DUTY TO DISCLOSE: The Failure of Food Companies to Disclose Risks of Genetically Engineered Crops to Shareholders - CALPIRG Education Fund
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DUTY TO DISCLOSE:
The Failure of Food Companies to Disclose Risks of
Genetically Engineered Crops to Shareholders
August 2004
1ACKNOWLEDGEMENTS
Written by Saida Benguerel of the U.S. PIRG Education Fund.
© 2004, U.S. PIRG Education Fund
The author would like to thank Richard Caplan of U.S. PIRG Education Fund for developing the
idea that became this report and for offering valuable oversight and input; Alison Cassady of
U.S. PIRG Education Fund for her editing expertise; Michelle Chan-Fishel for reviewing an
earlier version and offering suggestions; and Lisa Archer from Friends of the Earth for her input.
For copies of this report, please visit our website or send $30 payable to U.S. PIRG Education
Fund at:
U.S. PIRG Education Fund
218 D Street SE
Washington, DC 20003
(202) 546-9707
www.uspirg.org
U.S. PIRG is the national lobbying office of the state Public Interest Research Groups (PIRGs), a
national network of state-based public interest and environmental advocacy organizations. U.S.
PIRG Education Fund is the national 501(c)(3) research and policy center for the state PIRGs.
2TABLE OF CONTENTS
EXECUTIVE SUMMARY ............................................................................................................ 4
INTRODUCTION .......................................................................................................................... 6
THE IMPRECISE SCIENCE OF GENETIC ENGINEERING..................................................... 8
HEALTH RISKS OF GENETICALLY ENGINEERED FOODS............................................... 10
ENVIRONMENTAL RISKS OF GENETICALLY ENGINEERED FOODS ............................ 12
U.S. REGULATION OF GENETICALLY ENGINEERED FOODS ......................................... 14
A COMPANY’S DUTY TO DISCLOSE .................................................................................... 15
KNOWN RISKS OF GENETICALLY ENGINEERED FOODS REQUIRE DISCLOSURE.... 18
Consumer Rejection of Genetically Engineered Foods ............................................................ 18
International Renunciation of Genetically Engineered Crops .................................................. 19
Shareholder Demands ............................................................................................................... 21
Insurance and Financial Industry Concerns.............................................................................. 21
Lawsuit Liability....................................................................................................................... 21
Regulatory Compliance ............................................................................................................ 22
Growing Demand for Regulation of Biopharming ................................................................... 23
SURVEY FINDINGS: FOOD COMPANIES FAIL TO DISCLOSE RISKS ............................. 25
CONCLUSION AND RECOMMENDATIONS ......................................................................... 28
APPENDIX: PUBLICLY-TRADED COMPANIES SURVEYED ............................................. 29
END NOTES ................................................................................................................................ 36
3EXECUTIVE SUMMARY
Scientists in the United States and abroad recalled 636,000 cases of contaminated
continue to raise serious concerns about the product, at an estimated cost of $10 million
environmental and human health risks dollars in lost revenue. The StarLink
associated with growing and consuming contamination episode ultimately will cost
genetically engineered crops. As a result, the food industry billions of dollars.
genetically engineered foods may pose
financial risks to the food companies buying In the wake of Enron and other catastrophic
and selling genetically engineered crops. financial market failures, shareholders are
Even though the Securities and Exchange demanding greater transparency and
Commission (“SEC”) requires companies to enforcement of SEC regulations. One area
disclose to shareholders any “material” facts that is of particular concern is whether
that might affect business operations, most companies are disclosing to their
food companies have failed to alert their shareholders and the public all information
shareholders to the liabilities associated with that will have a material impact on business
genetically engineered ingredients. operations. Despite the StarLink debacle and
scientific evidence raising real concerns
Genetically engineered crops pose largely about the human and environmental safety
unexplored threats to human health and the of genetically engineered crops, the food
environment. On the food safety side, industry has done little to alert its
scientists have sounded the alarm about shareholders to potential liabilities.
potential allergenicity of some genetically
engineered ingredients. Scientists are also In the United States, any publicly traded
concerned with the possibility of heightened company registered with the Securities and
toxicity levels, increasing antibiotic Exchange Commission must disclose
resistance, immune suppression, elevated information that is “reasonably likely” to
cancer risks, and nutritional loss. Yet the have an impact on business operations. To
Food and Drug Administration still refuses determine the extent to which food
to make human safety testing of genetically companies are disclosing the risks
engineered foods mandatory. In addition, associated with genetically engineered
environmental risks include the creation of foods, U.S. PIRG Education Fund examined
“superweeds,” genetic cross contamination, the financial reporting documents of the 35
adverse effects on non-target and beneficial largest publicly traded food companies in
species, increased pesticide use, and harmful the United States and found:
soil contamination.
Ninety-five (95) percent of the top
The risks inherent in genetically engineering publicly traded processed food companies
the food supply have already cost the food completely ignore the genetically
industry financially. In 2000, Kraft- engineered foods issue in their annual
manufactured Taco Bell taco shells were reports to shareholders.
discovered to contain StarLink corn, a
variety of genetically engineered corn not Only two companies—Kraft Foods and
approved for human consumption. The Food Interstate Bakeries—mention genetically
and Drug Administration officially recalled engineered food as a potential liability in
the Taco Bell taco shells; in response, Kraft their annual reports to shareholders.
4that their suppliers, manufacturers, raw
Not one company elaborated on or gave goods producers, and farmers not use
an analysis of the risks involved with genetically engineered materials.
genetically engineered ingredients in their
annual reports to shareholders. While Fully disclose to shareholders the use of
Kraft and Interstate Bakeries’ and potential liabilities associated with
declarations are a good beginning, these genetically engineered ingredients.
financial documents do not discuss ways
to mitigate harm, avoid future liabilities, Label all products that contain genetically
and address future profitability. engineered ingredients so that consumers are
fully informed of what they are purchasing.
The U.S. food industry is at a crossroads.
