The Times: Will firing staff help Shell's cause?
April 27, 2004
IF A company makes a disclosure in a prospectus and it is wrong, it has strict liability and investors could sue, lawyers say. If a company makes a disclosure in other contexts, as Shell did in the US Securities & Exchange Commission filings, a plaintiff would have to prove that it had been reckless with the truth. “This is harder to prove, but in Shell’s case it might not be so difficult. People have been fired for knowing that disclosures had not been made,” a City lawyer says.
To fire directors responsible for misrepresenting reserves may not help a defendant company, according to Richard Baumann, a US lawyer with Norton Rose. “If there is strict liability, it won’t make any difference to the company’s defence. If there is recklessness or wilfulness at issue, the company would have to prove that the directors had been acting outside the remit of their duties for the company not to be culpable.”
For Shell, lawyers argue, it would be a hard case to make. The recent firing of some of Shell’s directors might help to negotiate reduced penalties from the SEC and federal prosecutors, but it will not create firm defences. “If a company faces charges, the prosecutor may go easier if it thinks that the defendant is remorseful, but it will not let it off the hook. With the SEC it might be possible to negotiate lesser fines or injunctive remedies,” one said.
Under US securities laws, a company has no defence of relying on professional advisers. Another lawyer said: “A large company would be likely to value its own reserves. But if it used an external appraiser, it could try to sue it for professional negligence.”
A large company would be rarely in a position to sue its own lawyers but it is not out of the question, according to Baumann. “If a lawyer was presented with two sets of valuations and it gave a professional opinion that it was safe to use one that turned out to be misrepresentation, there might be a case,” he said.
Vanessa Knapp, a partner at Freshfields, agreed. “If a firm has been wrongly advised by in-house lawyers or other employees, normal laws of negligence would apply and in theory it could sue an employee on the basis of tort,” she said.
In practice employers will normally avoid such action, giving power to in-house lawyers. The inaction is not least because of the bad publicity, according to Knapp. “The advice of lawyers would become public as part of the proceedings, and this could damage the firm taking the action,” she said.
Another reason for firms to avoid litigation is that it would be unlikely to retrieve losses unless the in-house lawyer or other employee targeted happened to be rich. In practice, in-house lawyers that gave negligent advice are likely to lose their jobs, according to lawyers.
Shell remains in the firing line. “The SEC could bring an action and impose fines and penalties,” a lawyer said. “If activity was undertaken with criminal intent, it would explain why the federal prosecutors have gone after them, as they went after the folks at WorldCom and Enron.”
The author is the editor of securities and banking at Complinet, an online news service for regulatory and compliance professionals