Do you sincerely want to be sued? As ugly Y2K litigation looms, prudent directors should pause to consider their own exposure.

• Author: Kaback, Hoffer
• Position: Year 2000 computer problem

Following a period of high living, colorful 1960s financial operator Bernie Cornfeld became closely acquainted with the interior decor of the Swiss jail system. You can read his story in the book Do You Sincerely Want to be Rich?

Today, you can ask directors: "Do You Sincerely Want to be Sued?"

The problem is Year 2000 (Y2K) computer system crashes. Many directors may not fully appreciate that this disaster may reach them personally. Consider:

1. The New York Law Journal ran a two-part January 1998 article analyzing potential Y2K suits against directors personally. Authors Dennis Block and Stephen Radin, securities law experts with Weil, Gotshal & Manges, indicate that plaintiffs might claim (a) breach of fiduciary duty for failure to anticipate or correct Y2K problems, and (b) securities law violations predicated upon inadequate disclosure. They also raise the specter of SEC enforcement action against directors.

2. Law Journal Seminars Press offered in April 1998 a program centering around a Y2K "mock trial" and featuring a "multimedia presentation" of potential jurors' reactions to Y2K issues.

3. One Y2K suit, based upon the claim that cash registers of the defendant failed to accept credit cards expiring post-2000, has already been commenced. According to The Financial Times, which headlined its story "2000 Blessings on Lawyers," the plaintiff's lawyer normally handles automobile cases, and his legal papers in the Y2K case had"cars" instead of"computers" in several places. A subsequent FT story states that some computer industry trade groups predict that Y2K litigation could dwarf asbestos claims.

4. Ed Yardeni, chief economist at Deutsche Morgan Grenfell and a self-described "Y2K alarmist," believes that the risk of a Y2K-induced recession is 60%, that large companies' operations "might be seriously disrupted by the failure of smaller firms," and that even a depression cannot be ruled out.

These items alone should get sane directors' attention. Add in (a) the Delaware Caremark opinion about the board's duty to oversee the integrity and reliability of information systems, (b) SEC Staff Legal Bulletin No. 5 (1/12/98), a four-pager on Y2K disclosure that should be on directors' night tables but won't help them sleep, (c) the SEC's September 1997 report concerning W.R. Grace's faulty disclosure, and (d) Skadden Arps' 2/26/98 memo, "Board Responsibility for Corporate Oversight."

Given these realities, a laid-back attitude towards D&O insurance...