For those of you who like me have been
watching in disbelief as the
accounting scandal engulfing Olympus Corp. has slowly unfolded like a
slow-motion train wreck, I am sure you have many questions, but one that occurs
to me in particular to ask is - why haven't there been any lawsuits yet? After
all, the company has lost over 70% of its market capitalization value
(representing more than $6.4 billion) since the scandal first came to light in
Not only that, but after weeks of denial, on November 8,
2011, the company admitted in a press release (here)
that "it has been discovered that the Company had been engaging in deferring
the posting of losses on investment securities, etc. since around the 1990s,"
and that the fees the company paid to advisors in connection with three
business acquisitions "had been, by means such as going through multiple funds,
used in part to resolve unresolved losses on investment securities, etc., by
such deferral in the posting of these losses." The company also separately
announces on November 8, 2011 (here)
that its board had voted to dismiss a company officer whom the company said in
a press release "was found to be involved in such deferral in posting of the
losses." In addition, the company also announced that its Standing Corporate
Auditor had resigned.
A few facts start to fill in the explanation of why there
have been no lawsuits yet, despite all of these circumstances and revelations,
and despite the magnitude of the drop in the company's market capitalization.
First, the company's shares trade on the Tokyo Stock
Exchange. While American Depositary Receipts trade on the Pink Sheets in the
U.S., those securities, according to Jonathan Stempel's November 9, 2011 Reuters
article entitled "Olympus Investors May Find Courthouse Door Closed" (here),
represent only about one percent of the company's float, and no single investor
has as much as even $1 million of the ADRs.
With the vast preponderance of the company's shares
trading on the Tokyo exchange, only a very small number of Olympus investors,
representing a very small share of the company's pre-loss market
capitalization, would be able to assert claims in U.S. court under U.S. law, in
light of the "transaction" test first articulated by the U.S. Supreme Court in
its June 2010 holding in the Morrison v. National Australia Bank case
(about which refer here).
Under the Morrison holding, the U.S. securities laws simply do not apply
with respect to the transactions in which those investors who bought their
Olympus shares on the Tokyo exchange.
The investors might try to sue Olympus and its directors
and officers in U.S. court under Japanese law, but that does not really seem
like a realistic alternative. Toyota's investors tried to Japanese securities
law claims in their securities class action lawsuit filed in the wake of that
company's sudden acceleration scandal. As discussed here,
in July 2011, Central District of California Judge Dale Fischer rejected the
argument that she had jurisdiction over the Toyota shareholders' Japanese law
securities claims. Among other things, she said that the requirements of comity
strongly militated against her exercising jurisdiction over the Toyota
shareholders' Japanese law claims.
While the Olympus shareholders might well consider the
possibility of pursuing the claims under Japanese law in Japan, the problem
they have is that Japan's courts do not have a class action procedure like that
in the U.S., and as the Reuters article linked above discusses, there
may be questions about how damages would be calculated under Japanese law.
(That said, prior corporate scandals in Japan have triggered securities
litigation in that country, as discussed here.)
One alternative gambit the Olympus shareholder might try
in order to be able to pursue claims in the U.S. is to try to assert claims
under the law of one of the U.S. states. That is a maneuver the shareholder
plaintiffs are trying to pull off in the BP shareholder litigation arising out
of the Gulf oil spill, as discussed in Alison Frankel's November
9, 2011 article on Thomson Reuters News and Insight about the BP
case. But as Frankel discusses, this effort to try to assert class claims under
state securities class is fraught with difficulties.
With all of these difficulties, we may not see any
shareholder litigation arising out the Olympus scandal any time soon. In the meantime,
though, there is a growing list of questions about this increasingly bizarre
story, such as - what were the investment losses that the company was trying to
mask, and how big were they? Exactly how were the merger transactions used to
mask those losses? Are there other losses that have not been disclosed or were
there other transactions used to mask those or other losses? Are there other
inflated assets that have to be written off? Who among the company's management
were aware of these accounting maneuvers?
This is one of the more striking stories to come along in
a long time, both in terms of the scale and the duration of the coverup, as
well as the complexity of the means of the deception. It seems likely that
whether or not there ultimately is any shareholder litigation, that there will
(or should be) some type of regulatory action. (Refer here for the strory about
the Tokyo Metropolitan Police investigation of the scandal.)
In any event, this case surely is another reminder of the
impact of the Morrison decision. There is no doubt that if all of this
had come up before Morrison, there would have been a raft of lawsuits in
U.S court against Olympus and its directors and officers about all of this.
And speaking of the breadth of Morrison's impact,
Victor Li has a very interesting November 9, 2011 Am Law Litigation Daily
describing how the lawyers for Aloca have successfully moved to reopen the
bribery case brought against the company by Aluminum Bahrain, after the case
had been administratively stayed to allow a criminal probe to go forward. The
company recently sought to reopen the case in order to be able to move to
dismiss it under Morrison. The company will now have a chance to try to
have the claims, which are based on RICO, dismissed. (For more background about
the Alcoa case, refer here.)
One final thought about the Olympus case. For those who
have been trying to think about where the Dodd-Frank whistleblower provisions
might lead, it is worth thinking about the fact that the scandal began with the
company's CEO confronting the board. It does not take too much imagination to
picture someone like him or another officer of a company subject to the SEC's
jurisdiction running to the SEC with this story. The bounty provisions under
the Dodd-Frank Act certainly would in these circumstances present a hefty
incentive for the prospective whistleblowers.
When They Ask Later How Europe Went Bankrupt:
a scene in Ernest Hemingway's novel, The Sun Also Rises,
where Bill Gorton, the New York friend of the book's main character, Jake
Barnes, asks Jake's rival, Mike Campbell, "How did you go bankrupt?" Campbell
responds, "Two ways. Gradually and then suddenly."
I thought of this exchange as I was reading an article in the October 29,
2011 issue of The Economist about the euro crisis. I think the likely
timing of the "suddenly" part of the euro crisis might be discerned in this
sentence in the article: "[i]n the next three years Italy and Spain will have
to refinance about €1 trillion-worth of bonds, not counting additional
borrowing to finance their deficits." A three-year time frame may sound
more like "gradually" -- that is, unless bond investors start
assessing how likely likely ithe refinancing really is. .
And Finally: How
about a map of every
McDonald's in the United States? (Did you know that the furthest
you can get from a McDonald's Restaurant in the Continental U.S. is 110
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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