Like a number of public companies that have evolved from personal brands (Martha Stewart (MSO) and Steve Madden (SHOO), which Sonya footnoted last month are two that come immediately to mind), there’s a certain amount of — how can we put this politely? — co-mingling between the personal and the corporate that strikes us as a bit incestuous, not to mention downright tacky.

Despite this, Ralph Lauren stock has been on something of a tear, rising over 35% over the past year. That kind of performance often prompts investors to turn the other cheek when it comes to the type of largesse we’ve documented at the company over the years.

Until now, that is. In the 10-Q that Ralph Lauren filed earlier this week, it noted that the City Pension Fund for Firefighters and Police in Pembroke Pines, Fl. (motto: to Protect and Serve Your Retirement) has filed a suit in New York State Supreme Court against the company’s directors and certain executives for “waste of corporate assets by the Company’s directors for permitting excessive compensation to, and alleged related party transactions with, the Company’s Chairman and Chief Executive Officer and certain other executives, and unjust enrichment by these executives”. The filing goes on to note that:

The Plaintiff seeks damages on behalf of the Company in an unspecified amount sustained from the alleged breaches of fiduciary duty and waste of corporate assets and seeks disgorgement of excessive compensation and benefits of related party transactions. The Plaintiff also demands it be awarded the costs and disbursements of the derivative action, including reasonable attorneys’ fees.

The lawsuit was filed in November and was picked up at the time by Courthouse News Service, which monitors courts for news-worthy suits. But this is the first time that this is appearing in any of Ralph Lauren’s filings. In the 10-Q, the company doesn’t give an estimate for damages and says the company and the defendants sought dismissal of the case on Jan. 12.

While there’s no discussion in the filing on who’s footing the bill for fighting this lawsuit, the company does note in a different section of the filing that its SG&A expenses climbed by over 15%. While legal fees are not specifically broken down, the filing does make clear that they’re included in this number.

Given the heady performance of the stock, other investors may be more than happy to sit on the sidelines and see whether the Florida firemen and police or the Bronx prepster ultimately prevail.

Image source: firefighter via Shutterstock

Over at footnotedPro, we’ve put out four reports in the past week.  We’re at the beginning of filing season and the actionable disclosures are coming in fast and furious. For more information or to inquire about a trial subscription, email Todd Serpico. Find out what you’re missing in the filings.

“…contacted him, and members of the class he seeks to represent, on their cellular telephones without their express consent in violation of the Telephone Consumer Protection Act (‘TCPA’).”

However effective they might be, we’ve never met anyone who actually liked getting telemarketing calls. And sales calls to your cell phone are particularly annoying, especially because most of us wind up paying for incoming calls one way or another.

In this case, the plaintiff who filed the suit is seeking statutory damages for alleged negligent and willful violations of the TCPA, attorneys’ fees, costs and injunctive relief, which could cost $500 for each violation and $1,500 if it’s a “willful violation.” Discover said it can’t currently predict how the case might turn out, but it “…will seek to vigorously defend against all claims asserted by the plaintiff.”

Never ones to pass up the opportunity to do a little cyber-snorkeling in the Code of Federal Regulations, we found the relevant rules here, in the Telephone Consumer Protection Act. There are indeed restrictions that limit the circumstances in which a party can make a sales or marketing call to a cell phone user, but there are also some exceptions that would possibly get the company off the hook (if the consumer had previously given his consent to be called or if the call had an emergency purpose).

It turns out that this isn’t the first time that Discover has litigated this type of class action lawsuit. Earlier in 2011, the company settled a similar case that had been filed in federal court in the Southern District of California, according to a 10-Q filed last July.

Neither filing goes into the details of the respective lawsuits, so there are a lot of possibilities here. It could be that the underlying facts of the case are similar, or they might be very different. The fact that the first case was settled might have inspired a second plaintiff/attorney duo to file their own lawsuit. And – as far as Discover is concerned, as a company with a $14.79 billion market cap – this could be the metaphorical equivalent of swatting mosquitoes at a picnic. As soon as it swats one down, another one comes circling.

