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There’s one big, lingering question over the $2.7 billion judgment against Yahoo in a lawsuit it lost in Mexico: Why was there no warning to shareholders?There’s a simple answer, according to Compliance Week: While regulators are concerned about this kind of surprise loss, existing rules don’t seem to adequately govern them and they haven’t come up with new ones yet.
The Financial Accounting Standards Board recently abandoned a five-year-long effort to develop new rules, Compliance Week says.
But experts told the publication that the Securities and Exchange Commission has been clear about the subject of loss contingencies.
“The SEC has done a very good job saying that they don’t want to see surprises like this; that companies should keep their investors apprised of how litigation is progressing,” Keith Peterka of audit firm Mayer Hoffman McCann told Compliance Week.
Yahoo has disclosed the existence of other pending legal matters and estimated losses in its annual and quarterly filings. But it includes this disclaimer in its annual report:
The ultimate outcome of legal proceedings involves judgments, estimates and inherent uncertainties, and cannot be predicted with certainty. In the event of a determination adverse to Yahoo!, its subsidiaries, directors, or officers in these matters, however, the Company may incur substantial monetary liability, and be required to change its business practices. Either of these events could have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company may also incur substantial legal fees, which are expensed as incurred in defending against these claims.
So, in a sense, Yahoo has warned shareholders that it may be exposed to unknown and unknowable legal risks.
And right now it’s debatable whether there’s been adequate guidance from regulators on when a company in its situation should warn shareholders about a pending legal risk. Companies are struggling to follow existing rules, which is why regulators are looking into new ones.
In the specific case of the lawsuit filed by Worldwide Directories, a telephone-directory startup, against Yahoo and its Mexican subsidiary, Yahoo could argue that its business in Mexico was so small that it did not expect damages to be material. But from the beginning, Carlos Bazan-Canabal and the other partners in Worldwide DIrectories have argued that it had a global business deal with Yahoo, which considerably expanded the scope of the case. Yahoo’s lawyers, arguably, should have been aware of this claim.
We asked Yahoo about the disclosure issue.
A Yahoo spokeswoman didn’t address that, but offered this statement, which the company has previously shared: “We have always believed that the claims are without merit. This is a non-final judgment, and we believe that we have numerous grounds for appeal based upon both errors in procedure and application of law.”
In the filing it made announcing the judgment, Yahoo also described it as “nonfinal.” It is nonfinal, in the sense that complete damages have yet to be calculated and could exceed $2.7 billion, and that Yahoo has the right to appeal the judgment, as is typical with most legal proceedings.
Update: Compliance Week deputy editor Joe McCafferty wrote us after publication to clarify that their report didn’t mean to suggest there weren’t existing rules, but that regulators are looking into whether new rules are needed. We’ve clarified the language in this piece accordingly.