On December 14, Reuters reported that Johnson & Johnson had know for decades that its baby powder contained, or could contain, asbestos.

The Reuters article provoked a nearly instantaneous sell-off in the market and a press release from Johnson & Johnson denying the claims. Shares fell from $147.79 on December 13 to $131.28 on December 14 and then continued to steadily decline before eventually bottoming out at $122.71 on December 24.

The nearly 17% drop over the 10-day period represents a loss of more than $67 billion to investors.

The news came as result of discoveries made in conjunction with a class-action lawsuit that had been winding its way through the courts since February 10, 2018.

Two quick points. First, let’s consider the Efficient Markets Hypothesis. If investors had known about the lawsuit since February 10, why the market reaction? Shouldn’t the likelihood of such as disclosure have been priced in long before the Reuters article? But, of course, there is good reason to doubt the Efficient Markets Hypothesis for the simple reason that information is costly to obtain and evaluate. Just because data is available, even publicly available, does not mean market participants are aware of it, no matter how relevant it may be.

Second, red flags matter. Or, perhaps more accurately, red flags don’t matter until they do. A class action is definitely a red flag, and anyone with any sense of financial history should be aware of how devastating asbestos liabilities can be.

So who else is exposed?

The short answer is Honeywell, although not in the same way as Johnson & Johnson. Honeywell’s exposure comes from understating its liabilities in its financial reporting, not as the result of product liability. The other two cases are likely too old to provide much exposure to investors.

Here is a list of all of the case summaries containing the word “asbestos” from Audit Analytics litigation data:

Kanefsky v. Honeywell International Inc et al

Case started on: 10/31/2018

Plaintiffs allege that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. According to the complaint, throughout the Class Period, Defendants made materially false and misleading statements regarding the Company’s business, operational and compliance policies. Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (i) Honeywell’s Bendix asbestos-related liability was greater than initially reported; (ii) the Company maintained improper accounting practices in connection with its Bendix asbestos related liability; and (iii) as a result, Honeywell’s public statements were materially false and misleading at all relevant times.

Hall v. Johnson & Johnson et al

Case started on: 2/8/2018

In February 2018, a securities class action lawsuit was filed against Johnson & Johnson in the United States District Court for the District of New Jersey alleging that Johnson & Johnson violated  Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder by failing to adequately disclose the alleged asbestos contamination in body powders containing talc, primarily JOHNSONS® Baby Powder.  The lawsuit was assigned to the District Court Judge managing the personal injury multi-district litigation.

Safety National Casualty Corporation v. Garlock Sealing Technologies LLC et al

Case started on: 8/2/2017

Enpro Industries, Inc. is a party to legal proceedings initiated in August 2017 in the District Court with two insurers that collectively provide $15 million of coverage under the Garlock Coverage Block. The legal proceedings were initiated by one of the insurers seeking to compel arbitration of issues under its policy and, alternatively, a determination that its policy does not cover asbestos claims. Enpro counterclaimed, seeking a determination that the policy covers asbestos claims and that the insurer breached the terms of its policy by failing to provide coverage for these claims. Enpro joined the second insurer in this action and is seeking similar relief against it.     On October 12, 2017, the magistrate judge issued a decision denying the petitioning insurer’s motion to compel arbitration and holding that the arbitration clause in the policy was deleted by an endorsement. The insurer filed an objection to the magistrate judge’s decision with the District Court. The District Court issued an order on August 20, 2018 upholding the magistrate judge’s decision and the insurer has appealed that determination to the U.S. Court of Appeals for the Fourth Circuit. This appeal is pending.

Sitetech Inc v. Cross Environmental Services Inc et al

Case started on: 3/16/2016

A suit was filed against CES in district court of Michigan on or about March 16, 2016 by SiteTech, Inc. (“SiteTech”). In this suit, SiteTech alleges negligence by CES for failing to remove asbestos-containing materials in a timely manner allegedly resulting in damages in excess of $75,000.00. CES plans to vigorously contest the allegations made by SiteTech in this suit.

 

Background Reading

Girion, Lisa. “Johnson & Johnson knew for decades that asbestos lurked in its Baby Powder.” Reuters. Dated 12/14/18. https://www.reuters.com/investigates/special-report/johnsonandjohnson-cancer/

“Johnson & Johnson Issues Statement on Reuters Talc Article.” Johnson and Johnson. Press release. Dated 12/14/18. https://www.jnj.com/our-company/johnson-johnson-issues-statement-on-reuters-talc-article

Joseph, Saumya. “J&J shares nosedive on report it knew of asbestos in Baby Powder.” Reuters. Dated 12/14/18. https://www.reuters.com/article/us-johnson-johnson-cancer-stock/jj-shares-nosedive-on-report-it-knew-of-asbestos-in-baby-powder-idUSKBN1OD1ZK

Spector, Mike. “J&J moves to limit impact of Reuters report on asbestos in Baby Powder.” Reuters. Dated 12/14/18. https://www.reuters.com/article/us-johnson-johnson-cancer-impact/jj-moves-to-limit-impact-of-reuters-report-on-asbestos-in-baby-powder-idUSKBN1OG2HH