Currently, genetically engineered U.S. PIRG Education Fund recommends
ingredients offer no financial or commercial that the SEC:
benefits to the food industry, nor are
consumers clamoring for genetically Enforce the duty of public companies to
modified products. In fact, surveys and polls disclose to shareholders the potential
show just the opposite. liability from using genetically engineered
ingredients.
U.S. PIRG Education Fund recommends
that companies in the processed food Hold CEOs and CFOs responsible for
industry: material omissions in companies’ annual
reports, in compliance with the Sarbanes-
Remove the risk of liability related to Oxley Act of 2002.
genetically engineered food by demanding
5INTRODUCTION
Genetically engineered crops and foods have Bell taco shells in October 2000 after Kraft
been on the market for a decade. Since their voluntarily pulled them from grocery store
introduction, genetically engineered shelves. The agency declared a Class II
products have generated controversy both in recall, defined as “a situation in which the
the United States and abroad. Despite this, use of, or exposure to, a violative product
processed food companies embraced the may cause temporary or medically
technology, although none chose to label reversible adverse health effects.”6 Due to
their products as containing genetically the StarLink discovery, Kraft recalled
engineered ingredients. By 2003, in the 636,000 cases of contaminated Taco Bell
United States alone, 42.8 million hectares of taco shells, at an estimated cost of $10
land were devoted to growing genetically million dollars in lost revenue.7 This number
engineered crops.1 Ninety-five percent of does not include the ancillary costs of
all genetically engineered crops are grown in recalling a product, such as loss of consumer
either the United States, Canada, or confidence. All told, more than 300 separate
Argentina.2 Today, 60 to 70 percent of all processed food products were recalled.8
processed foods on supermarket shelves in Kellogg’s was forced to close down a
the United States contain genetically processing plant due to the contamination,
engineered ingredients.3 Corn and soybeans and, in 2001, recall its Morningstar Farms
make up the vast majority of genetically brand of meat-free corn dogs for containing
engineered crops and often appear in StarLink corn.9 Consumers, farmers and
processed foods as soy lecithin (a stabilizer) others who claim they were affected by the
and corn syrup (a sweetener). contamination filed several lawsuits – two of
which were settled for $110 million and $9
Kraft Foods, the largest food company in the million.10 A report completed by Promar
United States and the second largest food International, a global consulting firm for
company in the world,4 produces such well- the food industry, on behalf of Kellogg’s,
known products as Lunchables, Boca ConAgra, Unilever, and Aventis, numbered
Burgers, Oreo Cookies, and Post Raisin the loss from the StarLink contamination in
Bran. Kraft also markets the Taco Bell taco the billions of dollars.11
shell brand, under license from the Taco
Bell restaurant chain. In 2000, Genetically Public interest organizations, consumer
Engineered Food Alert, a consortium of groups, trade associations, scientists and
public interest groups, tested Taco Bell taco others point to the Starlink debacle as proof
shells purchased at a local grocery store and that genetic engineering is inherently
discovered that some contained StarLink unpredictable and that contamination of the
corn, a variety of genetically engineered food supply could have widespread
corn not approved for human consumption. environmental, human health, and financial
The possible side effects from ingesting effects. Critics also point to weak federal
StarLink corn include vomiting, diarrhea, oversight of genetically engineered crops
and anaphylactic shock.5 and food, as the responsible agencies do not
require any safety testing of transgenic crops
This discovery had ripple effects throughout or food products.
the food industry. The Food and Drug
Administration officially recalled the Taco
6The risks posed by genetically engineered publicly silent on the issue.12 Food
crops and inadequate federal oversight companies have a duty to report the
combine to create substantial liability issues liabilities associated with the use of
for food companies that buy and sell genetically engineered ingredients in their
genetically engineered crops. While some annual shareholder reports and other
food companies have recently sought to financial filings. But according to our
avoid the use of certain genetically analysis—with very few exceptions—food
engineered ingredients, most remain companies are ignoring the issue entirely.
7THE IMPRECISE SCIENCE OF GENETIC ENGINEERING
The genome of an organism can aptly be over the precise location of the inserted
compared to a complex ecosystem. Any genetic material.15
alteration or perturbation can have major
consequences. Proponents of genetic Additional genetic material often
engineering maintain that scientists can accompanies the foreign gene into the host
locate genes and insert them into new plants plant. This normally includes an antibiotic
with great precision and with few marker gene that flags the newly inserted
repercussions. Monsanto’s website, for gene material. Because of the inherent
example, quotes Henry Miller of the Hoover imprecision in the genetic engineering
Institution, a conservative think-tank, as process, scientists use antibiotic genes to
saying that “genetic engineering [is] mark which plant cells incorporated the gene
essentially a refinement of the kinds of of interest and which did not. The antibiotic
genetic modification that have long been resistance gene serves no purpose outside of
used,” and the company itself calls the the laboratory but remains in the plant
technology an “extension” of traditional regardless, posing human health and
plant breeding, only “more precise.”13 environmental risks.16 Along with the gene
However, an examination of the technology of interest and the antibiotic marker gene,
used to engineer plants and the choice of scientists also insert a gene promoter into
genes that scientists are inserting the host plant. The promoter, which
demonstrate that traditional plant breeding functions as a genetic “on” switch and
methods and genetic engineering are forces the gene of interest to express at a
radically different.14 The insertion process of more potent level, typically is a disabled
genetic engineering involves relatively virus. Scientists have raised concerns about
rudimentary methods, resulting in haphazard the safety of the most common promoter, the
placement that in no way can be described cauliflower mosaic virus, warning that it
as “precise.” may lead to “genome rearrangement,
insertion mutagenesis, insertion
Of the two most common insertion methods carcinogenesis, the reactivation of dormant
used, one employs infectious bacteria while viruses, and [a] generation of new
the other utilizes a crude physical means. To viruses.”17
use bacteria in genetic engineering,
scientists must first delete the disease- The imprecision of genetic engineering and
inducing genes in the bacteria and then the inability of developers of genetically
insert new genes that produce the desired engineered crops to fully understand what
traits. This engineered bacterium, often they are inserting into a plant cell have been
called a bacterial “truck,” is then mixed with revealed on many occasions. For example,
the plant cells and allowed to infect them. In in May 2000, Monsanto, the industry leader
the other popular method, foreign genes are in developing and commercializing
introduced directly into plant cells using a genetically engineered seeds and crops,
“gene gun,” which shoots microscopic disclosed that its genetically engineered
particles, such as gold, covered with foreign soybeans—the company’s best selling
DNA, into the plant tissues. These genetically engineered crop—contained
techniques and others offer little control gene fragments that scientists had not
intentionally inserted.18 After four years on
8the market, independent researchers
discovered two extra gene fragments in the Genetically engineered crops and traditional
soybeans. Neither Monsanto nor crops may contain similar levels of fats,
government regulators had any idea the proteins, and starch; on this basis, the Food
pieces of genetic material were inserted and Drug Administration (FDA) deems
during the process of engineering the crop. these new genetically engineered products
After that embarrassment, Monsanto again as “substantially equivalent” to their
had to admit it did not fully understand the conventional counterparts. This concept,
genetic makeup of the product it introduced aggressively advocated by manufacturers of
to market, when, one year later, new genetically engineered foods and crops, has
research discovered additional unexpected been followed by the United Nations’ Food
DNA.19 and Agriculture Organization and World
Health Organization and forms the basis of
As far back as 1997, Monsanto had to recall U.S. regulation of these products.
