The former masters of the universe have resisted repeated calls for an apology. From Joseph Cassano who made 30 cents to every dollar of profits generated by AIG?s financial team, selling the credit default swaps that effectively bankrupted the world?s biggest insurance company, to Lehman chief executive Dick Fuld who earned $500m over the eight years he encouraged the risk-taking that led to his bank?s demise. One reason for this, along with what some call sheer arrogance, is that an apology is accompanied by incalculable litigation risks. The general thinking is that as soon as one admits liability or appears culpable of incompetence, one opens the door wide open to legal claims, especially tort suits.
US tort costs grew 2.1% in 2007, to $252 billion. But analysts expecting an increase in litigation following from the implosion of firms like AIG, Bear Stearns, Fannie Mae and Lehman, predict that tort claims will bloat up by 4% in 2008 and by another 5% in 2009 and 2010. As an example of how companies are anticipating a wave of lawsuits, consider how Bear?s suitor JP Morgan not only said that the acquisition would generate around $6bn in expenses including litigation costs, but also agreed to indemnify former senior Bear executives like Jimmy Cayne for six years.
Opinion is currently divided on tort reforms. Does tort, ?a negligent or intentional civil wrong not arising out of a contract or statute?, abuse the law to settle facile scores or does it empower a regular person to fight back against the damages inflicted by big entities? On the former front are those who like to quote the McDonalds spilled coffee case. When Stella Liebeck suffered third degree burns from a 49-cent coffee cup in 1992, a jury awarded her $200,000 in compensatory damages and $2.7m in punitive damages. These are indeed amazing numbers. The counterargument, using the same case, goes that McDonalds subsequently reduced the temperature of its coffee and that it had previously received more than 700 claims from customers who had been burned by its coffee.
Satyam has made the issue pertinent in India, especially with reference to its auditors where we are trying to figure out the liability of the parent company. A recent paper by Michael Carey at Harvard Law School argues: ?Firms that do not have enough assets to cover potential tort liability have a reduced incentive to take safety precautions. Large firms can take advantage of this by compartmentalising their most dangerous activities into smaller subsidiaries. Under current law it is difficult to reach the assets of a parent corporation when a subsidiary cannot pay its tort debts.?
Former SEC chief accountant Conrad Hewitt argued for liability shields for the Big Four. A EU tort reform proposal, first floated in June last year, also recommended similar protections, arguing that unlimited liability could lead to damaging consequences for its capital markets, given the limited choice of audit firms.
Arthur Anderson, the auditing firm that melted down with the Enron scandal, is the real elephant in the room. Six years in the grave, it was hit with a $17m suit last year, exposing to what extremeties tort lawyers can chase down their marks.
In India, where courts are led by well-codified laws and where PILs are perhaps tort?s closest cousins, the question is whether we should be pursuing a more tort-friendly culture. A new report by the US Department of Commerce notes that while foreign direct investment is a key driver of the economy, it?s decline since the late 1980s is directly linked to fears of litigation under the US legal system, this being a major concern for interested investors. Apart from local impacts like causing a severe doctor shortage in Alabama, direct tort costs have risen 100-fold in the last 50 years to now add up to more that 2% of the country?s GDP. That?s roughly equal to the federal government?s combined expenditure on public education, transportation, agriculture, energy and scientific research last year. Obviously India cannot afford this. So, whatever the temptations of compensating Satyam shareholders under tort, it?s perhaps a good thing that the said apples are simply not hanging around in our fruit yard.
?renuka.bisht@expressindia.com
