Crises Are Becoming Fodder for Investor Lawsuits (Part Two)
This is the second installation of a two-part series. Read Part One here.
In last week’s post we highlighted a report by the U.S. Chamber of Commerce’s Institute for Legal Reform. The report notes a rise in securities-fraud suits brought by company investors that stem from crises such as data breaches, fires, and product issues. In addition to dealing with, say, consumer litigation, companies are confronted with so-called event-driven shareholder suits. Here we discuss some aspects of the trend related to reputation and communication.
Columbia University securities-law professor John C. Coffee, Jr. writes in a March blog post that these cases may be hard for investors to win but still present problems for companies:
Still, this scope of “event-driven” litigation could expand rapidly. If corporate boards have two nightmares today for which they have no adequate answers, those two nightmares are: (1) cybersecurity and (2) Harvey Weinstein-style sexual harassment allegations. Imagine that a skilled hacker penetrates security at a major bank and gains access to data on millions of its customers. Predictably, this will generate bad feelings and customer litigation against the bank, and if its stock price drops, securities litigation will follow close on the heels of the initial litigation. Correspondingly, suppose that a Steve Wynn did not resign as CEO of Wynn Resorts, and its stock price dropped in light of the charges of sexual harassment against him. These may be the “event-driven” cases of the future.
Even if the cases can be defended, they are troublesome because they keep the crisis in the news, continuing to hurt the company’s reputation. The Chamber of Commerce writes in its report that this is even more so than with the typical investor suit based on accounting fraud. That’s because plaintiffs’ lawyers bringing event-driven litigation “will focus on the underlying adverse event — and only tangentially on the alleged false statement or omission that occurred months or years earlier — which will keep the adverse event in the public eye,” according to the report.
This will force many companies to settle early. It wasn’t a securities suit, but we are reminded of how quickly United Airlines settled with the man who had been dragged off one of its flights; it helped to put the crisis in the past.
Kevin M. LaCroix, who writes a highly respected blog on securities litigation, The D&O Diary, said in a March post: “The fact is that in the ebb and flow of day-to-day business, many companies face setbacks or hit unexpected operational hurdles. It is bad enough that these companies must deal with the adverse circumstances; increasingly they must also deal with a resulting securities lawsuit as well.”
I think keeping control on communications is a better approach than failing to address risks the company faces.
— Kevin M. LaCroix, attorney and executive vice president at RT ProExec
The Chamber of Commerce argues that the cases lack merit because crises, by their nature, are unpredictable. But crisis communicators know that’s often not true, and a major part of the discipline is to analyze their organizations’ vulnerabilities. That raises the issue of how much a company’s planning for a crisis could open it up for litigation accusing it of knowing about the crisis’s potential.
LaCroix, an attorney and executive vice president at RT ProExec, an insurance intermediary focused exclusively on management liability issues, addressed that issue in an email to CrisisResponsePro. He said that it would be “putting the cart before the horse for a company not to plan for risk exposures,” fearing that it “would create a paper record that could be used against the company in subsequent litigation if the risk ever materialized.”
‘Abundance of Caution’
The smart way to approach this, he said, is to focus on how the company communicates about potential crises: “First of all, anyone who has ever been deposed knows to couch statements, so that you never say, ‘This is a terrible risk that is going to kill the company.’ Instead, the way to say these things [is], “It is extremely unlikely that anything would likely come of this, but out of an abundance of caution, the company might be well advised to take a look at this.”
LaCroix also said “employees should be trained never to say things like, ‘If word of this gets out, it will tank our share price,’ or ‘The regulator should not find out about this.’”
He concluded: “I think keeping control on communications is a better approach than failing to address risks the company faces.”
We agree. Clearly, event-driven litigation is an area crisis communicators will have to pay attention to.
Image Credit: Roman99/Shutterstock
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