For more than two years, reams of documents showing that InfoSpace executives deceived stockholders were sealed in a shareholder lawsuit...
For more than two years, reams of documents showing that InfoSpace executives deceived stockholders were sealed in a shareholder lawsuit at the King County courthouse.
The records contained evidence that some InfoSpace executives used accounting tricks to create the illusion of success — information that the company’s faithful investors would certainly want to know.
But King County Superior Court Judge Sharon Armstrong allowed InfoSpace lawyers to stamp as confidential hundreds of documents in the case.
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If the documents got out, they might fall into the hands of stockholders who were suing InfoSpace executives for deception and self-enrichment in a class-action lawsuit being heard a few blocks away in federal court, she reasoned.
“I’ve never heard of a judge doing that,” said Steve Berman, a lawyer in the federal lawsuit who has read Armstrong’s ruling. “It seems to me a very strange logic. Her role is not to be taking the side of the company.”
Armstrong also said she was concerned that if the shareholder lawsuit went forward, InfoSpace might have to admit to financial misdeeds by insiders that could cause the company to report a $1 billion loss, which “would destroy the company.”
“She was acting on behalf of the company and not on behalf of the public,” said Judith Endejan, an attorney who argued the case for The Seattle Times.
Armstrong recently told The Seattle Times by e-mail: “The decisions made in the InfoSpace case, like decisions made in all cases, were based on the law and the factual record presented to the court.”
InfoSpace, once the region’s biggest dot-com, provides Internet services such as search engines. At the height of the Internet stock mania, the company was worth $31 billion.
In early 2003, The Seattle Times asked Armstrong to unseal InfoSpace records filed in the shareholder lawsuit, citing the state’s constitution and past court cases. After she refused, The Times appealed her decision to the Washington Supreme Court.
In a 9-0 decision last year, the justices reversed Armstrong’s decisions that allowed wholesale sealing of the court records.
“Proceedings cloaked in secrecy foster mistrust and, potentially, misuse of power,” Justice Tom Chambers wrote in the opinion. In the landmark decision, the justices ruled that court records in civil lawsuits are open unless there are compelling reasons for closing them.
Armstrong had ruled that many of the records were protected by attorney-client privilege and should be sealed. But the Washington Supreme Court said the privilege was lost once such documents were filed in court and used by her to make a decision.
The King County case, known as Dreiling v. Jain, was brought by shareholder Thomas Dreiling, a Seattle lawyer. His lawyers sued InfoSpace founder Naveen Jain and others, accusing them of deceiving shareholders and illegally selling stock based on insider information.
The suit was a “shareholder derivative action.” In such cases, a shareholder can ask the company to pursue alleged misconduct against the wrongdoers, with any money recovered going to the company. Usually, the company creates a special committee that investigates the claims and decides whether to pursue the action. InfoSpace’s committee investigated and sent a report to Judge Armstrong, asking her to dismiss the case. Instead, she put it on hold and sealed her order.
“There are very narrow circumstances under which a judge can seal her own orders,” such as matters of national security or protecting trade secrets, said Floyd Abrams, a First amendment lawyer in New York.
But Steve Sirianni, plaintiff’s lawyer in the case, defended Armstrong. “I know of no lawyer appearing before Judge Armstrong in this case who has anything but the utmost respect for her rulings, fairness and impartiality,” he said last week in an email to the judge, who had her bailiff send it to The Times.
The federal class-action suit was settled last year for $34.3 million.
In December, Jain and more than a dozen key InfoSpace officials settled the Dreiling lawsuit, with Jain agreeing to pay $3 million. Others are paying $3.4 million. InfoSpace’s insurance, covering executive misdeeds, is paying up to $43 million to settle outstanding lawsuits.
As part of the settlement, Dreiling, Jain and the former InfoSpace executives signed confidentiality agreements and will not comment.