A Securities and Exchange Commission report seems to echo this worry. In it, the Commission estimated that just 5 percent of corporations include any sort of legal liability on their balance sheets. That’s troubling, considering 46 percent of public companies report being sued. Most public issuers, the SEC noted, “recognize no liability and disclose no maximum loss or range of loss.” Businesses that did take a balance-sheet hit reported only $12 billion total in liabilities. By the SEC’s lights, their potential losses could top $52 billion.
It’s unclear if the agency will put pressure on FASB to force companies to reveal more, but in this era of extra disclosure, it’s a possibility. While Herz states FASB does not have a project under way to alter FAS 5, he says his personal preference would be for “companies to recognize and quantify such liabilities at an earlier stage, and provide more fulsome disclosure.”
The lack of fulsome disclosure could turn out to be something of a prison for public issuers. Absent corporate guidance, analysts at investment houses and credit-rating agencies are beginning to plow ahead on their own, factoring in contingent liability when assessing a company’s financial health. In a sign of things to come, S&P recently issued several papers explaining how litigation uncertainty affects corporate ratings. “At the end of the day,” admits Wong, “it’s almost anyone’s guess how lawsuits will affect a company.”
Maybe so, but S&P is giving it a shot anyway. Wong notes that the looming legal liability at Merck accounted for a full notch in the company’s credit-rating drop from AAA to AA-. Businesses facing lots of court time can expect similar treatment. — T.R.
Electronic Records Retention: Known When to Hold ‘Em
Last May, Wall Street was stunned when a jury ordered white-shoe firm Morgan Stanley to pay financier Ron Perelman $1.58 billion for the bank’s role in a botched deal. Almost as stunning as the award: the high-profile case turned on Morgan Stanley’s failure to turn over requested electronic documents.
The staggering jury award not only lined Perelman’s pockets, it also underscored the rising importance of E-discovery. The average U.S. corporation is currently contending with 37 lawsuits — and, increasingly, litigants are demanding to see defendants’ digital documents. So, too, are regulators: in February, the Securities and Exchange Commission hit Morgan Stanley with a $15 million fine to settle a probe of the bank’s E-document retention policies.
The requests for data can prove daunting, even for the 57 percent of U.S. businesses that have records-retention policies. Cell-phone distributor Brightpoint Inc. is typical. Executive vice president, general counsel, and secretary Steven E. Fivel has set up procedures that trigger a “records hold” once a suit is filed. The problem? Many businesses like Brightpoint craft retention policies that cover memos, Word files, and the like, but not E-mail, instant messages, or other “unstructured” data.
That’s an enormous blind spot. Without a robust archiving and retrieval system, digging up critical E-mails can be an exercise in frustration. Eric Schwarz, the Americas leader-legal technology for Ernst & Young’s fraud-investigation and -dispute services practice, is currently working with a global corporation to find data relevant to issues related to the sale of one of its subsidiaries. “It’s taken 5 [of our] guys plus 30 of their guys the better part of nine months to locate every tape in 80 countries.”