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| 2002 News and Press Releases |
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HEADLINE:
Director And Officer Liability In The Age Of Enron
By: Thomas W. Nihill, C.P.A., M.B.A., managing partner Nihill & Riedley P.C.,
White-Collar Crime Reporter, Vol. 17; No. 3; Pg. 28. December 30, 2002
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EXCERPT: The Enron debacle may prove to be a watershed event for liability claims involving directors and officers. Reports of a corporate culture that fostered shady and allegedly illegal practices have generated acute interest in how and why the directors and senior executives could have permitted such deviant behavior. Recent revelations of similar practices at other companies and corporate meltdowns reinforce the idea that Enron is not an isolated case. As a result of what appears to be a corporate crime wave, corporate governance issues will certainly be the focal point of a deluge of litigation. Directors and officers of offending companies will find themselves squarely in the crosshairs of litigants seeking to recover damages on behalf of shareholders, employees, pensioners, creditors and other parties in interest. Potential damage awards can be staggering. The settlement in the Cendant shareholder suit, the largest to date, exceeded $3 billion. In re Cendant Corp. Sec. Litig., 264 F.3d 286 (3d Cir., 2001). Potential claims for Enron and other companies, such as Global Crossing, could dwarf the Cendant settlement amount. Because of the potential for financial catastrophe, it is imperative that potential targets of director and officer claims recognize the need to educate themselves concerning the basis for lawsuits, insurance coverage, and the investigation and proof of claims. Lawsuits may be initiated against directors and officers in various ways. The Racketeer Influenced and Corrupt Organizations Act carries treble damages and may be applied in securities fraud actions by shareholders. According to a study conducted by Stanford University Law School, the number of class action securities fraud cases increased by 125 percent during 2001. Derivative actions, which seek to recover on behalf of the corporation for damages related to grossly negligent oversight, are another possibility. Still another area of exposure would be subrogation actions brought by bonding companies to recover on payments made in connection with fidelity bond claims. On top of all this is the specter of new federal intervention in this area, which could open up even more avenues of liability. According to CFO.com, President Bush has proposed that CEOs of public companies be held accountable for corporate financial reporting by mandating that they personally warrant the accuracy of financial statement disclosures. Directors who are charged with the oversight of CEOs would be expected to stand behind such representations and be ultimately accountable for them. D&O Policy Coverage The D&O liability insurance provides for the indemnification of directors, officers and other employees against legal and other expenses incurred in defending lawsuits brought against them by reason of the performance of their official duties.
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