We wondered, though: What other companies are dealing with class action lawsuits filed under the Telephone Consumer Protection Act? We found some other examples from the past few months’ filings, including:

Encore Capital Group, Inc. (ECPG), which got zapped with a couple of class actions filed in late 2010 in federal court in California’s Southern District. Encore Capital lost its bid to get the cases dismissed or stayed. Several months later, two more class action cases were filed in the Northern District of Illinois; but, according to the most recent 10-Q, Encore Capital won its motion to transfer the Illinois cases and consolidate them with the two already pending in California.

Career Education Corp. (CECO), a for-profit education company, has a couple of cases pending in federal court in the Northern District of Illinois, according to the company’s most recent 10-Q. Both of those cases alleged that the plaintiffs received unauthorized text message advertisements from the company, in violation of the TCPA. As of last fall, the parties were trying to negotiate settlements, but some issues remained “unresolved.”

Nelnet, Inc. (NNI), a student-loan servicing company, is defending a case filed against a subsidiary in federal court in New Jersey; that lawsuit, filed on behalf of a putative class, alleged that the company sent unauthorized advertising faxes, some of which were supposedly sent “willfully.” According to the most recent 10-Q, the complaint claims that the company “…sent putative class members more than 10,000 faxes that violated the TCPA, amounting to more than $5 million in statutory penalty damages and more than $15 million if trebled for willful violations.”

There are also several cases pending against smaller companies, but there aren’t so many that we would classify this as the cause of action du jour. Nevertheless, we’ll keep an eye on this topic and let you know if that changes.

Until then, if you get a call on your cell from a telemarketer, it may be comforting to know that you have options.

Image source: Set of touchscreen smartphones, via Shutterstock

The NBA’s season is in shambles after a lockout by owners this summer dragged on and talks faltered;  NBA officials canceled games through November 30. Yesterday, the NBA players’ union said it would disband, paving the way for an antitrust lawsuit against the owners — and raising the specter of a longer, messier fight.

Given the circumstances, some companies’ disclosures are no-brainers: Madison Square Garden (MSG) owns the NBA’s New York Knicks, and notes at one point in the 10-Q it filed earlier this month that its NBA and National Hockey League teams together mean the company earns “a disproportionate share of its revenues” while those sports are in season. In a section on events after the end of the quarter, the company warns that failing to reschedule the games canceled so far would hurt the company’s fiscal second-quarter results, and that further cancelations “could have a material negative effect on our 2012 fiscal year results.”  Moreover, the impact of any new revenue-sharing agreement adopted by the NBA after an agreement is reached (assuming one is, of course), is bound to affect the company as well, for better or worse.

Time Warner (TWX) says the lockout didn’t have a material impact on the most recent quarter’s results, and optimistically predicts that it “does not expect it to have a material impact on the segment’s operating results for the remainder of the year.” Not that all’s necessarily well, as its 10-Q goes on to warn:

“However, the longer-term impact of the NBA Lockout will be influenced by many factors including viewer ratings on TNT and advertising demand after the NBA Lockout ends. Because of the inherent uncertainties surrounding the NBA Lockout, the Company is unable to quantify the adverse impact that a prolonged NBA Lockout would have on the Networks segment s operating results.”

Others more peripheral to the off-court action (and all too soon, perhaps, the in-court legal action) tend to be less detailed in their warnings. Buffalo Wild Wings (BWLD), the chicken-wing restaurant chain, simply warned in the 10-Q that it filed on November 3 that “Our sales may be negatively affected by a disruption in the viewing of sporting events in our restaurants such as NFL, MLB, NBA, and NHL due to strikes, lockouts, or labor disputes.”

Take Two Interactive (TTWO), which sells sports-themed video games (and others), warned investors in a new risk-factor disclosure in its 10-Q last week that “The lockout by NBA owners could have a material adverse impact on our business and operating results.” It continued:

“The NBA players union and the owners of the NBA teams are currently renegotiating their collective bargaining agreement, which expired following the 2010-2011 basketball season. Sales of 2K’s annually released basketball game could be adversely affected due to the players being locked out and the reduction in the number of games in, or cancellation of, the 2011-2012 basketball season.”

