When Expert Advice Isn't Enough
There's a well-known maxim that says when you don't know, ask for expert advice. Unfortunately, in a recent court ruling reported by the New York Times, not only is taking so-called expert advice called into serious question, but following it might lead to serious legal trouble.
On Sept. 12, Judge Paul G. Gardephe of the United States District Court for the Southern District of New York made a pretrial ruling in the case of the SEC's civil case against Reserve Primary Fund, the bankrupt money management fund. This case centers on a complaint by the SEC that statements made by defendants were false and misleading, despite having been made on the counsel of "experts." As a result, in the opinion of the SEC, relying solely on experts would amount to legalization of carelessness.
Acts performed on the advice of outside counsel has long been held as a defensible argument since this advice has, until now, fulfilled the obligation by company directors to exercise duty of care. In this case, however, the SEC ruled that statements made by the company were false and misleading to investors to the extent that they addressed the safety and security of the fund. When the company countered that they were following the advice of outside counsel, the SEC pointed out that their counsel had a conflict of interest, something to which the court did not agree.
The government's position requires that the company's directors do more than just blindly accept the expert's advice. They must exercise due diligence in asking questions of the experts and their opinions. Are our experts qualified to make these judgments? Are they qualified to render an expert and unbiased opinion in this area of the law and others?
Admittedly, this extra diligence will probably make the process of making decisions on the part of a board much more tedious and time consuming, not to mention possibly ruffling the feathers of both management and board members. There is also the concern of building what amounts to law forums to determine legalization of a company's position. There are also added costs of delaying decisions due to time consuming study by law forums on the prospective courses of action, but what will result is perhaps better decisions.
The New York Times article summarizes the net result of legalization of this position adding to checks and balance on decision makers, which will make law forums a potentially good step in the decision making process.