approximately 60,000 bags of canola—
enough to seed between 600,000 to 750,000 Although the idea of substantial equivalence
acres of land—because the seed mistakenly is simple and may at first seem plausible,
contained an unapproved gene. According to scientists have critiqued it as insufficient and
some reports, quantities of seed had already misguided.22 Substantial equivalence does
been planted when Monsanto discovered the not guarantee the safety of food, food
mistake.20 Scientists also have shown that additives, or genetic alterations, as it is the
genetic engineering can alter the genetic industry that determines what is
make-up of the host plant in unanticipated “equivalent.” This vagueness makes the
ways. In one experiment, scientists concept particularly useful to the
attempting to genetically engineer potatoes biotechnology industry, although numerous
to increase the sugar content unintentionally studies demonstrate that genetically
altered the potatoes’ ability to process engineered crops could pose serious risks to
starch.21 human health and the environment.
9HEALTH RISKS OF GENETICALLY ENGINEERED FOODS
Genetically engineered food could have toxin in every cell of the plant, all of the
numerous human health consequences, time.
including heightened toxicity levels,
increased allergenicity, widespread In determining potential allergenicity,
antibiotic resistance, immune suppression, scientists compare the genetically
elevated cancer risks, and nutritional loss. engineered organism’s structural similarity
In 1991, FDA scientists alerted the to known allergens, as well as its digestive
regulatory agency that genetically and heat stability. Bt corn, particularly the
engineered foods could pose serious dangers type of Bt corn containing the Cry1AB
to the food supply, specifically resulting in protein, failed all three allergenicity
“increased levels of known naturally protocols. As for digestive stability, two
occurring toxicants, appearance of new, not studies revealed that 10 percent of Cry1AB
previously identified toxicants, [or] lasted in stomach-like conditions for one to
increased capability of concentrating toxic two hours, in contrast to the two minutes
substances from the environment (e.g. Monsanto’s results showed.26 Other studies
pesticides or heavy metals).”23 Despite this also revealed a considerable amount of heat
warning, FDA refused to require mandatory stability in the protein, yet the
safety testing. In addition, FDA was aware Environmental Protection Agency (“EPA”),
that the first commercialized genetically which is responsible for oversight of crops
engineered whole food, the Flavr Savr producing their own pesticide, did not
tomato, caused lesions in the stomachs of collect any heat stability data from
rats, but again chose not to require pre- Monsanto.27
market safety testing.24
Potatoes also have been genetically
FDA’s response to the potential toxicity engineered to produce the Bt toxin. In a
problem is mirrored in its response to study conducted in 1999 and published in
allergenicity concerns. Allergenicity is a the British medical journal The Lancet,
human immunodeficiency reaction that can scientists discovered that rats consuming Bt
lead to anaphylactic shock and death. potatoes showed suppressed immune
According to the National Institutes of function, including detrimental effects on
Health, four to eight percent of children and organ development and body metabolism.28
one to two percent of adults exhibit allergies Without mandatory and comprehensive pre-
to certain foods and the building blocks of market safety testing, and with no labeling
foods, namely proteins.25 Bacillus or post-market research conducted, the full
thuringiensis (Bt), an insecticidal microbe impact of transgenic crops on the human
that occurs naturally in the soil, is one immune system may never be fully revealed.