Some companies are less explicit about the potential for harm than others. Video-game maker Electronic Arts (ERTS) also has contracts with the NBA (presumably for its NBA Jam games). Yet when it filed its 10-Q the same day as Take Two, it didn’t say anything about the lockout. Of course, size may make a difference here: Electronic Arts is more than six times as big as Take Two, by market-cap.

As with so many things tied to the basketball dispute, how big a deal it all turns out to be depends on how long things drag out. So grab a seat, grab a drink, and enjoy the action as best you can.

Image source: NBA Facebook page

Indeed, the disclosure about McClendon’s map collection began to take on a life of its own, prompting several shareholder lawsuits (more on that in a minute), showing up in a New Yorker magazine profile of footnoted friend Nell Minow and prompting Chesapeake to issue an amended proxy in an effort to set the record straight about some of the, um, more unusual disclosures in the initial proxy, including the map collection. The amended filing was really just a letter from General Counsel Henry Hood to Daily Oklahoman reporter Randy Ellis. Both the initial disclosure and the amended filing are well worth reading, for sheer entertainment value.

Among the justifications given for the purchase was that the company “believed it was not appropriate to continue to rely on cost-free loans of artwork from Aubrey.” As we footnoted after reading the second filing, it really was hard to read these disclosures with a straight face. The letter also noted that the map collection was really worth more than $8 million more than Chesapeake had paid, at least according to the appraiser who had helped assemble the collection in the first place!

We mention all this back-story because yesterday we learned that Chesapeake had reached a settlement with the investors who first filed suit back in the spring of 2009. The settlement was first reported (subscription required) by Brianna Bailey of The Daily Record and we picked it up in our Twitter feed yesterday afternoon. As Bailey reported and Chesapeake later confirmed, McClendon will pay back the $12.1 million plus interest of 2.28%.

One key part of the settlement appears to be this: “The Company will not reimburse Mr. McClendon for the Recission Payment, whether as part of any future compensation or otherwise.” Insurance also won’t be used to cover the cost. Chesapeake also has to pay $3.75 million to cover the plaintiff’s legal fees (assuming the court approves the payment) and presumably spent millions of its own money over the last 2 1/2 years fighting the lawsuit. A spokesman for Chesapeake declined to provide an estimate of what it had spent. The spokesman for Chesapeake did provide this statement however, which it attributed to Holt:

“We are pleased to have reached this settlement and believe it is fair and conducive to bringing this matter to a positive conclusion.  Since the settlement remains subject to final court approval, we will limit further comment. ”

Even with a few more years of SEC scuba-diving under our belts, McClendon’s map collection remains something of a gold-standard when it comes to unusual disclosures. While we’ve come across some other CEO art collections in the filings, we’ve yet to come across something quite as flagrant.

That Chesapeake stock has far underperformed some of its closest competitors, including Anadarko Petroleum (APC), Cabot (COG) and  EOG Resources (EOG) since the disclosure is a cold-hard fact. But how much of a role the disclosure and ensuing legal mess and, quite frankly, the environment that led directors to approve such a stupid deal in the first place is one of those — to borrow some words from former Defense Secretary Donald Rumsfeld — great unknown unknowns.

Perhaps the real question is whether other top executives — and their boards — learn from this. Let’s say the whole thing wound up costing around $20 million in cash plus millions more in lost opportunity costs (summoning up that Brandeis economics degree). Is that really enough to prevent this sort of thing from happening again? We’d like to think so, but the pessimist in us says that’s probably not the case.

Image source: MorgueFile

By way of background, Wright Medical is an orthopedic medical-device maker that last fall settled [PDF] a U.S. Justice Department investigation into its relationship with surgeons, involving the company’s hip and knee products. In addition to paying $7.9 million, the company entered into a deferred prosecution agreement, admitting no wrongdoing but promising to keep to the straight and narrow in return for seeing charges dropped at the end of four years. Since then, Wright Medical’s CEO quit, and it forced out another executive. To all appearances, these problems seemed to be receding into the past.

Then on Thursday last week, the company issued an earnings release and disclosed that three other executives had resigned “without cause” (and thus without severance). Maybe more significantly, it also said the U.S. Attorney that oversaw its settlement “believes that the Company has knowingly and willfully breached material provisions of the DPA.” The company, Wright Medical noted in the press release, has three weeks to respond before any action is taken — in other words, it can try to persuade the prosecutor not to come down on the company like a ton of bricks.

