Société Générale’s U.S. Legal Torture Begins

by Kurt Schulzke on March 20, 2008

It was bound to happen some time. It’s what you get, as a European company, for daring to market your shares (usually in the form of ADRs) in the United States. By providing extensive disclosures about how Jerome Kerviel whacked the the bank for nearly € 5 billion, SocGen also empowered Weiss & Lurie, an American law firm, to subject SocGen to Wall Street’s equivalent of the Star Chamber.

European companies safely on their own side of the pond, beware: if the United States accepts “your” International Financial Reporting Standards, politically powerful “special interests” will demand, in return, that the legal playing field between here and there be equalized somehow. Chances of the U.S. legal culture changing might be measured in quarks. Here’s a teaser from Business Wire:

NEW YORK– The law firm of Weiss & Lurie announced that it has filed a class action lawsuit against Société Générale (OTC:SCGLY) and two individuals associated with it was commenced in the United States District Court for the Southern District of New York on behalf of purchasers of American Depositary Receipts (“ADRs”) and all United States residents and citizens who purchased Société Générale shares between August 1, 2005 and January 23, 2008.

The complaint charges Société Générale and certain of its executive officers with violations of the Securities Exchange Act of 1934. It alleges that defendants misrepresented or omitted material information regarding Société Générale’s internal controls, risk management procedures, policy and practices; and exposure to subprime real estate loans and collateralized debt obligations (“CDOs”). It also alleges that one of the defendants engaged in insider trading before the disclosure of billions of dollars of write-downs in connection with the Company’s subprime exposure and the loss of more than $7 billion as a result of a “massive fraud” by “unauthorized” trading over a period of two years by one of its derivatives traders.

For those Europeans who have never witnessed the U.S. legal system in action, you’re in for a treat! One of the more bizarre aspects — from a European perspective — of U.S. civil procedure is what we call “discovery”. Discovery is a period of time and process that occurs before the court first rules on whether a claim has enough “merit” to be heard by a jury or other fact-finder. During discovery, the parties have basically free reign to pummel each other with hugely intrusive demands for documents, harddrives, e-mails, instant messages and whatever other information might be out there that could yield information “admissible” during the trial.

And this brings us to another American oddity. After the excruciating, voyeuristic discovery process, much potentially relevant material that has been “discovered” will be ruled “inadmissible” because of its tendency to bias the minds of untrained, lay juries to will most likely decide the case. The Europeans — including to a great extent the Brits — have either abandoned lay juries or never had them in the first place. This means that much more evidence is admissible (if it is discovered) in European courts than in U.S. ones. Suffice to say, SocGen and its co-defendants are in for a nerve-wracking, time-consuming ordeal. Most defendants negotiate as soon as possible.

More at Business Wire.