example of the potential allergenicity of
genetically engineered products. Another human health concern is the
Conventional and organic farmers have used increased use and release into the
Bt spray for years to control certain insects, environment of antibiotics. By using
and the spray is seen as relatively benign antibiotic marker genes to determine gene
because it breaks down quickly in sunlight. expression, the industry may be
But with the help of genetic engineering, compromising one of the most important
corn has been developed to produce the Bt tools humankind has for fighting common
10infections in people and animals. Novartis, a human health from antibiotic resistance
French biotech company, has used developing in micro-organisms is one of the
ampicillin to gauge transference of a new major public health threats that will be faced
gene in genetically engineered corn. Britain, in the twenty-first century.”29
among other European countries, has banned
the farming of Novartis’ corn over concerns Genetic engineering also may compromise
it will migrate from the corn to the general the nutritional value of some foods. FDA’s
population and weaken the effectiveness of Division of Food Chemistry and Technology
ampicillin, a much-needed defense from and the Division of Food Contaminants
bacterial infections. The British Medical Chemistry have warned the agency that the
Association seconded the ban, when it genetic engineering of food could lead to the
concluded: “There should be a ban on the “undesirable alteration in the level of
use of antibiotic resistance marker genes in nutrients.”30
[genetically engineered] food, as the risk to
11ENVIRONMENTAL RISKS OF GENETICALLY ENGINEERED FOODS
In addition to endangering human health, may persist and spawn more troublesome
field testing and growing genetically weeds.38 Studies on the viability of hybrids
engineered crops pose several risks to the between genetically engineered crops and
environment as well. In a highly publicized wild relatives show that the hybrids are not
study on harm to beneficial and non-target necessarily less fit than their wild parent.39
species, Dr. John E. Losey of Cornell Without adequate regulatory oversight,
University showed that Bt corn pollen that genetically engineered plants may continue
had dusted milkweed leaves harmed the to hybridize with their wild relatives and
monarch butterfly.31 Industry challenged this potentially create serious problems as
study, but additional research ultimately invasive, or non-native, species. The current
confirmed the findings of Losey and his annual costs to the United States due to non-
fellow researchers.32 Similarly, studies have native species is estimated at $123 billion.40
reported that ladybugs, which prey on the
Colorado potato beetle, consumed fewer One profound but largely unexplored area of
potato beetle eggs when the potatoes had environmental harm is the damage
high levels of Bt toxin.33 Other studies have genetically engineered crops may pose to
found that lacewing larvae reared on prey soil ecosystems. Bt toxin is released in
that was fed Bt-producing corn took longer harmful levels into the rhizosphere soil by
to develop and had an elevated mortality root exudates from Bt corn.41 Bt engineered
rate.34 In yet another study, researchers into cotton and other plants can seep into the
looking at genetically engineered potatoes in soil through their roots and remain in the dirt
Ohio found natural and beneficial enemies at least seven months, depressing the soil
reduced to such low levels that harmful microbes that help plants grow.42
aphid outbreaks occurred.35 Subsequent types of Bt corn, geared towards
the eradication of the corn rootworm, a type
Another problem associated with genetically of beetle, may prove to be even more
engineered crops is the creation of herbicide harmful to soil. One study found that the
resistant “superweeds.” In fact, the current glyphosate herbicide sprayed onto
reliance on just a few broad-spectrum Monsanto’s Roundup Ready crops remained
herbicides makes it likely that resistance will in the soil as long as three years.43
develop even faster. Already canola weeds
resistant to three herbicides have been found Proponents of genetic engineering argue that
in a field in northern Alberta, Canada.36 the new technology reduces or eliminates
Recent research also has revealed that weeds the use of toxic farm chemicals, which are
are beginning to develop resistance to frequently manufactured by the same
Monsanto’s Roundup herbicide. Weeds companies touting genetically engineered
resistant to the herbicide have been crops. On the contrary, genetically
discovered in Delaware, Maryland, engineered crops often call for the use of
California, Tennessee, Ohio, Kentucky, and more chemicals. In an important analysis of
Indiana.37 A recent scientific article reported Roundup Ready soybeans, the former Chair
that plants can take on this trait with of the Board on Agriculture for the National
“negligible” impacts, meaning the new trait Academy of Sciences, the body that advises
is incorporated without any noticeable harm Congress on scientific issues, found that
to the plant; as a result, herbicide resistance genetically engineered soybeans “clearly
12require more herbicides than conventional in the Midwestern farm-belt states claim to
soybeans, despite claims to the contrary.”44 be adversely affected by genetically
engineered gene drift; 88 percent declare
Another serious environmental danger is that they take measures to protect their
unchecked gene flow—also referred to as farms from cross contamination.47
genetic pollution—from genetically
engineered crops to their conventional or In the fall of 2001, genetically engineered
organic counterparts, as well as their wild corn was discovered growing in Mexico,
cousins. Many farmers rely on the premium despite a 1998 government moratorium on
prices that they receive from non-engineered commercial planting.48 Mexico is the source
crops, which require strict segregation to of corn’s greatest genetic diversity, and
meet specific market demands. Stewart contamination of corn there could mean that
Wells of the National Farmers Union of corn biodiversity is severely threatened.49
Canada, for example, has stated that it may
soon be impossible to certify canola as The mass contamination demonstrated by
organic because genetically engineered StarLink corn is a chilling example of the
canola has been dispersed throughout the potential for widespread genetic pollution.
region by wind, rain, birds, and farm Although StarLink corn was only grown on
equipment. “If this continues, once wheat, 0.4 percent of the total corn acres planted in
barley, lentils, and other crops are the United States, it turned up in one-tenth
genetically-engineered, I won't have of the corn tested by the EPA between
anything left to grow. For organic farmers November 2000 and April 2001.50 Even
and the hundreds of thousands of consumers more alarmingly, the Cry9C protein, which
who choose organic food, this is an was the protein responsible for EPA keeping
extremely serious issue.”45 In the United StarLink out of the human food chain in the
Kingdom, the government recently first place, was found in other varieties of
announced that field experiments of yellow corn seed.51 In addition, white corn,
genetically engineered corn would be halted which has never been genetically
for fear of genetic pollution of nearby engineered, was found to contain the
organic farms.46 According to a 2002 StarLink protein.52
survey, 70 to 80 percent of organic farmers
13U.S. REGULATION OF GENETICALLY ENGINEERED FOODS
In 1986, President Reagan’s executive office a “no effect” level in its submission.56 The
finalized a strategy for regulatory oversight agency summarily fired Dr. Richard
of genetically engineered crops and foods. Burroughs, the lead government scientist in
This policy report, titled the “Coordinated charge of reviewing the rBGH data, after he
Framework for Regulation of proposed conducting a two-year study on the
Biotechnology,” stated that “existing safety of rBGH and ordered toxicology and
statutes seem adequate to deal with the immunology tests. By 1993, the FDA was
emerging processes and products of [genetic willing to approve rBGH under a new
engineering].”53 Twenty years later, this standard of review: “manageable risk.” Dr.
