Kenneth P. Koury, ESQ.Home.htmlHome.htmlshapeimage_1_link_0
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    When you are in an atmosphere of stock market volatility in a society as litigious as ours, the result is often complicated and expensive securities litigation. There are, however, a number of steps a company can take that may reduce the chance of it being sued and often increase chances of winning if your company is sued. Consideration should be given to taking these steps before any problems occur because once you company's stock drops in price, chances are the company's record has already been established.

Disclosure of Corporate Information

    Only one or two key executives should be authorized to speak for the Company. This helps to ensure consistency and reduces the risk of improper disclosure. When ever possible they should use a prepared script that anticipates questions on tough issues. Extemporaneous remarks should be avoided as mush as practicable. Guidelines should be established regarding the kinds of information the company is willing to discuss publicly, and the rules should be applied consistently in good times or bad. Do not discriminate regarding who you disclose information to. If disclosure is appropriate, it should be available to any shareholder who asks for it. The extent of the distribution should also be appropriate to the information. Do not allow a favored few hear major news first. The more important the news, the broader the distribution should be. You will likely be issuing a press release later anyway, after the stock moves.

Some Types of Information You Should Disclose

    Anytime something big happens, whether the news is good or bad, issue a press release. You do not want a disgruntled stockholder to be in a position to claim he bought his shares while you were concealing information. When in doubt, consult legal counsel. Disclosure issues can be complex. Foreseeable risks should always be disclosed. Disclosing risks that are specific to your industry or some business opportunity enhances the company's credibility in the market and improves its position in the event of a lawsuit. In many industries forecasts are common. If you make forecasts, the assumptions that support them should be supported by your internal documents.  If there are material facts that undermine your forecast, think twice about whether it should be made. Be careful about supporting forecasts made by others. If you provide detailed information or guidance to analysts, you might be held legally responsible for their forecasts. If you trade, you should disclose. Any information important enough to make you want to trade, is likely to be considered material and should be disclosed. Disclosures should also be updated as appropriate. You should track prior disclosures and issue updates when the situation changes materially.

Corporate Records

    With few exceptions, most corporate records are subject to discovery in litigation proceedings. This includes your computer database and e-mail. Computer records are often available on your computer back ups months, or even years, after they might be deleted from the main system. Be aware of what's in your computers.  The importance of maintaining accurate and reliable corporate records can not be over emphasized. Maintaining internal documents that do not match what you are saying publicly can

have disastrous legal consequences. Be careful what you write. Use common sense when using e-mail. Avoid language that is too colorful or could be taken out of context. Be aware that jokes can often backfire. An intelligent and realistic document creation, retention and destruction policy is essential. Every company should have a record retention policy and follow it. You should preserve essential company documents like contracts, press releases, minutes, etc. but you do not want to be a pack rat. You should discard notes and other non-essential papers. The key goal, from the perspective of anticipating defending a future securities litigation case, is that you need enough

information in the way of records to document and support your legal position. On the other hand, you do not want to retain non-essential records that might hide a legal time bomb subject to discovery by an adverse party. Files should be routinely reviewed to see if they can be discarded, consistent with the company's record retention policy.

Insider Trading

    Every company should have a strict written policy prohibiting insider trading. Everyone in the company should be aware that you are serious about this. Employees should be reminded periodically of the policy by memos circulated annually. Trading windows should be established. If disclosure of some major news is pending, close down trading until it is released. Anyone who knows of a major development should specifically be cautioned not to trade. Do not allow anyone to tip, whether they trade or not. Remember, a tangible benefit from disclosure is not required to trigger an investigation by the S.E.C..

What To Do If You Are Sued

    If you are sued, these are the critical steps that you should take immediately:

  1. 1.Notify the company attorney.

  2. 2.Notify your D & O insurance carrier and send a copy of the lawsuit. Continue to keep them informed of all developments.

  3. 3.Your attorney should immediately contact critical witnesses such as former employees, customers and analysts. You will need to establish rapport with then and keep tabs on their location.

  4. 4.Suspend document destruction. policies. Any inference from destroying documents after a lawsuit is served can be more harmful than the documents themselves.

  5. 5.Circulate a memo informing your employees of the lawsuit. Tell them that this is a routine occurrence and that you are in control of the situation. Instruct them not to discuss the case with anyone.

  6. 6.All inquiries from anyone should be referred to the company attorney.

  7. 7.Immediately Issue a press release informing the market that you have been sued, what is being claimed, and that you will vigorously defend the lawsuit.

  8. 8.Locate and review critical documents to determine if there are any serious problems to be addressed.

  9. 9.Put the lawsuit claims in context. If statements are quoted from a document or speech, obtain the full text for review by counsel.

  10. 10.Review and analyze movement of the stock during time period of the claims. This can be important in terms of evaluating potential exposure. If the stock didn't move in response to disclosures cited in the complaint, the nondisclosure being alleged may not be material.

  11. 11.Examine insider stock transactions for the time period in question. If the insiders didn't trade, the plaintiffs may not be able to prove intent to defraud.

A Final Word

    The information contained in this article is not intended to be a complete discussion of all the issues related to the areas discussed. Your company's factual situation may be different and you should seek the legal advice of an attorney regarding specific information.

Copyright 1995-2012 by Attorney Ken Koury.