Yet if you had read Wright Medical’s filings carefully — or saw our FootnotedPro report on the subject Wednesday evening — you would have been prepared for this, and had nearly a day’s head-start on other investors. Just glancing at the company’s press releases (as every news outlet we could find seems to have done), would have left you flat-footed.

Here’s why: The company issued an earlier press release and 8-K the previous day. This Wednesday press release disclosed the company’s preliminary quarterly results — and mentioned in an offhand sort of way that it had received the results of an internal investigation, which it passed along to the authorities. Here’s the bulk of that section:

“The Board received a report on the investigation and notified the independent monitor and the U.S. Attorney’s Office for the District of New Jersey (USAO) pursuant to the Deferred Prosecution Agreement (DPA). The same notice was also provided to the Office of the Inspector General of the U.S. Department of Health and Human Services (OIG). The Board also took a number of measures to enhance the Company’s compliance environment.”

It goes on to say that “communications” with the authorities “are ongoing.” No mention of, for example, potentially willful breaches of the settlement agreement. Yet, in the 8-K that accompanied that press release, Wright Medical warned precisely that prosecutors might have reason to be suspicious. Here’s the key sentence, missing entirely from the press release, that caught our attention in the 8-K:

“On May 4, 2011, pursuant to Paragraph 20 of the DPA, WMT provided written notice to the independent monitor and the USAO of ‘credible evidence of serious wrongdoing.’”

Passing along the results of an internal inquiry “pursuant” to a prior settlement  vs. notifying the authorities of “credible evidence of serious wrongdoing” — strikes us as being pretty different. Moreover, in Wednesday’s 8-K, Wright Medical went on to warn that, should the U.S. Attorney’s office conclude that the company “has knowingly and willfully breached” the agreement, it

“could expose us to significant liability including, but not limited to, extension of the term of the DPA by up to 6 months, exclusion from federal healthcare program participation, including Medicaid and Medicare, which would have a material adverse effect on our financial condition, results of operations and cash flows, potential prosecution, including under the previously-filed criminal complaint, civil and criminal fines or penalties, and additional litigation cost and expense.”

In other words, Wright Medical found serious new problems, prosecutors could conclude (as they did, within a day) that the problems were willful, and all of this could have dire consequences for the company. None of that was in the press release, or in the articles based on the press release that we found.

Armed with that kind of knowledge, you might have been able to avoid some of the 6.4% decline in Wright Medical’s shares on Thursday. In fact, in after-hours trading last Wednesday, the stock was actually up 2% as we put together our report; it opened down 5% on Thursday morning. The stock only recovered a little of that ground on Friday.

Nor are we convinced the company is really being much more transparent than earlier in the week. For one thing, even the second press release skipped over the fact that the company could see serious repercussions if it can’t convince prosecutors to back off. And Wright Medical also managed to omit another detail. Specifically, (emphasis ours)

“that the USAO believes that WMT has knowingly and willfully committed at least two breaches of material provisions of the DPA.”

Where did we find that bit if it wasn’t in the press release? You guessed it: in the 8-K that Wright Medical filed with Thursday’s press release. (Scroll down to near the bottom of the last page to find it.)

As we said, it pays to read the fine print in addition to the spin.

Image source: Wright Medical website

The no-holds-barred battle between Tenet Healthcare (THC) and Community Health Systems (CYH) would be amusing if there weren’t so much at stake: Tenet is fighting for its independence in the face of a decidedly hostile overture from Community Health; Community Health is now facing so many lawsuits and government inquiries you need a spreadsheet to keep track of them, including a scathing lawsuit from Tenet.

We’ve written about several recent developments over at Footntoed Pro as they’ve happened. Others are doing a fine job of keeping up with the blow-by-blow (including the WSJ and Bloomberg). But on Monday, Tenet gave investors a glimpse of what goes on behind the scenes when lawyers get testy with one another, in one of multiple DEFA14A filings that day. It’s entertaining, and potentially illuminating, stuff.

