Northrop Settles Shareholder Suit for $18 Million : Pact: Denying misconduct related to defense scandals, leaders of the firm agree to one of the largest monetary settlements of litigation brought by stock owners.
In what is believed to be among the largest monetary settlements of a shareholder lawsuit, Northrop has agreed to resolve a case alleging that its officers and directors breached their duties and committed unlawful business practices in a host of defense scandals during the 1980s.
Under terms of the proposed agreement, the Los Angeles firm will receive $18 million from four insurers to settle the allegations of misconduct by its officers and directors. Those individuals, however, deny wrongdoing in the settlement, according to a notice sent Monday to company shareholders.
In addition, the settlement requires the executive committee of Northrop’s board of directors to expand its responsibilities in ensuring that the firm complies with federal laws and regulations. The firm also agreed to maintain a number of ethics safeguards put in effect prior to the settlement.
The 1988 case alleged that former Northrop Chairman Thomas V. Jones and current Chairman Kent Kresa--along with three dozen others--violated federal racketeering laws and breached their duties in such wide-ranging episodes as the faulty testing of nuclear cruise missile components and the payment of $6.25 million in a bizarre hotel venture in South Korea.
The $18 million “will go into the corporate coffers,” according to San Diego attorney William S. Lerach, who represented the three small Northrop shareholders who brought the suit. “This isn’t a lawsuit by the stockholders for themselves. It is for the benefit of the corporation.”
Lerach is seeking attorneys’ fees from Northrop amounting to $9 million, according to the notice to shareholders. Northrop has objected to those fees, and the issue will be settled in arbitration.
The settlement must be approved by the U.S. District Judge David V. Kenyon, who has scheduled a June 25 hearing to review the terms.
Northrop vigorously contested the suit, according to Lerach. Indeed, the settlement notice sent to shareholders asserts that the directors and officers “vigorously deny any and all wrongdoing or liability.”
But Northrop said it settled “in the best interests of Northrop and its shareholders” and cited the “burden, expense and devotion of director, employee and executive time” if the suit continued.
Northrop spokesman Tony Cantafio said, “Consistent with the order of the court, we cannot comment on the settlement.”
The suit--brought by shareholders Gary Goldberg, Rodney Shields and Gabrielle Mayran--is one of a spate of actions in which shareholders have challenged the conduct of corporate officers and directors whose firms have become enmeshed in controversy or alleged wrongdoing.
The $18-million settlement in the Northrop case is not the largest in history but is believed to be among the largest. Lerach noted that shareholders won about $30 million in a case involving the Bank of America and about $15 million in a case involving Sundstrand, a Rockford, Ill., defense contractor and supplier to heavy industry.
William Klein, a professor of law at UCLA, said shareholder suits have generally had a dismal reputation because they seldom benefit corporations.
But he said the Northrop settlement appeared to defy that pattern.
“Often, the outcomes seem quite outrageous, because the benefit to the corporation is quite trivial and the fees to the plaintiff’s attorneys can be quite sizable,” Klein said.
Klein compared shareholder suits to medical malpractice cases, in which “liability is difficult to prove, but if you can prove liability then the damages can be quite sizable.” Insurers for companies such as Northrop may agree to pay monetary damages because they want to avoid the risk of a jury awarding larger sums at trial, he explained.
It is unclear whether the Northrop directors and officers will suffer as a result of the settlement. Klein said he was unaware of any studies indicating whether directors in general have a difficult time obtaining liability insurance after being parties to a major settlement.
In addition to Kresa and Jones, the Northrop suit named current and former directors George T. Scharffenberger, O. Meredith Wilson, Howard P. Allen, William F. Ballhaus, Richard J. Flamson III, Ivan A. Getting, Richard E. Horner, Earle M. Jorgensen, Tom Killefer, Robert L. J. Long and Charles W. Robinson, Frank W. Lynch, Fred J. Manzella and William G. McGagh.
Also named were current and former officers J. William Jenkins, Wallace C. Solberg, C. Robert Gates, Jamie Oxaca, L. Bruce James, John B. Campbell, Stanley Ebner, Marvin Elkin, William M. Elliott, David N. Ferguson, Joseph T. Gallagher, Welko Gasich, the late John Paterno, Robert G. Schlenzig, Joseph Yamron, John J. Richardson, Sheila M. Gibbons, James A. Dorsey and Donald D. Foulds.
The lawsuit also named defense consultants James K. Shin, William Galvin and William Parkin.
The suit alleged that the officers and directors breached their duties in such matters as:
* The air-launched cruise missile. Northrop pleaded guilty to criminal fraud charges for falsifying tests on the missile last year.
* The Harrier jet stabilization system, which was the subject of acrimonious congressional hearings last year.
* The MX missile guidance system, which is the subject of a civil case brought by the Department of Justice.
* Foreign payments of $6.25 million to South Koreans as part of an effort to market the F-20 jet fighter. The company said the money was for a hotel, but the Securities and Exchange Commission is investigating allegations that the payments were part of an improper sales promotion fund.
* The performance of the Tacit Rainbow missile, a project terminated by the Air Force after lengthy problems.
