Tuesday, January 8, 2013

Dismissal of Suit Against Satyam Directors

Last week, there was coverage in the financial press about the dismissal of a securities law suit by a New York court against the independent directors of Satyam. Now, a copy of the order dated January 2, 2013 issued by Judge Barbara Jones of the Southern District of New York is available through D&O Diary, which also carries a detailed analysis of the opinion.

The shareholder suits failed on two counts, one procedural and the other substantive. On the procedural count, it was found that on an analysis of the principle laid down by the US Supreme Court in Morrison, the plaintiff shareholders’ claim is to fail because they either bought shares on an Indian stock exchange or exercised employee stock options which was said to have taken place in India. In other words, the New York court was unable to exercise jurisdiction. On the substantive count, it was found that the shareholders’ claim against the independent directors of Satyam was not sustainable because the claims concern an “intricate and well-concealed fraud perpetrated by a very small group of insiders and only reinforce the inference that the [independent directors] were themselves victims of the fraud.”

Although the evidence of successful personal actions against independent directors even in the US is limited, this court ruling would provide some source of comfort to independent directors who are usually concerned about personal liability for actions that are beyond their control. 

1 comment:

Anonymous said...

Maybe there was no procedural issue here. In Morrison, the lower courts held the question to be one of jurisdiction, but the SC corrected this `threshold error' and held it to be a merits question. This is particularly interesting because US Congress, thru S. 929P of Dodd-Frank textually restored the SEC and DOJ `jurisdiction' based on something like `conduct and effects' test. There is a live controversy whether this really accomplishes anything in light of the SC approach discussed above. A good article dealing with this issue can be found at http://newsandinsight.thomsonreuters.com/uploadedFiles/National_Litigation/News/2011/06_-_June/professorpainterdoddfrankanalysis%20(2).pdf
-Mangesh Patwardhan