In addition to various legal motions and the exhaustive list of questions and requests — interrogatories, in lawyer-speak — that Tenet sent CYH as part of its lawsuit, and a brief reference to the Indiana qui tam lawsuit over Community Health’s hospital admission practices, there’s a touchy and affectedly breathless exchange between the companies’ law firms.

In Community Health’s initial letter to Tenet, Kirkland & Ellis attorney Peter Duffy Doyle spins a spiel about CYH’s code of conduct and confidentiality provisions, and then adds:

“I want to alert you that disgruntled, former employees of CHS affiliates and Triad may presently work for, or consult with, Tenet. These individuals may seek to peddle purported information about CHS or Triad, even though they are legally prohibited from disclosing such information. Some malefactors may possess stolen CHS or Triad information, which has been altered, is incomplete, or is outdated. These former employees may harbor grudges and may, with malice, attempt to harm CHS and its affiliates.”

Yikes. Then Doyle proceeds to the threat: “Because the motives of such scofflaws are suspect in all events, there will be serious legal consequences for knowingly, or with willful blindness, relying on stolen or inauthentic documents, or data…” (Points to Doyle for use of the word “scofflaw,” which doesn’t show up in SEC filings very often — less than three dozen times as far back as Edgar goes, that we can tell.) Doyle goes on to hint that he suspects Tenet may be behind still more scurrilous behavior:

“To our shock, we have received troubling reports that uninvited strangers have approached CHS employees, including doctors, and asked questions under false pretenses… lied to them; falsely claimed to be CHS researchers; showed them suspect data; and asked questions about matters related to subject matters raised in your lawsuit. This letter serves as notice of these illegal and unethical pretextual practices. We trust that these pre-texting agents are not working for your firm. … I am confident that your firm will re-check these anonymous sources [cited in the lawsuit] in light of this letter, and investigate the ethics and legality of their methods and practices.

Never fear — Tenet’s lawyers wield a sharp pen as well. Gibson, Dunn & Crutcher attorney Robert C. Walters, for Tenet, starts by politely denying the accusations — “We would not allow or condone these practices. … we are committed to prosecuting our claims by the rules and not through surreptitious information gathering…” — and then moves on to his own kind of taunt:

“[Y]ou should know that we have received many unsolicited calls since the filing of the lawsuit, from a variety of sources in positions to know of such things, confirming conclusions we reached from public data and other sources. Among other things, these callers have confirmed (1) the inappropriate Blue Book admissions criteria and the admission of patients who under accepted clinical practice should be treated in observation; (2) the relentless pressures placed on emergency department doctors by CHS hospital administrators to increase revenues by raising admission conversion rates; (3) and the concomitant pressures imposed on physicians to decrease CHS hospital observation rates.”

The callers, Walters continues,

“are concerned that CHS has failed to operate an effective regulatory compliance program or to treat seriously information provided by whistleblowers. In effect, these callers have confirmed (and added considerably to) what we learned before we filed our Complaint. And nothing we have learned since causes us to doubt the accuracy of a single allegation.”

Given the tenor and posturing of the letters — the shock, the surprise, the delicate and bruised sensibilities — we suspect these letters are written for public consumption as much as anything else. Indeed, Walters, Tenet’s lawyer, accuses CYH of writing its letter as “nothing more than an overt threat” to stop Tenet from talking with CYH employees and physicians, and to “smear … former employees … and to stifle the legitimate collection of important evidence.” We doubt the posturing is all on one side.

All of which makes for decent spectator sport — mud-slinging often is, assuming you don’t have too much riding on the stocks’ performance, that is. But as we said earlier, the stakes are very real. It’ll be interesting to see how it plays out.

Image source: via Wikimedia Commons (read more on bare-knuckle champion John L. “Boston Strong Boy” Sullivan)

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Over at FootnotedPro, we’re batting .300 with last week’s news that Lawson Software (LWSN) is being acquired in a $2 billion deal. Two other companies from our January 14 report on top M&A targets for 2011 have also announced deals: Smurfit-Stone Container (SSCC) and Pride International (PDE). FootnotedPro: Interesting. Actionable. Profitable.

