Rich and Wealth

Other Consequences (2)

Class Action Litigation Almost immediately after the announcement of a financial reporting problem significant enough to require restatement of prior-period results, class action lawyers likely will have identified investors who have lost money on their investments in the subject company. Using information that the SEC is investigating reporting problems and that prior-year results are in error, suits may be filed in the names of losing investors who are seeking to be named as representatives of an entire class of similar investors. These suits will target many potential defendants, including the company, its officers, the audit committee and other members of the board of directors, underwriters, selling shareholders, and the outside auditors. The complaints will seek redress for investment losses incurred as the result of allegedly false filings made with the SEC.

For example, in a class action lawsuit filed against certain representatives of Safety- Kleen Corp. by the firm of Grant & Eisenhofer, P.A. on behalf of the company’s bondholders, two institutional investors claimed more than $30 million in damages. The action was brought against Safety-Kleen’s officers, directors, controlling shareholders, accountants, and underwriters. The suit alleged, among other things, that the company’s financial statements for the years ended August 31 1997, 1998, and 1999 were “false and misleading, and had to be withdrawn by Safety Kleen and its auditors, icewaterhouseCoopers LLP.”66 These financial statements, according to the lawsuit, had been
used in connection with the sale of the bonds and also had been used after their sale, “artificially inflating the price of the bonds in the aftermarket.”67

Ultimately, a consolidated complaint that is representative of the class will arise from the many individual complaints that have been filed. Depending on the facts and circumstances of the case, the consolidated complaint likely will include claims that key sections of the securities laws, including Section 10(b) and Rule 10b-5 of the 1934 Act and others, have been violated. While the use of a jury trial to hear both sides of the case is a possibility, it is more likely that the end result of such a lawsuit will be a cash settlement. Such settlements can reach many millions of dollars and exceed by a significant margin any liability insurance the company may have in place for just such a possibility.

Taken From : The Financial Numbers Game