Trials & Errors

As two recent securities lawsuits illustrate, there are no guarantees when you go to court.

When institutional investors run up against executives who believe they are firmly in the right, conditions are ripe for a trial. In Apollo’s case, the insurers “were perfectly willing to settle, and probably would have preferred that we settle,” says Smith. But those executives dropped settlement discussions after one mediation session because “they felt they were right.” (Gonzales declined to be interviewed for this story.) One reason the company was so adamant was that it had consulted widely about its decision not to disclose the report. “If you’re not safe to make disclosure decisions based on the advice of professionals, it’s hard to know when you’ll be safe,” says Smith. Those same factors led former executives at Thane International, Everex, BDO Seidman, and Biogen to the stand in past trials.

The financial motives behind going to trial, however, can cut both ways. Typically, executives in these trials share something of a gambler’s spirit — and like the odds that a jury won’t assess the full amount of damages. “We had the sense that even if they [BDO Seidman] didn’t completely get off the hook, they would be assigned a smaller portion of blame” than they would face otherwise, says Michael Young, partner at Willkie Farr & Gallagher LLP and lead attorney for the audit firm in its 1998 trial. BDO Seidman was exonerated. On the other hand, sometimes it is fiscally prudent to fight. JDS Uniphase “had no alternative” but to head to court, says attorney Eth, since both the damages and the shareholders’ proposed settlement values were beyond any insurance coverage or cash stash the company had.

The X Factors

Of course, once the decision is made, companies are subject to the same whims and uncertainties of any other trial. To date, 8 out of 13 trials that have reached a verdict have been in favor of the defense, says Savett. But as the JDS Uniphase and Apollo cases illustrate, there are plenty of X factors at work.

To identify them, lawyers often use mock juries to test their cases. Such panels are paid to listen to a case and arrive at a verdict. While a negative outcome might not kill the case, it will certainly inspire some changes. “Mock juries don’t necessarily turn out the same way as actual juries do, but you can learn a lot from them about what they think are good facts and what they think are bad facts,” says Young.

In addition, attorneys say they also make honest assessments about how well defendants will play before a jury. While it may not be possible to avoid putting an arrogant or acerbic executive on the stand, you can “practice a lot to try to make them more appealing and take the edge off,” says Robert Varian, a partner with Orrick, Herrington & Sutcliffe. “Then, to the extent possible, minimize their role in the case.” The evidence that comes up during discovery is also part of the calculation. “Is there one really, really bad memo or E-mail out there?” asks Reed Smith partner Sarah Wolff. If so, executives and attorneys must recalculate their odds at trial, and possibly reconsider the settlement option.


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