framework remains the overriding policy Burroughs stated: “It used to be that we had
structure. a review process at the FDA. Now we have
an approval process. I don’t think the FDA
Several agencies share regulatory authority is doing good, honest reviews anymore.”57
over genetically engineered crops. Although
in certain cases food safety regulation is One major human health concern associated
shared between FDA and EPA, the FDA is with rBGH is that it stimulates production of
the ultimate authority. However, FDA does another hormone called IGF-1. Numerous
not require or enforce any mandatory safety studies and papers have connected IGF-1 to
standards; instead, the FDA provides several types of cancer, including breast and
industry with a list of voluntary and prostate cancer.58 In approving rBGH, FDA
“suggested” safety guidelines. FDA does not relied solely on summaries of tests
require manufacturers to notify the agency performed by Monsanto. When the
when bringing a genetically engineered crop Canadian government reviewed Monsanto’s
to market and does not conduct its own data, it found that “the only short-term
independent tests of genetically engineered toxicology study, performed for three
food. The agency simply reviews summaries months in rats, was improperly reported, to
of studies that the company has completed.54 include that [rBGH] was not and could not
As a result, the agency does not make be absorbed into the bloodstream.”59
determinations of safety, but merely notes According to Dr. Michael Hansen, a
that the manufacturer has determined that biotechnology expert at Consumers Union,
the product is safe. In many instances, the “these are toxicologically significant
agency has asked for additional data from changes in the rats and they should have
manufacturers and been denied.55 triggered a full human health review,
including assessment of potential
One of the first indications of the carcinogenic and immunological effects.”60
inadequacies of FDA’s regulatory oversight The genetically engineered hormone was
arose when the FDA reviewed Monsanto’s eventually approved by FDA and has gone
genetically engineered bovine growth into widespread use in dairy herds across
hormone (rBGH) for use on dairy cattle. In America. The analogy to food crops is clear:
April 1988, the FDA questioned whether FDA does not review data for safety
Monsanto’s own studies had answered implications, but only acknowledges receipt
crucial safety questions, such as whether it of industry summaries.61
had established a “margin of safety” or met
14A COMPANY’S DUTY TO DISCLOSE
Companies that are publicly traded on the even if they have not had an impact in the
United States stock market have a duty to past.67 The 1934 Act, Section 10(b), also
disclose operating policies and procedures to makes fraud and the omission or
their shareholders, as well as to the misstatement of material facts unlawful.68
Securities and Exchange Commission
(“SEC”).62 Companies must file a 10-K Companies are encouraged to make
report with the SEC on a yearly basis, along forward-looking statements regarding
69
with quarterly and other reports. Disclosures business operations. Overly optimistic
to shareholders usually come in the form of statements about the future of the company
annual reports, which chart the gains and are tempting to make, as they may increase
losses of the company, as well as its future shareholder confidence and increase the
trajectory. Annual reports include an price of stock. But there is also the
opening letter from the Chief Executive possibility that management can perpetrate
Officer, hard financial data, a Management fraud on unsuspecting shareholders, as
Discussion and Analysis section, results of demonstrated by the Enron fiasco.
continuing operations, market segment
information, new product development, The Private Securities Litigation Reform
subsidiary activities, and forward-looking Act (PSLRA) of 1995 inoculates
statements, as well as potential liabilities. management from being responsible for
statements that they make about the future
The Securities Act of 1933 and the successes of the company. Prior to PSLRA,
Securities Exchange Act of 1934 require that the Securities and Exchange Commission
investors receive financial and non-financial upheld the principle that management had to
information about the companies in which make predictions of future performance in
they own shares; the Acts also prohibit “good faith” or with a “reasonable basis” of
misrepresentations, fraud, and deceit on the knowledge by allowing shareholders to sue
shareholder.63 They require the “full for fraud.70 PSLRA now allows corporations
disclosure” of any “material facts” that to make these statements with little fear of
might affect the company.64 liability or reprisals, provided the company
includes a disclaimer in the form of a “safe
Rule S-K, Item 303, of the Securities Act of harbor” statement. The company may assert
1933 requires the company—in the the “safe harbor” provision, by declaring
Management Discussion and Analysis that the statements are “forward-looking
section—to discuss hard financial data in statements” and that many factors may alter
such a way as to enable the shareholder or the outcome.
the public to come to an understanding of
the company’s business operations and In response to the Enron fiasco, the U.S.
