A new bill would make sure the strict federal laws that guard corporations against shareholder lawsuits apply to state courts as well.
The individuals, securities brokers, and members of Congress that last year joined forces to defeat California's Proposition 211 are now taking steps to solidify their victory. A series of private and government coalitions are floating out proposals to high-tech executives and even President Clinton himself to galvanize support for a bill that would make sure the strict federal laws that guard corporations against shareholder lawsuits apply to state courts across the country.
The defeat of Prop. 211 last November, which would have made it easier for stockholders to sue companies, was only the beginning.
"What I and others realized is that Prop. 211 was just the tip of the iceberg," said Jack Levin, director of legal and regulatory affairs at Montgomery Securities. "It can be brought over and over again, and not just in California. The logical solution for now and, frankly, for the 21st century is to have uniform federal laws."
The proposals would require that any securities class-action suits be brought in federal court against companies whose stock is publicly traded on an exchange or Nasdaq, or if the potential for damages exceeds $5 million. This, proponents say, would assure that there are not 50 different standards for securities fraud suits.
Several groups are searching out support for their proposals. Congresswoman Anna Eshoo (D-California) recently sent a letter signed by 57 Congressional Democrats to President Clinton, asking him to support legislation that would ensure that class-action suits are not filed in state courts. "Although plaintiffs traditionally have brought securities class-actions in federal court...claims now are being filed at record rates in state courts," the letter states. "In effect, the standards in the federal securities laws as amended by the Reform Act are being bypassed."
Congressman Tom Campbell (D-California) also sent a letter last month to over 70 high-tech executives and attorneys in Silicon Valley to whip up support for a bill that would close up loopholes in the 1995 reform. "As you were so important in the fight to pass Securities Litigation Reform and to defeat Prop. 211, I am hopeful that you would support supplementary efforts to discourage those who would use 'forum shopping' in states," the letter reads.
"The language is broad, but we hope that it is helpful to various high-tech start-up companies," said Charlie De Witt, Congressman Campbell's legislative director. "There is a narrow opportunity to debate, now is the time to follow up."
Other coalitions are forming. Montgomery Security's Jack Levin is spearheading the drive for the amendment in California. He is joined by other opponents of Prop. 211 such as venture capitalist John Doerr and the American Electronics Association. The Washington-based Securities Litigation Reform Coalition also has proposed a statute to require that class actions be filed in federal court.
"This is just the next battle in the war to put a stop to abusive securities law suits," Levin said.
Studies show that the number of stockholder class-action suits filed in state courts has increased since the 1995 Federal Securities Litigation Reform Act made it more difficult for plaintiffs to file in federal court. A recent study by two Stanford law professors shows that about 26 percent of litigation has moved from federal to state court. Michael Perino, who coauthored the study, said that this shift is likely the result of a "substitution effect" whereby plaintiffs file in state court when the underlying facts don't satisfy new, more stringent federal pleading requirements.
Other reports say the move to file in state courts is even more dramatic. According to Congresswoman Eshoo's office, in California alone securities class-action suits in the first six months of 1996 increased roughly fivefold compared with the first six months of 1995.