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As Toyota saga continues, shareholders ready case

As Toyota saga continues, shareholders ready case

WASHINGTON—Congressional hearings and investigations into Toyota Motor Corp.'s knowledge of accelerator problems could help plaintiffs suing the automaker and potentially endanger directors and officers insurance coverage that Toyota likely has in place, observers say.

One day before the start of congressional hearings last week, Toyota announced it had received a voluntary subpoena from the U.S. Securities and Exchange Commission seeking documents related to unintended acceleration of Toyota vehicles and the company's disclosure practices.

Toyota also said a federal grand jury in New York had issued a subpoena for related documents.

Those events came after litigation seeking class action status on behalf of Toyota stockholders. The securities lawsuit filed Feb. 8 in U.S. District Court for the Central District of California alleges Toyota's officers and directors defrauded investors by failing to disclose defects that could have led to unintended acceleration. Shareholders have lost tens of billions of dollars, plaintiffs allege.

On Friday, Toyota's stock closed at $74.83 per share.

Toyota securities traded at an artificially inflated price during the class period from Aug. 4, 2009, to Feb. 2, 2010, reaching $91.78 on Jan. 19, according to the lawsuit. As a result of recalls and related sales declines, the stock closed at $73.49 per share on Feb. 3, plaintiffs allege in their complaint.

Federal law governing securities litigation stays discovery in such lawsuits until after a court has ruled on motions to dismiss, which is a significant hurdle for plaintiffs, legal experts say.

Therefore, hearings and government investigations can help securities plaintiffs overcome that hurdle by producing information earlier than is normally obtained through discovery, defense and plaintiffs attorneys said.

“We have our hands tied behind our back more so than plaintiffs (in other types of litigation) as a result of that discovery stay,” said Hamilton Lindley, a shareholder attorney at Kendall Law Group L.L.P., a Dallas firm seeking to become the lead attorneys by representing institutional investors in the securities litigation against Toyota.

“The more information (investigations) can reveal about what Toyota knew and when they knew about these problems with the gas pedals would be beneficial to our case,” Mr. Lindley said.

Others agree the investigations could help plaintiffs, especially if they uncover evidence that Toyota's directors and/or officers knew of unintended acceleration problems but kept quiet about them.

That is part of what congressional leaders overseeing last week's hearings said they hoped to uncover.

During a House subcommittee hearing last week, Rep. John D. Dingell, D-Mich., questioned James E. Lentz, president and chief operating officer of Toyota Motor Sales U.S.A. Inc., about when Toyota first learned of sudden acceleration incidents, when it began its recall and the number of consumer complaints it has received since 2001.

Mr. Lentz had no answers, but observers say establishing a timeline is critical for plaintiffs.

Already, the lawsuit filed in California contains statements that Mr. Lentz made on NBC's Feb. 1 “Today Show,” when he allegedly contradicted previous Toyota statements about when it knew of possible defects.

Now ongoing investigations could hand plaintiffs a smoking gun should they turn up harmful e-mails and internal documents, observers say.

“What is beautiful for the plaintiffs lawyers is there is a congressional investigation and SEC investigation, (so) the government is going to do all the work,” said Greg Flood, president in New York of IronPro, a professional liability division of Bermuda-based Ironshore Insurance Ltd. Plaintiffs attorneys could “take the results of those investigations and have a field day.”

While results of congressional investigations typically are made early on, SEC investigation results, if there are any, may not emerge until much later, said Ronald L. Marmer, co-chair of the securities litigation practice at Jenner & Block L.L.P. in Chicago.

Either way, plaintiffs can use the media attention drawn by investigations to persuade a court that they have a case that deserves to be heard, Mr. Marmer said. “Judges who see newspaper stories and congressional investigations and acknowledgements by the company that they are being investigated...those always add a certain quality of "where there is smoke there is fire,'” he said.

But fraud and misrepresentation allegations without facts to support them commonly are thrown around, said Carl E. Metzger partner and member of the securities litigation and SEC enforcement practice at Goodwin Proctor L.L.P. in Boston.

If investigations establish fraud, however, that could affect D&O insurance recovery. Policies typically exclude coverage when fraud or willful misconduct occurs, although personal misconduct exclusions generally do not trigger until final adjudication of wrongdoing, Mr. Metzger said.

With most D&O cases settling before a final adjudication, though, insurers often are on the hook, unless the fraud allegations are substantiated.

Company officials' public statements generally can be used by plaintiffs as well as insurers citing exclusions, said Ken Ross, executive vp in the executive risk practice of Willis North America's New York office.

“Whenever senior officials make comments, they always run the risk that somehow those statements can perhaps be used against them—not only by plaintiffs, but (they can) be a basis for some defense a D&O insurance carrier may raise whether an exclusion applies,” Mr. Ross said.