prospects.65 The narrative should focus on Congress passed the Sarbanes-Oxley Act of
“material events and uncertainties known to 2002. On August 27, 2002, the SEC
management” that would change the implemented Section 302, which requires
outcome of the reported financial CEOs and CFOs to certify financial and
information.66 This would include other information in their companies’
descriptions and amounts of “matters that quarterly and annual reports.71 The
would have an impact on future operations,” Sarbanes-Oxley Act instills a strict fiduciary
15duty on board members to be accountable that there is “a substantial likelihood that the
for what appears in the company’s annual disclosure of the omitted fact would have
report. The 2002 Act also attempts to been viewed by the reasonable investor as
improve the accuracy and reliability of having significantly altered the ‘total mix’ of
corporate disclosures by requiring the SEC information available.” The Court further
to review company filings more often and noted that a disclosure is material if “there is
companies to report any changes in financial a substantial likelihood that a reasonable
condition and results of operations on a shareholder would consider it important in
timelier basis.72 This Act also requires deciding how to vote.”76 In a more recent
companies to “fairly present” their financial decision, the Court reaffirmed the definition
conditions and results of operations and not and extended it to encompass factual
just follow the letter of the law.73 omissions as well.77
Materiality Triggers the Duty to Disclose Similarly, the Financial Accounting
Standards Board (“FASB”), a private
Congress passed the Securities Act of 1933 organization responsible for codifying
and the Securities Exchange Act of 1934 in accounting and financial terms and
the wake of the 1929 stock market crash to operating procedures, states that a disclosure
renew shareholder faith in capital markets, or omission is material if it would probably
as well as to protect investors. The system is change or influence “the judgment of a
based on a simple, straightforward concept: reasonable person relying upon the report.”78
Most importantly, the SEC clarified in its
“all investors, whether large institutions Staff Accounting Bulletin No. 99 that
or private individuals, should have access qualitative information can be material and
to certain basic facts about an investment that “exclusive reliance on certain
prior to buying it. To achieve this, the quantitative benchmarks to assess
SEC requires public companies to materiality in preparing financial statements
disclose meaningful financial and other and performing audits of those financial
information to the public, which provides statements is inappropriate.”79
a common pool of knowledge for all
investors to use to judge for themselves if In a July 2004 report on environmental
a company's securities are a good disclosure, the United States Government
investment. Only through the steady flow Accountability Office (“GAO”), formerly
of timely, comprehensive and accurate the General Accounting Office, states that
information can people make sound the SEC requires disclosure if the liability is
investment decisions.”74 “probable” and the amount is “reasonably
estimable.”80 If the liability is not at least
Congress also established the Securities and probable or reasonably estimable, but is
Exchange Commission in 1934 to “enforce “reasonably possible,” then it must be
the newly-passed securities laws, to promote disclosed in the footnotes of the annual
stability in the markets, and most report.81 Reasonably possible is defined as
importantly, to protect investors.”75 any outcome that has more than a remote
chance of happening.82
Companies have to disclose all “material”
facts to their shareholders. In 1976, the The SEC clarifies that if the known trend,
Supreme Court defined materiality to mean demand, commitment, event or uncertainty
16is not reasonably likely to occur, no According to the SEC itself, the weight
disclosure is required. However, if that should tip more towards disclosure unless
determination cannot be reached, management can objectively determine that
management must proceed under the the reasonability of the facts or events will
assumption that the trends and events will not come to fruition or will not have an
take place and full disclosure is required.83 effect on company operations.84
17KNOWN RISKS OF GENETICALLY ENGINEERED FOODS REQUIRE
DISCLOSURE
Publicly traded food companies have a duty • Lawsuit liabilities associated with cross
to disclose facts associated with genetically contamination and loss of consumer
engineered ingredients because the risks and confidence;
liabilities involved with genetically
engineered crops and ingredients are • Compliance with sudden regulatory
material to their business operations. changes, labeling laws, and other laws;
Testifying before Congress in 2004, William
H. Donaldson, Chairman of the SEC, stated • Growing demand for stronger regulation
that a company should disclose whether it of biopharming.
“faces public or government opposition,
boycotts, litigation, or similar circumstances Known risks posed by genetically
that are reasonably likely to have a material engineered foods are both qualitatively and
adverse impact on a company's financial quantitatively material to shareholders and
condition or results of operations.”85 He the public. Easily quantifiable financial
acknowledged that public or government impacts, such as lawsuits or boycotts, are
opposition to a company’s product is a obviously material to business operations.
material matter subject to disclosure. Less quantifiable, but no less important, are
qualitative issues, such as regulatory
Item 303 of SEC Regulation S-K of the compliance, insurance industry concerns,
Securities Act of 1933 is of particular and shareholder demands.
importance to companies that face risks
posed by genetically engineered food. This Consumer Rejection of Genetically
regulation requires that companies describe Engineered Foods
trends and information known by the
company to have a material impact on Consumer concerns regarding genetically
business operations.86 The application of engineered foods are increasing. A 2003
this rule could reasonably cover: Food Policy Institute report out of Rutgers
University found that the number of people
• Consumer rejection of inventory, who felt that genetically engineered foods
boycotts, and growing consumer would better their quality of life fell by 20
preference for organic products; percent since a similar poll conducted in
2001. Two-thirds of those polled believe
• International renunciation and loss of that serious incidents involving genetically
international market share, as well as costs engineered foods are certain to happen. And
associated with complying with almost half of the respondents felt that it was
international rules and regulations. unsafe to eat genetically engineered foods.87
The Pew Initiative on Food and
• Shareholder resolutions and divestment; Biotechnology, in comparing a 2003 survey
to one conducted in 2001, found a similar
• Loss of insurance coverage; split over safety concerns.88
Despite the prevalence of genetically
engineered foods on America’s supermarket
18shelves, only 25 percent of respondents in Even McDonald’s instructed its potato
the Rutgers study believe they have eaten supplier not to grow genetically engineered
them.89 U.S. consumers remain in the dark potatoes,98 and McCain Foods, which
about genetically engineered ingredients in produces a third of the world’s French fries,
their foods because there are no labeling also has agreed to stop using genetically
requirements. Industry has lobbied for the engineered potatoes.99
prohibition of labeling, stating that “it would
unfairly stigmatize products already Meanwhile, the organic food industry,
determined to be safe.”90 FDA’s own which does not use genetically engineered
research, however, shows that a majority of ingredients, continues to grow by a
consumers want foods labeled if they compounded 20 percent rate annually.100 In
contain genetically engineered ingredients.91 the United States alone, the organic snack
The same research also uncovered the fact food sector grew by 29.6 percent in 2003.101
that consumers feel “outrage” when they Since there are no labeling laws for
discover the true extent to which genetically genetically engineered foods, and organic
engineered ingredients are already in the products cannot be produced with
food system.92 Researchers from twelve genetically engineered ingredients, buying
American universities joined together to organic is the best way that consumers can
create a comprehensive study to reveal how be assured that they are not purchasing
Americans feel about the labeling of unwanted genetically engineered foods.
genetically engineered foods.