Beasley Allen’s petition claimed that Taco Bell’s products that purported to contain “seasoned ground beef” or “seasoned beef” actually contained “taco meat filling;” it then went on to say, “Taco meat filling is not beef. In fact, it does not meet the minimum standards set by the United States Department of Agriculture (‘USDA’) to be labeled or advertised as ‘beef,’ seasoned or otherwise.”

The blogosphere exploded with the story, as did many other news outlets, and customers throughout the country decided not to make a run for the border. Taco Bell wound up taking out full-page ads denying the allegations in Beasley Allen’s petition vociferously, protesting that its food items featuring beef were in fact 88% beef and 12% spices and other edible ingredients.

Less than three months after it filed the suit, Beasley Allen dismissed it on April 18, ostensibly because “changes were made to Taco Bell’s marketing practices.” Speaking on the firm’s behalf, attorney Dee Miles reportedly said, “From the inception of this case, we stated that if Taco Bell would make certain changes regarding disclosure and marketing of its ‘seasoned beef’ product, the case could be dismissed.” In another source, Miles was quoted as saying, “We accepted Taco Bell’s invitation to confer with company representatives and share information and ideas about the issues in the case. As a result of the lawsuit, changes in marketing and product disclosure were made by the company, allowing us to dismiss the case.”

We bring this up because in the 10-Q that Yum! Brands filed yesterday, it appears that the three months of questions over Taco Bell’s beef had a bigger negative impact than the company initially predicted (as reported in accounts like this one), when it hoped that its prompt action had “turned the tide” and that the matter would be contained, thereby causing only a “negative, short-term impact.” The company also said that it spent between $3 million and $4 million to defend itself publicly against Beasley Allen’s lawsuit (all reference to which – quite curiously – has completely disappeared from the law firm’s website). In its recent earnings call, Yum’s leaders acknowledged that the lawsuit had a negative impact on sales; however, the new SEC filing warns of more serious losses. After referencing declining operating profits and commodity inflation, the filing adds:

“Taco Bell’s operating profits were significantly impacted in the quarter by the publicity associated with a lawsuit filed in late January 2011 alleging a violation of consumer protection statutes and deceptive business practices by Taco Bell through its advertising that the beef served in its products is ‘seasoned beef’.  Such claims were false and the lawsuit was voluntarily withdrawn on April 18, 2011.  Nonetheless, Taco Bell experienced a significant reversal in sales trends immediately following the filing of the lawsuit.”

Taco Bell has stated that it may sue Beasley Allen over the incident. So here we are, with the ball in Taco Bell’s court, where it will probably remain until the company can quantify its losses and then decide whether it’s going try to recover them and the cost of its emergency public relations campaign. Whatever the company decides, we bet that it will spend a fair amount of time on the due diligence process before it files a lawsuit. Maybe at some point in the near future it will come to light just how much due diligence Beasley Allen did before it filed the lawsuit that started all this in the first place.

Image source: Like_the_Grand_Canyon via flickr

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Yesterday’s news that Lawson Software (LWSN) was being acquired in a $2 billion deal brings our M&A batting average up to .300. Back on Jan. 14, we gave FootnotedPro subscribers a list of 10 M&A picks and Lawson was one of our picks. Smurfit-Stone and Pride International (PDE), which announced deals in late January and early February, were also on our list. You can find out more about FootnotedPro here. FootnotedPro: Interesting. Actionable. Profitable.

Could it be that, in the outrage over the safety bonuses awarded to top executives at Transocean (RIG), two other striking parts of the company’s proxy go largely overlooked?

Transocean, of course, is the offshore drilling contractor that owned the Deepwater Horizon drilling rig that burst into flame a year ago, killing 11 and triggering a massive oil spill and environmental disaster. Yet, as has now been widely reported, the company patted itself on the back for “an exemplary statistical safety record” and “the best year in safety performance in our Company’s history” — and promptly awarded top executives most of the portion of their bonuses tied to safety. Now the company has apologized and executives are vowing to donate that portion of their incentive compensation to charity.

The bonus incident speaks volumes about Transocean and the tone set at the top of the company. But so do two other details in the filings. First, the company’s board created a Health Safety and Environment Committee in August last year, some four months after the spill. Guess how often it met during the four months between then and the end of the year? Once.

