Product safety and litigation exposure are both material to investors in GM and both issues need to be discussed in its public filings with the SEC (10Ks, etc.). A lawyer cannot possibly advise GM about the adequacy of its disclosure to investors – a critical part of a general counsel’s job – without knowing details about product liability litigation against GM. Even if a case over a single automobile settles for an immaterial amount (under $5 million?) there is still a disclosure issue for many reasons, including the fact that GM could be exposed to many other suits and even class action litigation over the same model, and other models with similar problems. This issue might or might not have to be disclosed in the 10K, but in order to advise GM on disclosure the General Counsel at least has to know about the problem. GM’s General Counsel apparently did not know.
In this case, either the general counsel did not ask his subordinates about product liability cases, or his subordinates (a lot of them) lied to him when he did ask.
The subordinates of course have a duty to report these issues to the General Counsel (mandatory up-the-ladder reporting is required under MR 1.13 if a client’s products risk serious injury to the public, not to mention investors, and up-the-ladder reporting is probably required under SOX 307 and SEC rules if the General Counsel needs the information to determine whether GM’s SEC filings violate securities laws). Subordinates who did not report these problems should be fired, and apparently were fired.
But the General Counsel also had a duty to ask. He needed this information in order to do his job, and he didn’t have it. Why not?
Up-the-ladder reporting is important (it took the ABA a while to catch onto that concept, but Congress nudged things along in 2002 with SOX 307). Down-the-ladder due diligence is also important. Perhaps the SEC should use its authority under SOX 307 to make that point clear if it is not clear already. And GMs directors and shareholders should think about whether GM has been adequately represented by all of its lawyers, not just the lawyers who knew about fatal flaws with it products.