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Corporate executives worried about criminal prosecutions for fraud or other misconduct have another cause for concern: civil suits by individual shareholders.
Private shareholder suits against corporate officers and directors remain an active litigation area, despite a seven-year-old federal law making it more difficult for plaintiffs to file such suits. The suits typically are class-action cases seeking compensation for the losses that investors claim they suffered due to misinformation or fraud.
Already this year, 180 civil shareholder suits have been filed, most in connection with the current corporate-crime investigations: 45 against Enron or its executives, 56 involving Adelphia Communications and 60 involving Tyco International. An average of about 200 shareholder suits are filed each year.
Since the Private Securities Litigation Reform Act was enacted in 1995, there has been no appreciable decline in shareholder suits. In fact, shareholders have won more than $10 billion from civil suits during the ensuing seven years, according to Bill Ballowe, an assistant vice president at Woodruff-Sawyer, a San Francisco insurance brokerage specializing in coverage of director and officer (“D&O”) liability. Data compiled for the Securities Class Action Clearinghouse at Stanford University Law School similarly indicate there has been “no material decrease” in shareholder litigation since 1995.
“Plaintiffs continue to have powerful economic incentives to sue many companies for large sums of money,” according to Stanford Professor Joseph Grundfest, a former member of the Securities and Exchange Commission (SEC). “Whether these claims have merit is an entirely different issue, but the incentive to sue is alive and well.”
The law — enacted over President Bill Clinton's veto — may have had the effect, however, of increasing the number of suits that are dismissed or withdrawn at an early stage.
One of the law's major provisions was a requirement that plaintiffs include specific allegations of misconduct when filing their initial complaint. Judges were instructed to dismiss suits without allowing pretrial discovery if the complaint did not state allegations “with particularity.” Supporters of the law said lawyers often filed complaints with little substance and then went on “fishing expeditions” to try to gather evidence of wrongdoing.
About 28 percent of the shareholder suits filed since the law was enacted are being dismissed or withdrawn, according to Ballowe. Before the law was enacted, the proportion was significantly lower: 13 percent.
The $10 billion has been won entirely through settlements offered by defendants unwilling to risk a jury trial, Ballowe says. “The rule is settle it and get out for as cheap as you can,” he explains. “You never know what a jury's going to do. It may award this incredible sum of money or blow the case away.”
The largest settlement so far was a $3.19 billion payout in late 1999 by the Cendant Corp. and its accounting firm, Ernst & Young, to repay investors for losses attributed to financial misstatements over a three-year period. The lead plaintiffs in the case were the nation's three largest retirement systems, representing state workers in California and New York.
More typically, settlements are in the range of $1 million to $5 million, according to the Stanford clearinghouse. Nearly two-thirds of the settlements since enactment of the 1995 law have been below $10 million.
Bibliography
Books
Benson, Michael L., and Francis T. Cullen , Combating Corporate Crime: Local Prosecutors at Work, Northeastern University Press, 1998.
Study by academic researchers of prosecution of corporate crime at local level. Source notes; 10-page bibliography.
Clinard, Marshall B., and Peter C. Yeager , Corporate Crime, Free Press, 1980.
Comprehensive treatment by two university professors with chapters on antitrust, foreign payoffs and accounting irregularities, among other topics, and final chapter discussing nine strategies for controlling corporate crime. Chapter notes, appendixes and 23-page list of references.
Friedman, Lawrence M. , Crime and Punishment in American History, Basic Books, 1994.
The Pulitzer Prize-winning history by a Stanford University law professor includes insightful overviews of business-related crimes in the 19th and 20th centuries. Source notes.
Gruner, Richard S. , Corporate Crime and Sentencing, Michie, 1994.
A professor at Whittier Law School exhaustively covers corporate-crime issues, including rationales for corporate criminal liability under federal and state law; and corporate sentences under state law and under the federal sentencing guidelines. Supplemented annually; detailed chapter notes.
Mokhiber, Russell , Big Business Power and the Abuse of the Public Trust, Sierra Club Books, 1988.
The editor of Corporate Crime Reporter offers a 50-point agenda for reform and 36 individual profiles of corporate-crime episodes. For more recent coverage, see Russell Mokhiber and Robert Weissman, Corporate Predators: The Hunt for Mega-Profits and the Attack on Democracy (Common Courage Press, 1999), a collection of columns written individually by Mokhiber and Weissman, editor of The Multinational Reporter.
Simpson, Sally S. , Corporate Crime, Law, and Social Control, Cambridge University Press, 2002.
An overview of recent history and a critical, empirical examination of the “failure” of punitive approaches to deterring corporate crime by an associate professor of criminal justice at the University of Maryland. Chapter notes, appendixes.
Spencer, Margaret P., and Ronald R. Sims (eds.), Corporate Misconduct: The Legal, Societal, and Management Issues, Quorum Books, 1995.
Eleven articles by various authors examine a range of topics, and an overview catalogs various estimates of the cost of corporate crime. Sims is now a former business professor at the College of William and Mary; Spencer is a general district court judge in Richmond, Va.
Sutherland, Edwin H. , White Collar Crime: The Uncut Version, Yale University Press, 1983.
A distinguished sociologist's seminal work, first published in 1949, catalogs criminal-law violations by 70 large corporations; companies' names — omitted originally because of possible legal liability — were added to the new version, along with an updated introduction by two leading criminologists. Includes detailed notes.
Articles
Gibbs, Nancy , “Summer of Mistrust,” Time
, July 22, 2002, p. 16.
Major article on loss of public confidence in corporate America following disclosures of fraud and abuse and misconduct.
Perine, Keith , “Regulation Back in Vogue,” CQ Weekly
, July 27, 2002, p. 2018.
Article describes final congressional action on Sarbanes-Oxley anti-corporate fraud bill. For further detail, see Keith Perine, “Provisions of Corporate Fraud Bill,” CQ Weekly, Aug. 10, 2002, p. 2204.
Wessel, David , “Venal Sins: Why the Bad Guys of the Boardroom Emerged en Masse,” The Wall Street Journal
, June 20, 2002, p. A1.
Opening article in series published under title “What's Wrong?” concludes that the scope and scale of corporate transgressions of the late 1990s exceed anything witnessed in the U.S. since the years before the Great Depression. Article includes chart showing 18 companies facing “serious questions” about their business practices.
Reports and Studies
Alexander, Cindy R., Jennifer H. Arlen, and Mark A. Cohen , “The Effect of Federal Sentencing Guidelines on Penalties for Public Corporations,” Federal Sentencing Reporter, Vol. 12, No. 1 (July-August 1999), pp. 20-26.
Criminal fines and total sanctions are significantly higher under federal sentencing guidelines than before, according to a study by three academics. In a later article, the same authors identified some apparent gaps in U.S. Sentencing Commission data but did not change that broad conclusion. See “Evaluating Trends in Corporate Sentencing: How Reliable Are the U.S. Sentencing Commission's Data?” in Federal Sentencing Reporter, Vol. 13, No. 2 (September-October 2000), pp. 108-113.
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