Agenda Item 2 in the proxy is even more eye-opening. To hear the company tell it, the provision is an attempt to “discharge the members of the Board of Directors and our executive management from liability for their activities during fiscal year 2010,” explicitly including the rig explosion and oil spill. It would, Transocean says, not only prevent many shareholders from suing directors and officers entirely — whether by taking part in existing lawsuits or future ones — it would give other shareholders a narrow window of just six months to sue.

Those who vote for the measure give up their right to sue altogether, Transocean says. Those who vote against the measure, assuming they fail to stop it, will have just six months to sue, the company says:

“After the expiration of this six-month period, such shareholders will generally no longer have the right to bring, as a plaintiff, claims in shareholder derivative suits against our directors and executive management.”

Derivative lawsuits, of course, seek to hold directors and officers accountable for damage to a company, with plaintiff shareholders acting on behalf of the company and other shareholders as a group. Transocean’s proxy provision applies to “facts that have been disclosed to shareholders (including through any publicly available information, whether or not included in our filings with the SEC)” — which could be read to encompass even the voluminous materials filed in court or with public inquiry panels.

Giving directors and officers a pass is apparently one of the inalienable rights of Swiss shareholders; we find it in other companies’ proxies as well. But it’s worth noting that — at least according to this 2008 report on European discharge proposals, from corporate governance and proxy-voting firm Manifest –

“a discharge of liabilities rightfully granted by shareholders in Switzerland can hinder claims against directors notwithstanding the fact that such claims are based on willful misconduct, fraud or any criminal offenses…”

That also contrasts with other European countries offering directors a discharge of liabilities, Manifest notes. In other words, it appears Transocean is going for as close to blanket protection against shareholder litigation as it possibly can.

We’re not international securities lawyers, so it may be an open question as to how well this kind of protection would hold up in U.S. courts. Still, however routine such proposals might be in Switzerland, it’s an audacious move by a company facing the kind of litigation that Transocean is.

Image source: USCG Press via Flickr

Madoff didn’t invent the Ponzi scheme; that dubious honor goes to Carlo “Charles” Ponzi, who swindled people out of millions nearly a century ago. But in the wake of Madoff’s multi-billion dollar  scams, more investors are stepping forward to claim that they lost money through Madoffesque con games that professionals should have detected, but didn’t. The latest: separate cases filed against MF Global Holdings Ltd. (MF) and a demand for payment sent to Towers Watson  (TW).

In the 10-Q that MF Global filed Feb. 3, the company discloses that it has been slapped with a couple of new lawsuits. The first was filed by the receiver of a partnership that allegedly operated a Ponzi scheme; the petition alleges that subsidiary MF Global, Inc. (MFGI) negligently violated its duties by failing to detect discrepancies or recognize that the partnership wasn’t properly registered. It also claims that MFGI’s conduct “…enabled the Partnership to operate a Ponzi scheme and cause damage to the investors.” MF Global hadn’t been served with the pleading as of Feb. 3.

In the second lawsuit, a New York bankruptcy trustee sued to recover allegedly fraudulent transfers made by Agape World, Inc., its principal, Nicholas Cosmo, and related entities. (A different lawsuit in federal court put the losses from those allegedly fraudulent transfers at “millions of dollars.”) The trustee claims

“…that MFGI failed to conduct sufficient diligence when opening the account, failed to respond to red flags about how account principal Nicholas Cosmo was using Agape’s funds and failed to provide proper oversight and monitoring which, if conducted, would have caused termination of the accounts and trading, and prevented losses to the investors.”

MF Global was sued in May 2009, along with Bank of America, over allegedly aiding and abetting Cosmo, but that case was dismissed with prejudice, meaning the plaintiffs couldn’t simply re-file. But this case is in bankruptcy court, where the rules – as well as possibly some of the underlying facts – are different. The trustee is seeking to recover $27.1 million, plus fees earned from the trades. MF Global says it hasn’t recorded a provision for losses, noting that the suit is in its early stages.