Approximately 92 percent of respondents International Renunciation of Genetically
believe that genetically engineered foods Engineered Crops
should be labeled. Other studies show
similarly strong numbers calling for The financial impact from international
labeling.93 In a recent Time magazine poll, renunciation of genetically engineered foods
for example, 58 percent of those queried has a quantifiable material impact on the
said they would not eat genetically business operations of the processed food
engineered products if they were correctly industry. The European Union’s new
labeled as such.94 requirements for labeling and traceability of
genetically engineered ingredients became
Consumers have demonstrated their effective on April 18, 2004. John R. Cady,
rejection of genetically engineered crops in President and CEO of the National Food
other ways. A 100-city protest against Processors Association, stated that these
Starbucks led the company to offer non- new requirements “establish a serious trade
genetically engineered products.95 Bowing barrier that will keep many U.S. food
to consumer pressure, three major products out of the European market.
supermarket chains, Whole Foods, Wild European consumers will see such labels on
Oats, and Trader Joe’s, have pledged to ban food products as ‘warning labels.’”102
genetically engineered ingredients from their Already, official opinion polls show that 95
private-label products.96 Trader Joe’s percent of EU citizens want the right to
mission statement on genetically engineered choose whether genetically engineered crops
organisms states: “we determined that, given are imported or grown in the EU, and 70.9
a choice, our customers would prefer to eat percent would ban genetically engineered
foods and beverages made without the use foods entirely.103 To keep abreast of
of genetically engineered ingredients.”97 European consumer desires, international
19food companies are making their products South Korea and Japan, two of the largest
“GE-free.” importers of U.S. corn, rejected shipments
of corn found to be contaminated with
Companies such as Kraft, Heinz, Danone, StarLink. In both nations, StarLink is not
and Kellogg’s have had to create twin authorized for human consumption, and
production and distribution systems for although the U.S. had guaranteed that the
different markets. These companies have shipments were StarLink-free, it was proven
announced that they source their ingredients otherwise.110 StarLink also was found in a
for the European market from non-GE variety of consumer products in Japan and
producers.104 PepsiCo alerts its customers South Korea.111 In 2000, South Korea was
that ingredients used in its products are “not forced to recall 14,528 kilograms of tortilla
derived from genetically modified sources chips that were tainted with StarLink
and no GMOs are used in our soft drink corn.112
manufacturing process or in those of our
ingredients suppliers in Europe.”105 The South Korea and Japan also have blocked
rejection of genetically engineered products other genetically engineered ingredients
extends to the supermarkets that are the from their grocery store shelves and forced
distribution point for the processed food recalls of contaminated products. In 2001,
industry. Major European grocery store Calbee Foods of Japan recalled a variety of
chains, such as Marks & Spencer, Spar, its snack products after traces of genetically
Tesco, Safeway, Carrefour, and Waitrose, engineered and prohibited NewLeaf Plus
have removed genetically engineered potatoes were found. Proctor and Gamble
products from their shelves.106 was forced to pull 800,000 canisters of its
Pringle potato chips from Japan after they
Countries around the world have banned the were found to contain the same prohibited
import, production, and commercialization genetically engineered potato.113
of genetically engineered foods on various
levels. Nations as diverse as Algeria, which In 2002, Angola, Malawi, Zambia,
has an outright ban on genetically Zimbabwe, Lesotho, Mozambique, and
engineered goods, and China, which banned Swaziland were hit with a serious food
the commercial planting of transgenic rice, shortage crisis. But Zimbabwe still rejected
wheat, corn, and soybeans, are denying shipments of U.S. food aid since they
genetically engineered foods a foothold in included genetically engineered crops, and
their country.107 In Russia, Valery Kechkin, the neighboring nations followed suit. These
who serves on the Federation Council, said nations feared that farmers would plant the
the Russian Parliament would not approve genetically engineered grains rather than eat
purchases of genetically engineered food them, introducing genetically engineered
“unless there was such a desperate need to organisms in their already fragile
justify it.”108 Chile, according to a recent agricultural systems. Eventually, most of the
report, is second only to Europe in its countries decided to accept the food
rejection of genetically engineered shipments if the grains were milled, but
ingredients. The report relies on a study that Zambia turned down the food in any form,
shows 75 percent of the Chilean public purely on the basis that it was genetically
completely rejects genetically engineered engineered.114
food.109
20Shareholder Demands concern of the insurance industry is that the
FDA does not guarantee the safety of
At a July 2003 symposium in Washington, genetically engineered foods. Thomas
D.C. hosted by Senators Corzine, Nelson, Greany, senior vice president at Marsh, a
and others, SEC Commissioner Goldschmid risk-management firm, has stated, “When it
stated that emerging issues such as genetic comes to a drug or medical device, what
engineering were material if shareholders underwriters look to as most important is
demanded information on them.115 During FDA oversight.”123 But without any
the question and answer period, mandatory safety testing or effective
Commissioner Goldschmid replied to a regulation required by the FDA, the
question on materiality by stating that what insurance industry is left hanging.
an investor considers material varies over
time. As an example, he stated that “current As far back as 1998, Swiss Re, one of the
shareholder proposals on genetic leading re-insurance companies in the world,
116
engineering” are material. In addition, in saw genetic engineering as potentially the
May 2001, the director of corporate finance most high-risk bet of all new
at the SEC wrote a memo declaring that technologies.124 Recently, the top five
shareholder divestment campaigns and insurers in the United Kingdom announced
consumer boycotts can be considered that they would not cover certain risks
“material” and thus subject to disclosure associated with genetically engineered
under SEC rules.117 agriculture.125 Without insurance, or with
compromised insurance, the food industry
More than 30 food-related companies have could be in serious financial danger.
been the subject of shareholder resolutions
since 1999.118 Filed by three-dozen separate The finance industry also has renounced
investment groups, the resolutions called for investment in genetically engineered foods.
the research, labeling, and phasing out of The largest bank in Europe, Deutsche Bank,
genetically engineered ingredients.119 This is wrote in a report that investors should
the largest social-issue shareholder completely divest from companies involved
resolution movement since apartheid-era in genetically engineered organisms.126
South Africa.120 In 2003, shareholders filed Other financial institutions have followed
resolutions against Archer Daniels Midland, suit, including Credit Suisse First Boston,
ConAgra, Kellogg’s, Safeway, Wal-Mart, which stated that the commercializing of
and others.121 Shareholder resolutions on genetically engineered organisms has “lost
such a mass scale indicate that genetically momentum.”127
engineered ingredients are material to the
shareholder. Lawsuit Liability
Insurance and Financial Industry Item 103 of Rule S-K requires companies to
Concerns disclose any “material legal proceeding,
other than ordinary routine litigation
According to Robert Hartwig, chief incidental to the business.”128 The
economist for the Insurance Information instruction further narrows the requirement
Institute, genetically modified foods “are to exclude disclosure if the “amount
among the riskiest of all possible insurance involved, exclusive of interest and costs,
exposures that we have today.”122 A main
21does not exceed 10 percent of the current economic losses are very difficult to prove.
