Baltimore Business Journal - February 10, 2006

by Rachel Sams

Staff

An Anne Arundel County judge ruled last month that two former Network Technologies Group directors, Nora Zietz and Robert Stewart, were negligent in their dealings with a consultant hired to turn around the company.

But last week, the Maryland Court of Special Appeals affirmed a separate 2004 ruling that dismissed fraud claims by a major NTG investor against Zietz and Stewart. The telecommunications firm collapsed amid accounting fraud in 2002.

The differing rulings show how murky the issue of directors' liability remains, despite growing focus on it in the business world. The Sarbanes-Oxley Act bulked up the role of independent directors at public companies. And some of the biggest corporate scandals of recent years resulted in directors at WorldCom and Enron agreeing to dig deeply into their pockets to settle shareholder fraud claims.

The WorldCom and Enron cases set precedents that plaintiffs' attorneys in shareholder fraud suits can use when trying to negotiate settlements, said Peter Henning, a law professor at Wayne State University in Detroit who co-edits a Web log on white-collar crime. Seeking personal payment from company directors, he said, "becomes a bargaining chip" in putting together a shareholder settlement.

The Anne Arundel County case was brought by John Collard, hired by NTG as interim CEO in 2002. Within days, Collard had found evidence of fraud. Officials at privately held NTG had overstated at least $1.9 million in revenues to show a profit in 2001 financial statements.

Collard's consulting firm, Strategic Management Partners, Inc., sued NTG and several board members in 2003, saying he was misled about the company's finances and was not paid for all his work. In his ruling on the case, Judge Ronald Silkworth found that Zietz and Stewart "made material misrepresentations during the course of their negotiations" with Collard. For example, he wrote, they gave Collard financial documents they should have known were inaccurate, and they did not inform Collard that NTG faced an $880,000 lawsuit.

At the time, Zietz worked with the Abell Venture Fund, another major investor in NTG. She went on to become associate provost for development at Johns Hopkins University, a post she left last year. Stewart is general partner at Spring Capital Partners, which was also an NTG investor.

Collard had sought more than $350,000 in fees. Silkworth ordered Zietz and Stewart to pay Collard's consulting company $59,500. The former directors are appealing the decision. Silkworth denied a cross-claim by Zietz and Stewart against some other parties involved with NTG, and denied Collard's claims against Zietz and the Abell Foundation regarding a guarantee of funds allegedly made to Collard.

Collard said he was "delighted the court recognized the negligent misrepresentation on behalf of Zietz and Stewart," but was "disappointed in the amount" he was awarded.

"We are gratified that the court agreed with us on most of the points in the case, and we are appealing the portion in which the court found against Zietz and Stewart," said attorney James T. Heidelbach of Gebhardt & Smith, who represents the two former directors. Neither Zietz nor Stewart could be reached for comment.

Heidelbach said the Court of Special Appeals' recent opinion in the separate NTG case is encouraging. That ruling stemmed from a 2003 case in which investor Bon Secours Community Investment Fund LP sued NTG officers and directors, along with Baltimore-based accounting firm Ellin & Tucker Chartered. The Bon Secours fund, which invested $1 million in NTG, claimed the directors and accountants should have uncovered financial problems and disclosed them.

In a ruling the following year, Baltimore City Judge Evelyn Omega Cannon dismissed claims against the directors and auditors. Bon Secours was "a sophisticated investor," she wrote, with plenty of resources to do its due diligence. The fund failed to prove that other parties were responsible for its loss on the investment, Cannon wrote.

The Court of Special Appeals, in an unreported opinion filed Feb. 2, affirmed Cannon's decision to dismiss Bon Secours' claims against the outside directors before trial. Bon Secours did not prove that they "knew or should have known" of instances of fraud at NTG, the court wrote.

The Bon Secours fund is considering whether to ask the Maryland Court of Appeals to review the case, said its attorney, Peter Gunst of Astrachan Gunst & Thomas.

Though many have worried that the increased scrutiny of directors would make fewer talented people willing to take on the job, Wayne State's Henning said he doubts capable executives will shy away from directorships, which can provide prestige and experience. But, he said, they probably will be more sensitive to the hefty requirements involved and less likely to take on more than one or two director roles.