NEW YORK — Livent could face having to part with as much as $40 million in a potential damages payout from shareholder lawsuits filed in response to its disclosure last month of accounting irregularities, lawyers involved with the suits estimate. The situation poses yet another hurdle for the company as it attempts to rebuild.
A payout of even half that amount would be sizable for Livent, a company in which shareholders equity was just $46 million on March 31. The equity figure will be diminished even further by restatements relating to the accounting problems.
At least eight class-action securities lawsuits have been filed against the theater concern and its former chairman, Garth Drabinsky, and former chief operating officer and president, Myron Gottlieb, since the company’s new management disclosed on Aug. 10 its discovery that accounting irregularities inflated the company’s earnings by “millions of dollars” since 1996.
Livent stock was suspended from trading on Nasdaq and the Toronto Stock Exchange the day the irregularities were disclosed, and the stock has not recommenced trading. Resumption of trading is expected to see the stock slide to $2 to $3 a share, down from $6.75 before the accounting disclosures.
Losses suffered by shareholders from the stock price decline will be at the center of the class-action suits, which will be consolidated in the coming weeks before a New York federal court convenes preliminary hearings into the matter.
The Livent suits allege that shareholders who held stock between 1996 and the time of the disclosures were hurt by the company’s misstatement of the reported profits.
During the period concerned, the company and the two execs “engaged and participated in a continuous course of conduct to misrepresent the results of Livent’s operations and to conceal adverse material information regarding the finances … of Livent,” alleges a typical complaint, filed by Abbey, Gardy & Squitieri in a New York federal court.
A spokesman for Drabinsky and Gottlieb declined to comment “given that these matters are coming before a court,” and a Livent spokesman said the company would not comment on pending litigation.
Of course, class-action securities lawsuits are routine for companies encountering any sort of financial difficulties and often are dismissed out of hand. Cases alleging accounting fraud account for more than half of all class-action securities suits filed, according to Standard University’s Law School.
“When a company says ‘accounting irregularities,’ that’s the dinner bell for the vultures, as we are regarded by some people,” quipped Russel Beatie, a partner in Beatie and Osborn who has litigated extensively in both defense and plaintiff corporate law.
Few believe the Livent case is frivolous, however. Beatie, who has filed one of the suits in the matter, said that “this is one of the larger cases and it is certainly one of the more noteworthy cases because it is in an eye-catching business and it has a number of very well-known people involved in it.”
“We have found that accounting restatement cases are ones which have a very good chance of surviving a motion of dismissal and where a widely held stock or a substantial decline in value can correspond to very substantial damages,” said Steven Schulman, a partner with shareholders lawsuit specialists Milberg Weiss Bershard Hynes & Lerach.
Still, corporate defense lawyers say estimating damages is never that straightforward. “It’s a much more complex situation than it would appear on the surface,” said Stuart Shapiro, a partner with Shapiro Forman & Allen, who defends companies in such suits but is not involved in the Livent matter.
Shapiro said it’s not easy for shareholders to prove that accounting problems were the specific cause of a decline in a stock price, even when the company has admitted the problems.
“You have to separate out the factors in the marketplace, and there is no certain outcome to that,” he noted, particularly when the market is volatile.
But any payout would add to Livent’s woes and cast doubts on Livent CEO Roy Furman’s assurances last month that “Livent remains a viable company financially.”
One Wall Street analyst, who declined to be identified, said a big payout “is going to hurt them.”
A payout won’t necessarily cripple the company, however. Livent has insurance totaling $9.4 million, according to its SEC filings, which will cover much of any future damages payout.
The degree of pain the company would suffer is an issue in assessing damages, however. Almost all cases are settled out of court in negotiations, and myriad factors influence how damages are finally agreed on, lawyers on both sides note.
Aside from the “nature of the conduct” and difficulty of proving the conduct, the lawyers have to agree on how much the decline in stock price was specifically caused by the accounting issues.
And even when the shareholders’ case is very strong, their lawyers don’t want to bankrupt a company with a huge damages payout because a bankruptcy filing only delays payments, lawyers said.
Beatie and Osborn estimates Livent’s average trading price between May 1996 and August 1998 to have been $9.89, which suggests the average shareholder will have lost $7.89 a share if the stock reopens at $2.
The firm estimates that if damages equaled just one-quarter of that loss, the payout would be $42 million, given the amount of stock traded in the two-year period.