S. Lerach, entered a guilty plea last fall on similar federal charges. In February he was sentenced to two years in prison and ordered to forfeit $7.75 million. That was a small fraction of the several hundred million dollars in fees Lerach and his partners earned from scores of cases involving many billion dollars in settlements and awards from the likes of Enron and WorldCom as well as many less venal corporations.

In March, another larger-than-life trial lawyer, Richard “Dickie” Scruggs, filed a guilty plea in the face of allegations that he and others bribed a judge in Mississippi who was hearing a case involving a dispute over $26 million in legal fees from a mass settlement of insurance claims brought by victims of Hurricane Katrina. Scruggs is best known for his role in winning a $200 billion settlement from the tobacco industry in the 1990s.

There was never any doubt that Weiss, Lerach and Scruggs were motivated by personal enrichment at least as much as their quest for justice. Yet in the absence of adequate government regulation of business, their lawsuits served as a countervailing force against the power of big business. Now that they have been neutralized, what corporate abuses will go unchallenged?

Will Tesco Brings Its Litigious Ways to the USA?

Say all you want about Wal-Mart—the giant retailer usually deals with its many adversaries in the court of public opinion rather than by filing lawsuits against them. The same can’t be said about Tesco, the British counterpart of Wal-Mart that has begun to enter the U.S. market.

In the past week, Tesco has brought two separate legal actions against its critics. First, it sued the Guardian newspaper and its editor Alan Rusbridger for “libel and malicious falsehood” in connection with a series of articles claiming that the company had used offshore partnerships as a way of avoiding up to £1 billion in taxes when selling UK properties. Tesco acknowledges that it may have saved £23-60 million in taxes but wants its day in court to argue that the £1 billion figure is erroneous. Playing hardball, Tesco says it is collecting communications from customers angry about the Guardian stories—and who say they are taking their business elsewhere—to justify a demand for “special damages.”

Now it’s been reported—by the Guardian—that Tesco has brought a libel suit against a former member of parliament in Thailand for criticizing the company’s expansion in that country. This follows a similar action against a Thai newspaper columnist.

Tesco may be tempted to bring similar suits in the U.S., given the negative coverage of its campaign to create a string of Fresh & Easy Neighborhood Markets. Some of the criticism is purely of a business nature. USA Today wrote recently that the stores, which it described as “about the size of a Trader Joe’s with lots of Whole Foods-type natural foods and prices that can seem Costco-esque,” don’t seem to be hitting the mark. The paper continued: “The unfamiliar combination—and a rather sterile store décor—seem to have left American shoppers confused about just what the chain is.” It’s apparently for this reason that Tesco recently decided to freeze its U.S. rollout, which began in Southern California, Las Vegas and Phoenix.

Like Wal-Mart, Tesco has started facing scrutiny—most notably in a report published last year by the Urban and Environmental Policy Institute of Occidental College—on supply-chain issues and its expected U.S. labor practices. If the rollout continues to falter, these issues may become moot. Otherwise, let’s hope the company spends more here on public relations and less on lawyers.