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June 18, 2009
Investors Face Risk From Lack of Disclosure by Nanotechnology Companies
    by Robert Kropp

Report from the Investor Environmental Health Network finds that regulatory loopholes leave investors in the dark about potential liabilities, and suggests corrective steps for regulators to take.


The current economic crisis has clearly shown that regulatory oversight of corporate liability reporting is insufficient. In their financial reports and other disclosures, companies exploited loopholes in the regulatory framework that led to the loss of trillions of dollars of value. The Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) should take steps to ensure that corporate liability reporting becomes more effective, according to a new report.

The report, issued by the Investor Environmental Health Network (IEHN), examines the lessons that should have been learned when the severe health issues associated with asbestos led to multiple bankruptcies and the loss of millions of dollars in investments. IEHN is a partnership of investment managers who manage more than $25 billion in assets, that focuses on the financial and public health risks of corporate toxic chemicals policies.

The report, entitled Bridging the Credibility Gap: Eight Corporate Liability Accounting Loopholes that Regulators Must Close, finds that the same regulatory loopholes that allowed such companies as Johns-Manville and Kaiser Aluminum to conceal billions of dollars in liabilities still exist. The report also finds that companies engaged in nanotechnology, many of whose product raise worrisome health concerns, are exploiting the same loopholes to avoid disclosing to investors the potential liability damages of their operations.

Extrapolating from the case studies provided by asbestos and nanotechnology companies, the report identifies eight liability loopholes that it contends regulators must close. It also describes eight steps that regulators must take to "restore the credibility of the disclosure and accounting system."

At a press conference announcing the publication of the report, Sanford Lewis, counsel to IEHN and author of the report, addressed the concerns about honest corporate accounting for pending liabilities.

"There is not honest reporting going on today," Lewis said. "Regulatory loopholes on environmental issues continue to render corporate disclosure an unreliable indicator of value for investors."

"In March, I participated in an FASB discussion about improving rules on contingent liability reporting," Lewis continued. "But the corporate reporting community opposed meaningful changes by FASB."

The report details the ways in which asbestos companies concealed information from regulators, workers, and investors about the emerging scientific consensus on the health hazards of asbestos. When lawsuits started to mount, according to the report, "Companies relied on accounting rules allowing them to only accrue the 'known minimum' liabilities, to hide key assumptions in order to reduce liability estimates, to provide different estimates to insurers and investors, and to fail to benchmark their emerging liabilities against those of other companies that had already faced similar claims."

Lewis said, "Typically, asbestos companies only provided accurate liability assessments on the day they announced bankruptcy. Investors lost millions of dollars due to inaccurate disclosures."

Turning its attention to the rapidly growing nanotechnology industry, the report discovers chilling similarities in corporate avoidance of responsible disclosure of potential liabilities. For instance, carbon nanotubes, used in electrical circuits, energy-efficient batteries, and safety equipment, have been found to cause the growth of granulomas in the body cavities of laboratory animals. Scientists theorize that structural similarities between carbon nanotubes and asbestos fibers are a likely reason for the finding, and suggest that exposure to carbon nanotubes could lead to mesothelioma as well. Mesothelioma is a form of cancer that is usually caused by exposure to asbestos.

Despite such findings, companies engaged in nanotechnology have failed to disclose to investors the potential liability damages that could result from the deployment of carbon nanotubes and other nanomaterials.

"When we examined SEC filings and corporate financial statements, none of them disclosed the existence of the alarming studies about nanotubes," Lewis said. "We see the patterns exploited by asbestos companies being repeated with nanotechnology companies. In their rush to bring products to market, companies are failing to disclose hazards to investors or workers."

"Investors cannot afford another wiping out of million dollars of equity in an emerging technology," Lewis continued.

At the press conference, David Rejeski, the director of the project on emerging nanotechnologies at the Woodrow Wilson International Center for Scholars, a non-partisan policy research organization, discussed the potential impacts of the rapidly growing number of nanomaterials reaching the marketplace.

"There are currently three to five new nanotechnology products entering the marketplace each week," Rejeski said. "Many of these products are manufactured in the Pacific Rim, in countries that do not have the environmental health regulations that we do. The potential for exposure and associated liability is real."

Rejeski described the potential benefits of nanotechnology, and warned that such benefits could be wiped out by the loss of public confidence in the aftermath of insufficient corporate liability disclosure.

"Four billion dollars a year is being spent on nanotechnology research and development," he said. "In the next three to five years, we could see significant innovations in solar cells, batteries, and medical treatment systems. The worst-case scenario would be if such benefits are compromised by corporate mismanagement of potential liabilities."

The eight regulatory loopholes identified in the report as requiring attention include avoiding disclosure of potential long-term liabilities, concealing emerging scientific findings, disclosing only the known minimum of potential liabilities, using attorney-client privileges to conceal damaging information, providing inconsistent liability information to insurers and investors, using hidden assumptions to minimize liability, refusing to benchmark liabilities against other companies, and refusing to allow shareowners to vote on disclosure of risks.

The report urges the SEC and the FASB to work together to ensure the following: that potential long-term liabilities and emerging scientific findings are disclosed, a range of potential liabilities and inconsistencies in estimates are disclosed, third-party consultants working from non-privileged information are utilized, benchmarks against other companies are utilized, and shareowner resolutions requesting risk disclosure are allowed.

 

 
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