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Investor suits flood Valley

Despite the defeat of Prop. 211, there has been no slowdown of shareholder lawsuits against high-tech companies.

One of the hottest California election issues on the November ballot was Proposition 211, a shareholder rights initiative that proponents trumpeted as a way to protect investor interests and companies denounced as an excuse to file frivolous lawsuits.

After waging the most expensive political campaigns in state history, the measure was soundly defeated, by a three-to-one margin. But five months later, shareholder lawsuits--frivolous or not--have yet to show signs of slowing. Despite the demise of Prop. 211, which would have increased company liability for earnings forecasts and allowed out-of-state residents to join California class actions, elements of this initiative are surfacing in shareholder lawsuits filed throughout the state.

"Everyone was looking for these frivolous lawsuits to be stopped. They're costly to defend and we were hoping they'd come to an end," said Steve Polcyn, investor relations director for Read-Rite (RDRT), which was named in a shareholder lawsuit in December.

In the past few weeks alone, suits have been filed against networking company 3Com (COMS), software developer NetManage (NETM), and service provider America Online (AOL), among others.

"Rather than being slow, its been a tsunami," said Boris Feldman, an attorney with Wilson, Sonsini, Goodrich & Rosati in Palo Alto, whose firm represents companies accused of investment fraud. "The reason it's picked up is we're in a transition period. Since the federal reform act has shut out a number of shareholder suits, they're turning to the state courts, even without the benefit of Prop. 211."

Many recent securities fraud cases have been filed in state instead of federal court, analysts say, because there are fewer procedural hurdles that a plaintiff must overcome to have a case heard.

Although many companies denounced the federal Private Securities Litigation Reform Act for not providing them enough protections, the 1995 law did tighten up such requirements as new pleadings, joint-liability governance, and discovery stays--effectively making shareholders pass more tests to show that their cases had merit.

In addition, state courts, unlike federal ones, do not include something called a "comparative fault rule," under which a defendant must pay only those damages for which he or she could be help reasonably responsible. That means that it may be easier for plaintiffs to get more compensation from a state court even if the defendants are only partially at fault.

In turning to California state courts, Feldman said shareholders' attorneys are taking positions in their filings similar to what they likely would have if Prop. 211 had passed.

But Melvyn I. Weiss, a partner with Milberg Weiss, Bershad Hynes & Lerach, said several other things must be taken into consideration when studying the volume of shareholder lawsuits that have been filed in the past year.

"You must measure things in relative terms," said Weiss, whose firm represents the bulk of investor lawsuits filed in Silicon Valley and across the country. "The market and securities are at an all-time high, with volume of trades and the amount of money raised in IPOs at a high. So when you measure securities litigation in the current year vs. past years, you have to take into account those factors."

He added that California technology companies have "no right to complain," given the millions of dollars the businesses are receiving from the capital markets.

Paul Bennett agrees. A partner with Gold, Bennett & Cera in San Francisco, which has represented a number of shareholders in lawsuits, Bennett said the defeat of Prop. 211 has had no effect on the volume or crafting of suits.

"I don't know why anyone would expect a change with the defeat of legislation. I would think, however, there would be one if there was a new law passed," Bennett said.

Others, however, maintain that law firms representing shareholders are taking advantage of gray areas left by the absence of clear regulations at either the state or federal levels, including those that would have been delineated by Prop. 211.

For example, it's not a black-and-white issue that all shareholder lawsuits will allow plaintiffs to include investors who reside outside the state where companies are based. But Feldman said he has seen a number of cases that seek to include all investors, no matter where their state of residence.

Lawsuits are also seeking to cite a company executive in fraud cases, even if investors had never directly heard or read any comments from that officer, something that Prop. 211 would have allowed shareholders to do automatically.

"These [shareholder] attorneys are taking positions that they would have if this proposition had taken effect," Feldman said.

As a result, Feldman says, he does not expect to see any abatement in shareholder lawsuits in California--with or without laws like Prop. 211. 

High tech companies sued
since November 5, 1996
Company Court (State) Date
Centennial
Technologies
Federal Court (NY) 3/27/97
3Com State Court (CA) 3/24/97
NetManage State Court (CA) 3/21/97
Citrix Systems NA 3/21/97
Centennial
Technologies
Federal Court (MA) *
America Online Federal Court (VA) 2/24/97
FileNet State Court (CA) 12/20/96
Wonderware Federal Court (PA) 12/16/96
Read-Rite State Court (CA) 12/11/96
Systems of
Excellence
Federal Court (SD, FL) 12/10/96
Com/Tech Communications
Technologies
State Court (NY) 12/5/96
Quarterdeck State Court (CA) 12/3/96
CAI Wireless
Systems
Federal Court (NY) 11/22/96
Individual Federal Court (MA) 11/15/96
* Four separate class-action suits are pending against Centennial in the U.S. District Court in Massachusetts. Suits were filed on 2/12/97, 2/14/97, 3/10/97, and 3/13/97.