VideoFirst, the stock goes into a tailspin. Smelling blood, the lawyers quickly follow with shareholder lawsuits, and at best, an expensive hassle ensues. That's why executives across the land let out a cheer when one of the most notorious class-action securities firms, Milberg Weiss Bershad Hynes & Lerach, was slapped with a $45 million jury verdict. The jury ruled that Milberg Weiss unfairly targeted Lexecon Inc., a Chicago-based consulting firm, in one of its class actions and ruined its reputation. For once the shoe was on the other foot.
But the cheering has faded--and the lawsuits continue. Mark Nebergall, vice president counsel for finance and tax policy for the Software and Information Industry Association, doesn't expect the ruling against Milberg Weiss to have much effect on the number or quality of securities litigations. Very little has. "Companies are still afraid of the Bill Lerachs of the world," says Nebergall, of a Milberg Weiss senior partner who is known for his hardball tactics.
The Private Securities Litigation Reform Act of 1995, designed to shield companies from frivolous shareholder suits, ultimately has not slowed the stampede. The number of cases filed against companies dropped in 1996, the first year after the legislation went into effect, but grew to a record 235 in 1998. The act's safe-harbor provision delivers uncertain protection, since litigants remain free to claim that sinister motives lurk behind sharp stock declines. Even the most innocent companies are vulnerable if they aren't careful about what they say and how they manage insider trading.
Although a 1998 law forcing cases to federal courts may provide some relief, most companies remain unwilling to roll the dice with a jury. In weighing the costs of a defense and the risk of defeat, settlement generally carries the day.
In fact, the preponderance of settlements has created few tests for the Reform Act, says John Coffee, a law professor at Columbia University's School of Law. He says there have been only a few appellate decisions and that what district court decisions have been made have been split. Of course, the gray areas don't get cleared up if there are no decisions to set precedents. Moreover, the courts have been inconsistent, says Stuart Grant, an attorney with Grant & Eisenhofer, a Wilmington, Delaware-based law firm that represents large institutional investors in securities suits. Decisions vary not only from court to court, but from judge to judge, says Grant.
Safe Harbor?
Despite the Reform Act's highly touted Safe Harbor for Forward-looking Statements, companies are still being accused of fraud when their expectations don't pan out. True, there are fewer cases based solely on forward-looking statements, but failed forecasts are still cited as evidence of wrongdoing in roughly half the lawsuits filed since the act was passed. "In general, companies are very wary of making forward-looking statements and of taking advantage of the safe harbor until there is evidence that these safeguards are real," says Robert Hinckley, vice president of strategic plans and programs at Xilinx Inc., a San Jose, California, maker of integrated circuits and software design tools.
Company executives who are not skilled at making projections in public, or of touting new technology, could find themselves in the same mess as Norcross, Georgia-based Theragenics Corp. The onetime Wall Street darling was slapped with a securities class-action lawsuit that alleged the company made false and misleading claims about the outlook of its TheraSeed product, a tiny, radioactive seed that is implanted in patients to fight prostate cancer. The first suit was filed January 22, soon after the stock price dropped almost 34 percent--on January 11--when the company missed Wall Street's consensus earnings estimates by two cents. In court documents, plaintiffs pointed to press releases and statements by CEO M. Christine Jacobs, which they claimed were false and misleading.
The 1995 act requires the plaintiffs to prove that not only were the statements "reckless," but that company officials knew they were false as well. In the Theragenics case, as in many others based on missed forecasts, the plaintiffs allege that insider selling is proof that company officials knew the statements were wrong and wanted to keep the stock price up until they could sell shares (see "Defensive Measures," below).
The company denies the allegations of impropriety. "We believe this is precisely the type of frivolous class-action lawsuit Congress considered abusive and sought to curb when it reformed the securities laws," Jacobs stated in a company release. Moreover, Theragenics said it intends to "vigorously defend the litigation."
Still, proponents contend that forward-looking data is much safer as a result of the Reform Act. "There have been [fewer] allegations of false statements," says Professor Coffee. Lou Thompson, president of the National Investor Relations Institute, in Vienna, Virginia, adds: "Invoking the safe harbor is the best protection. To not use it is almost insane."
Race to the Internet
The act has also failed to end the so-called race to the courthouse, though it has altered the venue. In the pre-act era, plaintiffs tried to be the first to file a complaint against a company whose stock had dropped, because courts usually named the first to file as lead plaintiff. The idea was to file first, find the dirt later. The Reform Act now requires parties filing a class action to publish a notice so that other members of the class can come forward. The court is then supposed to choose the applicant with the largest financial interest to serve as lead plaintiff.
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