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GCs Bristle at Proposed Disclosure Rules
The Recorder
July 24, 2008
Accounting rule adjustments rarely elicit even a yawn from the legal community.
But changes proposed by the Financial Accounting Standards Board that would force public companies to disclose more about the risks of litigation have caused a howl of protest among general counsel and corporate and defense lawyers.
Under the revised rules for FASB Statement No. 5 (pdf), the threshold for reporting the potential loss from a lawsuit would be lowered from "probable" to anything but "remote." Public companies would also have to estimate just how much legal threats might cost and the likely outcome. They'd also have to disclose more details about the underlying litigation and the reasoning behind their predictions.
In-house and big-firm lawyers say the changes would force companies to lay their litigation strategies out for their opponents to see, potentially lead to a waiver of attorney-client privilege, and lead to more securities fraud cases if hard-to-predict litigation turns out differently.
"This is a solution in search of a problem," said Daniel Cooperman, general counsel of Apple. "I just don't understand what the problem is we're trying to solve. I just don't think any of the recent disasters have been based on misperceptions of litigation loss contingencies."
With the comment period coming to a close Aug. 8, the Association of Corporate Counsel and the American Bar Association are putting together letters critical of the proposed changes. And big legal names like Cooperman and Sun GC Michael Dillon are throwing their weight behind the opposition.
"I've been [with the ACC] almost 20 years, and I've never seen a member response like this," said Susan Hackett, the ACC's general counsel.
FASB released a draft of its proposed changes on June 5. FASB representatives did not return a request for comment, but one plaintiff lawyer applauded the effort to make corporations more transparent.
"I think it's about time -- it's long overdue," said Joseph Cotchett of Cotchett, Pitre & McCarthy.
In-house and defense lawyers claim that the disclosures will provide more opportunities for plaintiff lawyers and lay out their defense strategies beforehand. But Cotchett said that's not why he's in favor of the rule change. "It will make it easier for the public to know what's going on in those accounting departments," he said.
CARDS ON THE TABLE
A big worry, and one focused on by the ABA in its letter, is the impact on attorney-client privilege, said R. William Ide, who heads the ABA's task force on attorney-client privilege and is working on the letter. Privilege could be waived once the analysis of a case, most likely done by a lawyer, is disclosed in public filings, he said.
"The concern is that there is case law on work product and on attorney-client privilege," Ide said. "If you reveal discussions of a lawyer and a client to a third party, then you waive it."
Another concern is that companies would have to tip their hands in litigation since the new disclosures would force them to evaluate the case in detail for all the world to see.
The proposal says there is an exemption from disclosing information that could hurt a party's position. But defense lawyers aren't sure that would protect them.
"I can imagine instances where certain disclosures could be viewed as an admission against interest," said Steven Schatz, a Wilson Sonsini Goodrich & Rosati securities lawyer.
Finally, lawyers are wary about putting a number on litigation since the outcome of cases is often far from certain and a prediction could come back to bite in the form of a securities fraud case.
"Often the outcome of a case depends on your choice of counsel, discovery resources, venue, identifying expert witnesses, success of key motions and the members of your jury," wrote Sun's Dillon in a recent blog post about the proposed changes, which, if adopted, would take effect Dec. 15.
Synopsys GC Brian Cabrera said he's all in favor of shoring up disclosure, but not this way.
"The question is: Are we swinging the pendulum too far? Do you end up in a position where people are disclosing things that are a harm to the company?" Cabrera said.
