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
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
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
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."
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
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
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
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.