The demand for payment to Towers Watson was sent by privately-held Acument Global Technologies, Inc. and its pension plan, according to the 10-Q Towers Watson filed Feb. 8. Acument alleges that Towers Watson (at a time when it was known as Watson Wyatt Investment Consulting, Inc.) breached its fiduciary duty when it recommended that Acument invest in Westridge Capital Management Enhancements Funds.

A colorful press release issued by the SEC in February 2009 (available here), alleged that Westridge’s principals “essentially treated their clients’ investments as their personal piggy bank to purchase multi-million dollar homes, a horse farm and horses, luxury cars, and rare collectibles such as Steiff teddy bears…”. The Towers Watson filing adds another allegation by the SEC, that

“…Westridge had become a fraudulent investment scheme by which its principals purportedly misappropriated approximately $553 million from a number of highly sophisticated institutional investors, including public pension and retirement plans and educational institutions, some of which were investing in Westridge as late as February 6, 2009.”

Acument has recovered about $9.5 million of its $56.5 million investment in the Westridge Funds, but it is demanding that Towers Watson repay the rest of the pension plan’s losses. Towers Watson responds that it “plans to decline Acument’s demand for compensation and plans to defend vigorously against any legal proceedings that may ensue.”

The justice system will determine in due time whether the firms really breached their fiduciary duties to the plaintiffs, or whether these are just cases of disgruntled investors complaining about financial losses after the fact. But as a general rule, we applaud oversight and doing whatever it takes to put (and keep) the Baby Bernies – and their own boxes of evil – behind bars.

*A sloppy translation resulted in “jar” being written as a “box.”

Image source: John William Waterhouse, 1896

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Yet for all the exciting new work underway, the company is still trying to resolve a very old legal dispute.

The case – which is actually set for a hearing in Pasadena, Calif. this morning before judges on the Ninth Circuit Court of Appeals – relates to a contract that the Ministry of Defense for the Armed Forces of the Islamic Republic of Iran awarded to Cubic Defense back in 1977. That would be the Shah’s Iran, pre-Revolution, needless to say. According to this report from the Iran-U.S. Claims Tribunal, Iran hired Cubic to supply an air combat system and then furnish the parts needed to keep it going.

You’ll probably recall that the late 70s were a volatile time in Iran: The State Department’s website notes that Iran had a 1978 revolution, followed by the 1979 student-led seizure of the American Embassy (and 52 hostages), and America’s decision in 1980 to break diplomatic relations with Iran.

Iran later sued Cubic and got an arbitration award for $2.8 million, interests, and costs. After that, in 1998, a U. S. federal court judge declared that Iran’s arbitration award was an enforceable judgment. But, as Cubic disclosed in the 10-Q that it filed with the SEC on Feb. 3, neither it nor Iran was satisfied; both parties ended up appealing the court’s judgment to the 9th Circuit Court of Appeals.

Of course, in this case, Cubic can’t just write Iran a check – even if it wanted to. The filing explains:

“Under a 1979 Presidential executive order, all transactions by United States citizens with Iran are prohibited.  Therefore, even if Iran were to prevail in the 9th Circuit litigation, it is unlikely that we would be permitted to pay any amount to Iran.”

And that’s not the only complication. It turns out that there are “potential lienors” that want the money that Cubic allegedly owes to Iran. The company states that these lienors have filed liens against Iran’s judgment, but they haven’t obtained “valid court orders enforcing the liens.” The 10-Q continues:

“We are not aware whether any such claimants against Iran’s judgment have received Terrorism Risk Insurance Act funds (which would make their claims unenforceable)…. Payments to valid lienors could potentially be enforced, so in a previous year we recorded a liability for the amount of the judgment and are continuing to accrue interest.”

So after the oral arguments conclude, Cubic and its shareholders must wait for the decision by the 9th Circuit Court of Appeals. If the court reverses the judgment, Iran may seek a review by the U. S. Supreme Court. However, if the court affirms the judgment and Cubic’s liability, then Cubic can appeal the decision, or figure out whether it’s going to 1) pay the lienors if they obtain valid court orders, or 2) defy the executive order and pay Iran, although the odds of that happening seem very remote. We’ll see how the judges rule, and whether – after 34 years – the case finally comes to an end.

Image source: The U. S. Department of State

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