TXU Shareholders Recover $150 Million
Lead Plaintiffs, including the Plumbers and Pipefitters National Pension Fund, reached a preliminary settlement of approximately $150 million in their securities fraud suit against TXU Corp. earlier this year. In addition to the substantial monetary recovery, sweeping corporate governance reforms are being implemented at TXU as part of the settlement. These changes in the way TXU will be governed are the latest example of how shareholders are demanding and obtaining more accountability from corporate boardrooms through shareholder litigation.
“Corporate officers and directors should hear a loud and clear message from this and other recent shareholder litigation: the days when corporate insiders could act with impunity are over,” said Darren Robbins, an attorney for the plaintiffs.
“Corporate governance depends on real accountability,” said Richard Bennett, an expert on corporate management with Lens Governance Advisors. “And the governance reforms achieved via this settlement extends far beyond the statutory and regulatory minimums applied by Sarbanes-Oxley and other recent reforms,” as outlined below.
“Thanks to this settlement, lines of accountability at the new TXU will be manifestly strengthened. Directors will need to have meaningful amounts of their own money at stake in the Company. There will be a more independent board with a couple of fresh faces and shareholders will be more actively included in some of the most important governance decisions from the adoption of any future poison pill to the creation of any new stock option plan as part of employees compensation,” said Bennett.
The litigation charged TXU and its senior insiders with failing to disclose significant financial problems between the spring of 2001 and the fall of 2002. During that time, the plaintiffs charged, the company failed to disclose, among other things, declining earnings, an increasing liquidity risk, growing problems in its European operations and the failure of a new billing system.
Throughout that time, plaintiffs charged, the officer defendants engaged in what they admitted to be “earnings management” and assured investors that the Company’s results and performance were “outstanding,” that Europe was producing strong operating results, that TXU’s US and European operations were succeeding in the deregulated environment and that TXU’s future prospects were exciting.
As the defendants’ wrongdoing was revealed, the Company’s stock price tumbled from $56 per share to less than $15 per share and the Company was forced to report a loss of $15.23 per share in 2002 and slash its dividend, resulting in substantial losses for shareholders.
This article originally appeared in the second quarter 2005 edition of the Corporate Governance Bulletin.