Minimal Disclosure of Bad News Sparks Several Shareholder Suits

A number of major companies have been hit recently with shareholder lawsuits partly because of their allegedly delayed or sketchy revelations about bad news.

When bad news strikes a business, is keeping as mum as possible the best
legal strategy?

Many companies believe so. But a number of major companies, including
Vesta Insurance Group
Corp. and Mercury Finance
Co., have been hit
recently with shareholder lawsuits partly because of their allegedly
delayed or sketchy revelations about setbacks.

Companies often mismanage crises “by saying, ‘Let’s put out the minimum
amount of information that’s legally required,’ ” says John Olson, a
senior partner of Gibson, Dunn & Crutcher in Washington. “There’s more
of that in the current market where so many companies are doing so well”
and upbeat executives hope they’ll soon correct any problems.

Some legal experts had expected fuller disclosure of ill tidings in the
wake of the 1995 Private Securities Litigation Reform Act. It was supposed
to curb shareholder class-action suits by, among other things, giving
companies a “safe harbor” to make negative or positive forecasts about
future performance.

Under the 1995 law, a company’s liability is limited for any good-faith
projections that are coupled with clear warnings that actual results may
differ. But that protection doesn’t extend to state court suits. As a
result, the number of companies sued hasn’t declined since December 1995,
according to Stanford University’s Securities Class Action

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