Juries, upset over corporate scandals such as Enron, awarded $13.8 billion for fraud in 2003.
Largest Jury Verdicts
Juries, upset over corporate scandals such as Enron, awarded $13.8 billion for fraud in 2003.
By Margaret Cronin Fisk
Bloomberg News Service
NEW YORK - U.S. juries awarded damages totaling $13.8 billion last year against companies sued for fraud, up from $1.46 billion in 2002, a Bloomberg survey of the 25 largest verdicts shows.
The fraud judgments, which accounted for nine of the 25 largest awards of 2003, reflected juror anger about corporate wrongdoing disclosed since the collapse of Enron Corp. in late 2001, said defense lawyers who represented companies.
There were eight corporate-fraud verdicts in the top 25 in 2002, up from one in 2001, Bloomberg data show. "Because of the national scandals like Enron, WorldCom, Tyco - and, in Alabama, HealthSouth - people have an extensive distrust and even dislike for corporations," said Samuel Franklin of Lightfoot Franklin & White in Birmingham, Ala.
Exxon Mobil Corp. has hired Franklin's firm to appeal a fraud suit that resulted in an $11.9 billion verdict last year. It was the largest fraud judgment ever.
The rise in fraud verdicts against companies is prompting some companies to settle disputes confidentially before trial rather than risk large damage awards. The cost of settling has also risen by as much as 50% compared with 2002, said Robert Zito, a New York-based attorney who has defended fraud suits, including one against National Partnership Investments Corp., now owned by Apartment Investment and Management Co.
Juries have previously returned multiple fraud verdicts over a short period of time, such as in the late 1980s after a spate of insider-trading prosecutions and in the early 1990s after the collapse of several savings and loan associations. None was as large as the Exxon award or is among the 10-largest verdicts in U.S. history.
Fraud verdicts in 2003 surpassed in number and size those arising from personal injury claims, as measured by damages awarded in the 25 largest cases reviewed by Bloomberg. Personal-injury verdicts amounted to $945.8 million in 2003, compared with $31.1 billion in 2002.
In 2002, the largest personal injury award was for $28 billion, awarded to a smoker with lung cancer who sued Philip Morris Cos. In 2003, the largest personal injury award was for $250 million, awarded against USX Corp. to Roby Whittington, an Illinois man diagnosed with cancer linked to asbestos exposure.
The fraud verdict against Exxon Mobil, which came after a retrial of the suit, was more than three times larger than the $3.5 billion the previous jury had awarded. That initial award was overturned on appeal.
Other large fraud verdicts in 2003 included: a $934 million award in California against Flextronics International Ltd. on allegations of "economic extortion"; $218 million in damages in Ohio against a unit of Symbol Technologies Inc. over an agreement to develop a grocery-cart scanner; and a $151 million judgment in North Carolina against a Royal Philips Electronics NV unit in a dispute over development of an ultrasound machine.
In mock litigation or focus-group sessions held before scheduled fraud trials, corporations have learned that juries may give them a hostile reception, said New York attorney Dennis Orr, who has defended companies that gave their cases a test run. He declined to name them.
"In fraud and securities cases in the past year or so, mock juries have been coming in with verdicts that far exceed the amounts that are even at issue in the cases," he said. "In just about every case, these juries are finding document destruction, bad audits or corporate waste where the plaintiffs haven't even raised claims of that kind."
Jurors say they believe that executives of corporations conducted themselves in fraudulent ways, said Austin, Texas, attorney Kevin Sadler, who won a $132 million verdict in March against a BOC Group Plc affiliate.
The BOC Case
In the BOC case, corporate scandals unconnected to the company appear to have left the jurors "predisposed" to finding his client liable, said Christopher Benson, a lawyer in Austin who represented a small company affiliated with the British conglomerate.
The suit against Exxon Mobil, the world's largest publicly traded oil company, could have been interpreted as fraud or as a contract dispute, said analyst Fadel Gheit, senior vice president of oil and gas research at Oppenheimer & Co. He said the jury identified it as fraud in part because of the atmosphere in which the trial took place.
Exxon had leased Mobile Bay mineral rights from Alabama in return for royalties. The state claimed the contract required Exxon to pay on a gross-proceeds basis; the state argued the company deducted some costs first and didn't pay for gas it used to run production operations. The jury awarded about $2 billion more than the state requested, Exxon's attorney Franklin said.
"People are scared to death to go to trial right now," said Zito, the New York attorney. In the 2002 fraud case in which he represented National Partnership Investment, the jury's award of $184 million was more than the plaintiffs had sought.
