Uncovering the Corporate Rap Sheet

Corporate Research E-Letter No. 4, September 2000

Uncovering the Corporate Rap Sheet: How to Learn About a Company's Brushes with the Law

by Philip Mattera

In 1996 a Florida resident named ChrisTopher Kehm was seriously injured when one of the Firestone tires on his Ford Bronco blew out, causing the vehicle to roll over. Kehm sued Firestone, and early in the case a lawyer for the company offered to settle - if Kehm would sign a strict non-disclosure agreement. Kehm's attorney recently told the National Law Journal that she replied to the Firestone lawyer: "If I talk in my sleep, I'll violate the order." The Firestone advocate's reply: "Well, don't talk in your sleep."

The question of corporate secrecy about legal proceedings has become a hot issue amid the growing controversy about the apparent cover-up of tire defects by Firestone (and its Japanese parent Bridgestone Corp.) and Ford Motor Co. Before the word got out about the defective tires and Bridgestone/Firestone began a recall last month, scores of people died in accidents while driving on tires that they did not know were extremely hazardous.

The reason for the secrecy, of course, is that Bridgestone/Firestone and Ford did not want to encourage more litigation by accident victims, nor did they want documentation of the problem that may have come to light in one case to be used by plaintiffs' lawyers in others. Seeking gag orders is standard operating procedure for a company that has caused harm to a large number of people.

About a dozen states have laws limiting secrecy to some extent when disclosure would be in the public interest. It will be up to Congress and state legislatures to expand and extend those provisions.

While we wait for these bodies to act, there is a place to turn for at least a general overview of corporate legal entanglements: the public filings required of all companies whose securities are traded on stock exchanges. All publicly held companies must submit a variety of reports to the U.S. Securities and Exchange Commission, which in turn makes most of these documents available to the public.

Among these reports is the 10-K, an annual review of the company's operations and finances. Among the standard sections of the 10-K is Item 3--Legal Proceedings. Item 3 can sometimes contain a cornucopia of details about a company's involvement in litigation and in enforcement actions by federal and state regulatory agencies.

Ford's 5,000-word "Confession"

The most recent 10-K of Aetna Inc., for example, has more than 2,000 words describing a dozen class action suits and other complaints brought against the company's HMO subsidiary Aetna U.S. Healthcare alleging inadequate coverage. The 10-K of Tosco Corp. contains more than 1,000 words about environmental problems at its oil refineries around the country. Ford Motor Co. may have not been highlighting its rollover problems to federal regulators and plaintiffs' lawyers, but its current 10-K--issued months before the current scandal erupted--has a whopping 5,000 words on legal proceedings, covering rollover lawsuits as well as numerous class actions involving faulty ignition switches, defective transmissions and other product liability matters as well as a variety of alleged environmental violations. [You can obtain 10-Ks and other filings online from the SEC's EDGAR database, which is available from the SEC itself at (www.sec.gov) or from non-governmental sites such as (www.freedgar.com).]

At one time it was more difficult to find juicy revelations in corporate filings. Companies used to avoid disclosing litigation and regulatory action by claiming that whatever proceedings were going on would not have a material effect on their finances. The claims about materiality were based on a self-serving interpretation of Securities and Exchange Commission (SEC) rules. A public company's obligation, as stated in the Code of Federal Regulations (17 CFR 229.103), is to disclose "any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject...Include similar information as to any such proceedings known to be contemplated by governmental authorities."

These days the SEC won't let companies with serious legal problems get away with claiming that they are not material. The SEC doesn't hesitate to bring suit against companies that do not adhere to the rules. In 1996, for instance, the commission filed a complaint against a telemarketing company called Tellus Industries for failing to disclose that the federal government and at least five states had initiated enforcement actions against the company. Tellus was ordered to pay a fine of $300,000. The SEC has also brought actions against companies for failing to adhere to rules requiring disclosure of individual criminal convictions and other legal problems of executive officers and directors.

As useful as SEC reporting requirements are, 10-Ks cannot be relied on to provide a complete picture of a company's legal transgressions. The only way to be sure you are getting the whole story is to go straight to the courts and regulatory agencies themselves. There's not enough room in this newsletter to discuss the procedures for gathering information from all government agencies, so we will limit the discussion to the courts.

Diving Into the Docket

One of the great developments of recent years, from a research point of view, is that more and more court information is being put online. It is now possible to search the dockets of virtually all the federal courts in the United States. State and local courts are far behind, but they are moving in the same direction.

The thing to remember about these records is that they do not contain the full text of the filings in the cases. The dockets are limited to basic information such as the names of the parties, the general category of the litigation, the case number, the date on which it was filed and an outline of events (motions, rulings, etc.) that have taken place. To get a full understanding of a case, you will need to go to the courthouse in which it was filed and look at the paper versions of the complaint and other documents.

What follows is a summary of the main electronic sources for court dockets.

PACER (Public Access to Court Electronic Records). PACER was established by the Administrative Office of the U.S. Courts to provide online access to the dockets of individual federal district and bankruptcy courts. All bankruptcy courts and nearly all district courts participate. By setting up an account with the PACER office, you can tap into the various court dockets using a more or less standardized interface, and your online costs (60 cents a minute) are combined into one bill. For now, most of the courts still use dial-up connections, but they are beginning to appear on the web as well. One attractive feature is the U.S. Party/Case Index, which allows you to search nearly all the available dockets at once. For more information on PACER, see their website at pacer.psc.uscourts.gov.

CourtLink. Since PACER is not always the most reliable and efficient online product, many legal researchers turn to a commercial vendor called CourtLink, which provides access to roughly the same group of federal courts with more sophisticated software. Courts can be searched individually or all at once. CourtLink, which costs about $2 a minute, also provides access to state court dockets in about half a dozen states. For more information about CourtLink, see www.courtlink.com.

CaseStream. CourtLink recently acquired a competing company called CaseStream that claims to provide the most extensive and most rapid access to federal court dockets. It has a service that alerts subscribers when a new case has been filed in a particular category or one that involves a particular party. CaseStream, available directly (www.casestream.com) or via Lexis-Nexis, is designed mainly for law firms and other institutions with deep pockets, but there is an inexpensive way to access the information.

Earlier this year CaseStream formed a partnership with Hoover's Online, which produces the website with the best corporate profiles. [The basic Hoover's information (www.hoovers.com) is free, but you have to put up with ads.] Among the features now contained in each profile is a link to a CaseStream list of recent lawsuits involving the company in question. You can see the main information (party names, nature of the suit, date of filing, etc.) for free, and you can purchase a complete docket for $3. CaseStream information is also available through a free website called Company Sleuth (www.companysleuth.com) that will notify you when there is a new lawsuit or other public filing about a corporation.

Lexis-Nexis and Westlaw. These high-priced databases are the premier means of doing basic legal research of all kinds. They contain the full text of thousands of written decisions from federal and state courts, all extensively indexed and categorized for lawyers. As for pending cases, Lexis-Nexis, for example, contains docket information on state civil cases from 19 states (and some criminal dockets) as well as CaseStream, though keep in mind that the CaseStream feature is not included in the Lexis-Nexis accounts maintained by many universities and other non-profit institutions.

Internet. Ideally, information such as court dockets should not be sold at all, but instead ought to be available as a free, public resource. Some courts are moving in this direction by making their dockets available at no cost on the Internet. For a list of links to state courts that have taken this step (and to state agencies that have done the same with other data), see the website assembled by BRB Publications at www.brbpub.com/pubrecsites.asp.