By HOWARD FINE
A thorn in the side of L.A.-area high tech companies may soon disappear as Congressional action nears on closing a loophole in the 1995 federal reform of securities class action lawsuits.
The 1995 law toughened standards for filing these class action suits in federal court by requiring plaintiffs to present evidence of fraud when filing securities suit.
Typically, such suits allege that companies have misled investors about their financial prospects and are usually triggered by a 10 percent or greater decline in the stock price.
The reforms were pushed by the high technology industry, which had been especially vulnerable to the so-called “strike suits” because of their volatile stock prices. But the changes did not affect suits filed in state court.
Late last month, U.S. Senate Majority Leader Trent Lott, R-Mississippi, pledged to have the Senate pass a bill that would give jurisdiction of securities class action lawsuits exclusively to the federal courts in cases where companies trade on national stock exchanges.
“The high technology industry is the nation’s largest creator of jobs the engine that is driving America’s economic expansion,” Lott said in a statement. “In 1995, Congress passed securities litigation reform to ensure that high-tech companies continue their phenomenal growth and to end abusive litigation. This bill will finish the job.”
The bill, S-1260, was introduced last year by Sens. Phil Gramm, R-Texas, Pete Domenici, R-N.M., and Christopher Dodd, D-Conn. It must still go through committee hearings; however, with Lott’s backing, it will likely remain on the fast track.
On the House side, a similar bill is headed for committee hearings next month. The bill, HR 1689, is sponsored by two members from districts loaded with high tech firms: Rep. Anna Eschoo, D-Palo Alto, and Rep. Rick White, R-Seattle, whose district is home to Microsoft’s Redmond headquarters.
Spokesmen for both Reps. Eschoo and White say the bill has garnered more than 150 cosponsors from both parties which is an unusually high number for a bill that has yet to go through committee.
But opponents of the reform effort say there is no crisis in state filings of shareholder class action lawsuits and that valuable investor protections provided by states like California could be threatened by the legislation.
“The 1995 law has no loophole,” said Mern Horan of the National Association of Securities and Commercial Law Attorneys. “The option to allow cases to be filed in state courts was intentional, as a way to ensure that investors have a place to turn to if the law prevented filing in federal court.”
In addition to making it tougher to file strike suits, the 1995 law contained a “safe harbor” provision that made it more difficult for companies to be sued based on their failure to meet rosy economic forecasts.
Ironically, Lott’s push comes at a time when filings of securities class action lawsuits in state court appear to be on the decline.
According to a Price Waterhouse LLP study released last month, there were only 44 securities class action lawsuits filed in state courts in 1997, down from 66 in 1996 and the lowest number since 1992.
But the suits are still being filed. One notable case was filed in state court in December by shareholders of Redwood Shores-based Oracle Corp. after the software maker’s stock plunged 29 percent on Dec. 9 following a disappointing earnings release.
An attempt led by Gov. Pete Wilson to tighten the state standards for filing shareholder suits was killed last month in the state Senate Judiciary Committee.
The reform push has focused the attention of both sides on President Clinton and whether he will sign the legislation.
Clinton had indicated support for the original 1995 Private Securities Litigation Reform Act, but changed his mind at the last moment and vetoed the bill in December 1995. For the first and only time so far during the Clinton administration, Congress overrode Clinton’s veto and the law took effect on Jan. 1, 1996.
Clinton’s veto came less than 48 hours after he had dinner with William Lerach, a partner in the San Diego office of the New York law firm of Milberg Weiss Bershad Hynes & Lerach. The firm has had a role representing plaintiffs in at least half of the shareholder lawsuits filed nationwide since the law took effect, according to Stanford University Law School professor Michael Perino, who tracks securities class action filings nationwide.
However, in 1996, Clinton campaigned against state Proposition 211, which would have loosened the standards for filing shareholder class action lawsuits in California. He said at the time that he would support legislation that would assert federal jurisdiction over securities class action lawsuits against companies that trade on national stock markets.
“This bill is merely enforcing the federal law that has already been enacted,” said Mark Gitenstein, a partner in the Washington law firm Mayer Brown & Platt and counsel to Uniform Standards Coalition. “There should be no reason why, given his previous statements, he shouldn’t sign the bill.
“With each passing day we don’t get the reform, these lawsuits are hanging over companies’ heads,” he added.
Reform opponents say this increase is due to an increase in securities fraud caused by the bull market. They cite statements by Securities and Exchange Commission chairman Arthur Levitt one of the strongest opponents of the 1995 law that securities fraud is at an all-time high.
“This is no time to take away investor and consumer protections,” Horan said.
In Los Angeles County, 12 shareholder class-action lawsuits were filed in state courts between January 1996 and October 1997; Quarterdeck Corp., Citadel Holding Corp., and Cinergi Pictures Entertainment Inc. were among the defendants in these suits.
Three other L.A.-area high tech companies have sent letters to key members of Congress pushing for closure of the loophole: Creative Computer Applications Inc., Tekelec Corp. both based in Calabasas and Chatsworth based IRIS Inc.