Crosstown Hypocrisy

Lederle Laboratories, a subsidiary of American Cyanamid, is one of the nation's foremost producers and suppliers of a multi-purpose vaccine known as DPT (diptheria, tetanus, and whooping cough). Although DPT innoculations for children are required by law to prevent rampant outbreaks of disease, the vaccine is not perfect: according to the American Academy of Pediatrics, one in every 310,000 children who receive the vaccine are permanently brain-damaged as a result.

Over the last few years, DPT prices have risen steadily, with manufacturers claiming the increases are necessary because of rising insurance costs. On May 20, 1986, Lederle President R.B. Johnson sent a letter to physicians announcing that "the current litigation and insurance crisis has left us no other alternative" than to raise DPT prices "in order to remain in the DPT market."

In 1982, typical prices of the DPT vaccine averaged ten to twelve cents a dose; by mid-1986, Lederle was charging $11.40 a dose for the same vaccine. "We deeply regret having to raise the price of DPT," Johnson wrote.

However, at the same time that Lederle was telling doctors it had no choice but to raise DPT prices, the company was reassuring its shareholders and the Securities Exchange Commission that business was booming.

"The ultimate liability resulting from all pending suits and claims ... will not have a material adverse effect upon the consolidated position of [American Cyanamid] and its subsidiaries," American Cyanamid's 1985 Annual Report, published in March, 1986, stated.

A year earlier, American Cyanamid's annual report had boasted that "medical group sales and operating earnings hit record levels in 1984."

American Cyanamid was far from unique in its unabashed doublespeak. In reassuring the public that all was well, while pleading to physicians that it was barely able to stay afloat, the company drew upon a welldocumented tradition of corporate doublespeak.

On March 15, 1979, the Mead Corporation informed the Environmental Protection Agency (EPA) that compliance with hazardous waste regulations proposed by the agency could cost the company more than $115 million-an amount that Mead warned would pose an "intolerable [financial] burden" upon the company.

Less than two weeks later, Mead filed its annual Form 10-K with the Securities and Exchange Commission (SEC). The 10-K, an annual report filed by each publicly traded company, includes general financial and business data, as well as a management discussion of income and expenses. The contrast between what Mead told the EPA, and what it told the SEC was startling.

Mead estimated in its 10-K that it would spend only "from $40 to $66 million" over the next five years to comply with all existing federal, state, and local air, water and environmental laws and regulations-including those "scheduled for promulgation in the near future."

In a similar case, textile manufacturers including Fieldcrest Mills, West-Point Pepperell, Dan River, Riegel Textile, and Spring Mills told a federal appeals court and then the U.S. Supreme Court that Occupational Safety and Health Administration (OSHA) cotton dust standards were "not technologically feasible." Merely attempting to comply with OSHA standards, the manufacturers claimed, would cost them $2.7 billion.

When it came time to report to the SEC and textile shareholders, however, only one of the manufacturers said it might be faced with "unrealistic capital costs" in order to comply with OSHA's standard. The other textile companies either neglected to mention the alleged threat posed by the cotton dust standard, or said they were unable to estimate the potential cost of compliance with the standard.

But this type of doublespeak, where corporations make false statements before regulators on the one hand, while reassuring their stockholders that all is well on the other can backfire. Depending upon which of the claims (if either) is true, U.S. securities laws may permit disgruntled investors or the Securities and Exchange Commission to sue a company for fraud for inconsistent disclosures.

In 1980, the Washington public interest group Public Citizen petitioned the SEC to toughen its stand against corporate doublespeak. Under the antifraud provisions of the 1933 Securities Act and the Securities Exchange Act of 1934, a company is forbidden to make untrue or misleading statements of material fact, or to omit a material fact when making certain statements to the investing public. These provisions apply to statements made to regulatory agencies, as well as the public, where such statements can "reasonably be expected" to reach the marketplace.

Although the 1930s laws should have prevented corporations from making inconsistent disclosures, Public Citizen found that, "Numerous corporations inform agencies and courts that regulations will have serious impacts on their ability to do business, while not disclosing, or not fully disclosing, this information to shareholders or the Commission."

"The reason for this 'crosstown hypocrisy' is clear," Public Citizen attorneys claimed. "Corporations wish to , delay or prevent the adoption of regulations that may in- ' crease costs or decrease profits. At the same time, they wish to keep their stock prices high and their shareholders happy by not disclosing the possible impact of these proposed regulations."

After compiling over 50 examples of conflicting disclosures, Public Citizen asked the SEC to require companies to disclose the same information to their shareholders as they submit to government agencies and courts.

Although the SEC rejected Public Citizen's petition, in 1984 it took a small step in the direction of more consistent disclosure.

"It has come to the Commission's attention," an SEC release dated January 13, 1984 stated, "that companies and their spokesmen may not be exercising the care and attention necessary under the federal securities laws when addressing audiences other than investors and the marketplace."

The SEC advised corporations subject to the reporting and disclosure provisions of the securities laws that "the anti-fraud provisions of the federal securities laws apply to all company statements that can reasonably be expected to reach investors and the trading markets, whoever the intended primary audience" might be. Corporations that lie to federal agencies may be fined up to $500,000, and their representatives may face prison sentences.

Statements that could be expected to reach the market included filings with government agencies, as well as negotiations with creditors and labor unions, according to the SEC.

"While the Commission is aware of the interest a company has in making the best case available to further its interests," the SEC advisory stated, "companies must not serve such interests at the risk of misleading the investing public."

Phil Smith is the pseudonym of a Wall Street attorney.