assets of the registrant.”129 Aventis also proved that biotech companies
will compensate economic losses of
When the StarLink contamination and recall customers, to a point, both voluntarily and
went public, consumers sued in class actions through class-action settlements.”135 As
for perceived harms, as well as for a refund demonstrated by the StarLink corn recall
of their money.130 These cases delved into and ensuing litigations, processed food
the consumer effects of StarLink, while companies face potential legal battles that
farmers pursued the economic impacts with could number in the billions of dollars.
nuisance and tort claims.131
Regulatory Compliance
Lawsuits of all kinds can have a material
impact on the business operations of the Studies have shown that corporations may
genetically engineered food industry. Public experience financial loss and negative
nuisance “has a broad application, and it will impacts to business operations for failing to
have a broad application in the future, when prepare for regulatory changes.136 Calls for
public safety is at issue,” says Richard A. tightened regulation of genetically
Lewis, the lawyer who filed a class-action engineered foods have increased worldwide,
lawsuit against Aventis CropScience on even though the biotech industry has been
behalf of farmers who claimed that cross- lobbying for looser restrictions. By not
contamination of StarLink corn lowered preparing for and anticipating the inevitable
corn prices.132 In re StarLink Corn Products regulatory changes, the food industry is
survived summary judgment when the judge setting itself up for major financial losses,
likened the farmers’ private nuisance claims similar to monetary losses experienced by
to that of a 1973 case in which commercial other industries when environmental
fisherman and clammers in Maine sought regulations were tightened. Kraft Foods
damages against an oil company for a spill acknowledged in its 2001 Prospectus that
that endangered wildlife. Aventis settled out “governments throughout the world are
of court for $110 million.133 considering regulatory proposals relating to
genetically modified organisms or
Other settlements from the StarLink corn ingredients, food safety and market and
debacle include a $60 million payout to environmental regulation…”137 These
Taco Bell franchises by the manufacturers of regulations stretch from city-led initiatives
the StarLink-tainted taco shells for loss of to state and countrywide prohibitions.
sales due to consumer confusion over
whether Taco Bell restaurants were involved On March 2, 2004, for example, Mendocino
in the contamination—which they were County in Northern California became the
not.134 Attorney Thomas P. Redick, chair of first county in the nation to prohibit the
the Agricultural Management Committee of growing and raising of genetically
the Environmental Section of the American engineered plants or animals. At least seven
Bar Association, has said that “StarLink other counties in California are considering
serves as confirmation that both personal similar ballot measures in 2004.138
injuries and economic loss will be Legislatures in California, Colorado, Iowa,
compensated, even when the Centers for Hawaii, New York, New Hampshire,
Disease Control ("CDC") says no one could Vermont, Massachusetts, Maine, Michigan,
prove to have been hurt, and even though and Minnesota have introduced bills to label
22or ban genetically engineered foods over the districts are banding together to form a
last several years.139 All told, 288 bills network in an attempt to be completely
relating to biotechnology have come before “GE-free.”151
state legislators in the last three years
alone.140 Most recently, Vermont passed a Some decision-makers within the U.S.
law requiring genetically engineered seeds federal government have sought some form
to be labeled and registered.141 In addition, of regulatory change. In 2001, the FDA
78 out of the 246 towns and cities in issued a proposed rule that would require the
Vermont have passed non-binding food industry to consult with the agency 120
resolutions banning genetically engineered days before any genetically engineered
organisms.142 This grassroots groundswell product was brought to market, although this
has been repeated in states as far away as new rule never came to fruition. In addition,
Hawaii. Since 2003, Hawaii has been at the the U.S. Congress has introduced at least six
epicenter of the most prolific legislative and federal bills seeking to strengthen the federal
grassroots movements, as its island regulation of genetically engineered foods
ecosystem is the site of many genetically and crops. Finally, in 2000, the U.S. signed
engineered crop field trials.143 the Cartagena Protocol on Biosafety, an
international agreement centered on risk
Japan, which imports one-fifth of all U.S. assessment, notification, labeling, and
food exports, has added even more information transference of genetically
restrictive labeling requirements to its engineered organisms.152 Each of these
original 2001 laws.144 South Korea has had steps, taken at the local, state, federal, and
restrictive labeling laws in place since 2001 international level to strengthen regulations,
as well.145 Other nations that require has the ability to materially affect the food
labeling of genetically engineered foods industry.
include China, Australia, New Zealand, and
the European Union.146 Growing Demand for Regulation of
Biopharming
The European Union had a de facto
moratorium on new genetically engineered Biopharming, the process of using plants to
crops and animals, starting in 1998.147 grow and ultimately extract industrial
However, the U.S., Canada, and Argentina chemicals and pharmaceuticals, is the latest
have filed a World Trade Organization application of genetically engineered plant
(“WTO”) lawsuit against the EU, claiming technology. Plants, including food crops like
the moratorium violates free trade corn and soybeans, are being used to
agreements.148 Since the claim was filed, produce products such as growth hormones,
the EU has allowed new products to be sold blood clotters, abortion-inducing chemicals,
within its borders, largely because of the and vaccines. These products pose
new labeling and traceability framework that potentially serious risks to human health and
went into effect in April 2004.149 The U.S. the environment.153
continues to go forward with its claim
before the WTO anyway. Non-governmental The U.S. Department of Agriculture
organizations have spearheaded initiatives in (“USDA”) has approved the field testing and
24 separate European countries to ban planting of biopharm crops in more than 300
genetically engineered crops altogether.150 separate open-air fields across the
In addition, regional governments and country.154 Two major cases of known
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