In the past year, five of the 10 largest-ever shareholder settlements were also reached, Bloomberg data show. They include the $631 million agreement approved Dec. 12 for Lucent Technologies Inc. shareholders and the $300 million accord in August of an investor suit against DaimlerChrysler AG. A separate $3 billion fraud suit by billionaire investor Kirk Kerkorian is being tried by a judge. DaimlerChrylser and Lucent said in court papers that they had done nothing wrong.
A $300 million settlement last March in the Oxford Health Plans Inc. securities case was directly connected to the trial date, which came right after a number of stories were published about corporate fraud at WorldCom and other companies, said New York attorney Patricia Hynes, who represented investors.
The U.S. Securities and Exchange Commission accused WorldCom, the second-largest U.S. long-distance company, of an $11 billion accounting fraud in 2002. The company agreed in July to pay $750 million to settle the SEC allegations. WorldCom filed the largest bankruptcy in U.S. history in 2002, topping the one filed by Enron in December 2001 after the former energy trader admitted hiding debt in off-the-books partnerships.
"With all the news in the paper on corporate wrongdoing, there is a healthy fear in defendants," Hynes said.
Most of the largest awards from 2003, including the Exxon Mobil decision, may be reversed or reduced, lawyers for both sides said. Flextronics said it had settled the lawsuit after the verdict, for just $23 million. USX said it settled the $250 million asbestos verdict against it for an undisclosed amount. Symbol Technologies, BOC and Royal Philips said they were appealing the adverse verdicts. The $28 billion verdict against Philip Morris was subsequently reduced to $28 million and the judgment has been appealed. All the companies deny wrongdoing.
Gheit at Oppenheimer, who rates Exxon Mobil a buy and owns some shares, said the $11.9 billion verdict won't survive appeal. "I don't think Exxon will pay anything near that," he said.
Any appellate relief won't help companies or executives whose fraud suits haven't been tried, Orr said. Investor suits against HealthSouth, Tyco International Ltd. and top executives of Enron and WorldCom, are among the largest awaiting trial.
"In light of the bad publicity floating around out there, defending fraud and securities claims against corporate clients and accounting firms nowadays is akin to dining with panthers - you can't help but become part of the meal," Orr said.
Top 25 Verdicts
1. $11.9 billion (Alabama Department of
Conservation & Natural Resources v.
Exxon Corp.). Fraud.
2. $1.1 billion (Buettner v. Bertelsmann
AG). Breach of contract.
3. $934 million (Beckman Coulter Inc. v.
Dovatron International Inc.). Fraud.
4.$521 million (Eolas Tech Inc. v.
Microsoft Corp.). Patent infringement.
5. $417 million (Saudi Basic Industries
Corp. v. Mobil Yanbu Petrochem. Co.).
Breach of contract.
6. $383 million (International Paper Co. v.
Affiliated FM Insurance Co.). Breach of
7. $250 million (Whittington v. USX
Corp.). Personal injury.
8. $218 million (Telxon Corp. v. Smart
Media of Delaware Inc.). Breach of
9.$189 million (Fuller-Austin Insulation
Co. v. Fireman's Fund Ins. Co.). Breach
of insurance contract.
10. $164 million (Estate of Brad Johnson,
Sr. v. Trinity Materials Inc.). Wrongful
11. $151 million (Volumetrics Medical
Imaging Inc. v. ATL Ultrasound Inc.).
12. $147 million (In re: Vitamins Antitrust).
13. $143 million (Knight v. DePena).
14. $140 million (T-Bar-X Limited Co. v.
Anadarko Petroleum Corp.). Fraud;
breach of contract.
15. $137 million (Equatorial Tonopah Inc.
v. Kvaerner US Inc.) Fraud.
16. $132 million (TVT Records v. The
Island Def Jam Music Group). Fraud;
17. $132 million (Fluorine on Call Ltd. v.
Fluorogas Ltd.). Fraud; breach of con-
18. $112 million (Union Carbide Corp. v.
Shell Oil Co.). Patent infringement.
19. $112 million (Fellin v. Sahgal). Medical
20. $104 million (Peterson v. Sta-Rite
Industries). Products liability.
21. $100 million (Hinton v. 2331 Adams
Street Corp.). Negligence.
22. $92 million (In re: Chemical Release at
Bogalusa). Personal injury.
23. $91 million (Universal Exp. Inc. v.
Select Cap. Advisors Inc.). Fraud.
24. $86 million (Ceimo v. General
American Life Insurance Co.). Breach
25. $81 million (Rivera v. City of New
York). Malicious prosecution and