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After the arrest last year of its chairman, Carlos Ghosn, Nissan has made a very public accounting of its management failures, from a lack of strong internal checks and balances to board meetings that lasted only 20 minutes.
That frankness may play well with the Japanese public and with prosecutors, who have charged the company and Mr. Ghosn with financial wrongdoing. But Nissan’s disclosure of its problems at the top could cost it dearly, and deliver a potential gold mine for the lawyers who squeeze multimillion-dollar settlements out of corporations accused of wrongdoing.
A small pension fund in Jackson, Mich., that says it serves over 1,200 members, the Jackson County Employees’ Retirement System, is helping to lead the way. It holds 14,000 proxy shares of Nissan stock, and it has sued the Japanese automaker in a Tennessee federal court, asserting that its stake — today worth about half its purchase price — took a substantial hit after Nissan was revealed to have underreported Mr. Ghosn’s compensation and made misleading statements about its corporate governance.
Japanese prosecutors have indicted Mr. Ghosn and Nissan on charges of financial wrongdoing related to the former leader’s pay. Mr. Ghosn, who also faces additional charges, maintains his innocence.
As Nissan built its public case against Mr. Ghosn, the automaker has exposed itself to substantial legal liability, according to Darren Robbins, one of the lawyers leading Jackson County’s suit, which seeks class-action status to include all Nissan investors in the United States.
“They’ve admitted many of the elements of securities fraud,” Mr. Robbins said. “While it might have been helpful for the company vis-à-vis Ghosn, with respect to the securities laws, that’s a nettlesome fact for them.”
The costs are likely to mount. Nissan may already spend tens or even hundreds of millions of dollars defending itself against the suit. It could be hit with additional civil suits in Japan, though securities suits there are rarer and less punitive, and face regulatory penalties in both countries.
Nissan declined to comment on litigation, but said it took the charges against it “extremely seriously and expresses its deepest regret for any concern caused to its stakeholders,” adding that it would continue “to strengthen its governance and compliance, including making accurate disclosures of corporate information.”
Nissan is not alone in being sued by investors who have lost money. Settlements over such accusations are fairly common in the United States, although they rarely result in large judgments or payouts, according to data collected by the Securities Class Action Clearinghouse at Stanford Law School. Between 1996 and 2017, around 1,700 suits were settled for a median payout of just $8.6 million.
However, that amount can increase sharply in cases where there is an egregious violation of a company’s responsibilities to its shareholders. Last year, the Brazilian oil and gas company Petrobras agreed to pay almost $3 billion to settle a class-action securities suit in the United States alleging it had overstated its assets and failed to disclose a multibillion-dollar corruption scandal.
Any Nissan settlement will most likely be smaller, experts say, but will depend on a number of factors, including how many shareholders are included. Under American law, all buyers of Nissan securities listed in the United States, called American depositary receipts, could be automatically included.
However, the numbers of those securities are small. Hoping to increase the potential damages, Mr. Robbins’s team has also sought to include Americans who directly own Nissan’s shares in Japan. Those shareholders are represented in the suit by a second pension fund based in Rhode Island.
In a court filing this month, lawyers for Nissan argued that an American court is not the proper venue for settling claims by owners of the Japanese shares.
Nissan has pinned the bulk of the blame on Mr. Ghosn, saying he conspired with another top executive to hide irregularities at the company.
An April report by an independent panel revealed that the automaker’s internal controls had been a shambles for years. It said that the company’s chief executive, Hiroto Saikawa — who is also named in the suit — had signed off on documents that may have been related to the underreporting of Mr. Ghosn’s compensation. It also found multiple misrepresentations to shareholders, falsified documents, and rubber-stamp board meetings that averaged just 20 minutes in length.
That accounting will most likely complicate the company’s defense, according to Adam Pritchard, a professor who teaches corporate law at the University of Michigan.
One of the biggest hurdles for winning securities litigation in the United States is proving that the company knowingly violated the law, he said. In American courts, he added, a knowing violation by a director is treated as a knowing violation by the company itself.
The challenge for Nissan is how to blame Mr. Ghosn for its problems while absolving the company’s current executives of responsibility. In a court filing, Nissan argued that the independent report demonstrated that Mr. Saikawa was not aware of the “well-concealed fraud” perpetrated by Mr. Ghosn.
“It’s very unusual for companies to say that they’re being run by a criminal. Even if they think he’s a bad guy,” Mr. Pritchard said. “It’s like they’re asking for the judgment to be enforced in the U.S.”
In the American system, cooperation with the authorities normally results in a carefully crafted deal between the company and prosecutors that ends in deferred prosecution or the defendant pleading to lesser charges.
“It is certainly exceedingly rare in the United States for a publicly held company to go to trial defending two serious criminal indictments, with no certainty whatsoever what the outcome will be,” said Miriam Baer, a former federal prosecutor who teaches white-collar criminal law at Brooklyn Law School.
The most likely outcome is the company pleading guilty, said Nicholas Benes of the Board Director Training Institute of Japan, a nonprofit group that focuses on corporate governance: “If you confess, you’ll be treated lightly and you’ll be able to put it behind you soon.”
That could create additional problems for Nissan. A guilty plea and evidence that appears during the trial could be used against the company in future civil suits in Japan. Typically companies like Nissan take out insurance to protect themselves and their directors and officers against class-action suits and other legal liability.
But the plans usually include an exclusion for situations where the company or its leaders are found to have committed fraud. In that case, the defendant may have to pay its expenses out of pocket, according to Kevin LaCroix, an executive at RT ProExec, an insurance intermediary focused on management liability.
Japanese investors are probably considering their own legal actions, though they have the potential to be less costly.
Unlike in the United States, investors in Japan are not automatically included in securities lawsuits — class action is usually not available in such cases. While it is possible to file individual suits, institutional investors rarely seek damages, according to Gen Goto, a law professor at the University of Tokyo. In any case, over 43 percent of Nissan shares in Japan are owned by Renault, Nissan’s partner.
Those who do end up pursuing a claim against Nissan, Mr. Goto says, are unlikely to do it “for the money, but to share their anger.”
Nissan is aware of the problem and is making efforts to protect itself, one of the company’s independent board members, Keiko Ihara, said in an interview last month.
To stop further suits, she said, the company “has to recover the shareholders’ trust,” adding, “we’re moving in that direction.”
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