Nobody to Blame

 
 
By John Mulqueen  |  Posted 2001-05-28 Email Print this article Print
 
 
 
 
 
 
 

It's almost becoming a weekly internet soap opera. Rumors swirl about a company.

Its almost becoming a weekly internet soap opera. Rumors swirl about a company. Top executives deny anything is wrong. Top executives resign. Company restates earnings. Lawsuits fly.

But for all the noise, it seems unlikely that the directors of any of these companies, who have fiduciary duties to shareholders, will ever be blamed for wrongdoing. The law makes them responsible, but there is enough wiggle room to keep them out of harms way, according to lawyers who specialize in corporate law.

The law says that "directors are entitled to make bad business judgments if they do their duty on an informed basis," said John Gorman, a lawyer at Washington, D.C., law firm Luse Lehman Gorman Pomerenk & Schick. He also teaches corporate governance at the National Association of Corporate Directors. "There is no fiduciary responsibility to have earnings at a certain level," he said. In addition, investment bankers who take a company public are generally not held responsible one year after the stock offering, Gorman said.

The Securities and Exchange Commission has brought 429 civil cases against corporations in the last five years, charging violations of financial disclosures requirements. Lawyers said they expect more lawsuits from shareholders, and most expect the SEC to continue cracking down.

The melodrama played out again last week, as online marketplace PurchasePro announced that its founder, chairman, CEO and largest shareholder, Charles "Junior" Johnson, had resigned and left the company. The next day, the Las Vegas company reported "revised" results for the first quarter, ended March 31, that lowered revenue to $17.1 million from the $29.8 million reported April 26. The net loss was put at $32.4 million, or $14.3 million more than first reported.

PurchasePro gave no explanation for the new results, and a spokesman even denied that the company was restating its numbers. "Its a revision," the spokesman said. "There is a difference."

Critical Path found itself in a similar situation earlier this year, when it put President David Thatcher and William Rinehart, vice president of worldwide sales, on administrative leave and later restated earnings. MicroStrategy went through a similar crisis.

Almost all corporations, especially new Internet companies, have a provision in their charters that says a director cannot be held liable unless he or she is guilty of disloyalty or conflict of interest involving the company, said Leonard Chazen, a partner at Covington & Burling, a major New York law firm.

"Even if you accuse the directors of having been asleep at the switch, shareholders are not likely to get a monetary award against [them]," Chazen said.

 
 
 
 
 
 
 
 
 
 
 

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