Few Holds Barred

But the provision has had unintended consequences. Plaintiffs' attorneys now rush to issue a press release, often widely circulated on the Internet, to attract class members. The hope is to accumulate the largest financial interest and lead-plaintiff status. The practice also promotes multiple filings, which are harder for companies to defend.

Consider World Access Inc. The Atlanta-based telecommunications company announced on January 5 that its fourth-quarter earnings would fall well short of analysts' expectations of 31 cents a share, and would be closer to 15 cents per share. The price of World Access common stock plummeted 42 percent, or 87/8, to close at 123/8. Just two days later, a complaint was filed on behalf of Carol Milite, who owned only 100 shares of the stock. Over the next few months, 22 suits were brought against World Access.

The suits allege that the company touted the positive effects of pending acquisitions while it knew that pricing pressures in the industry would have a negative impact. The company insists there is no evidence of wrongdoing, yet it won't have a clear opponent for a while, as various law firms compile alleged victims.

Small Victories
Not all the news is bad. There is some evidence that a higher percentage of complaints are being dismissed. A study by David Levine, a senior Securities and Exchange Commission enforcement adviser, and Adam Pritchard, a University of Michigan law professor, found that U.S. courts dismissed 60 percent of shareholder fraud suits filed against companies in 1996 to 1997, compared with 38 percent in 1990 to 1991.

For a time after the passing of the 1995 Reform Act, many cases that were dismissed were subsequently filed in state courts. For example, a case brought against Quantum Corp., a Milpitas, California, disk-drive maker, was dismissed in 1997 by a federal judge who wrote: "The court finds the plaintiff's allegations preposterous," only to be refiled in a state court. In 1998, Congress passed the Securities Litigation Uniform Standards Act, which has substantially returned securities litigation to federal courts. "The Uniform Act has largely reduced, but not eliminated, the risk of dual-tract litigation," says Steven Schatz, a senior securities litigation partner with the Palo Alto, California-based law firm Wilson Sonsini Goodrich & Rosati.

Some interpretational case law that could give the legislation more bite is also starting to filter through the courts. A case against Silicon Graphics that was dismissed in 1996 could set an important precedent on the higher pleading standards, though there is an appeal pending. One key aspect of the 1995 act is that it requires plaintiffs' lawyers to describe the alleged fraud in greater detail in their complaint, or the case can be dismissed even before discovery. The district court dismissed the Silicon Graphics case based on the new pleading standards--namely, that the complaint did not contain a "strong inference of fraud."

Either way, many contend that real securities litigation reform will not come until the exorbitant damages that plaintiffs are able to seek are reined in. "Until Congress or the courts do something about the measure of damages, you won't see frivolous cases go away to the full extent Congress would like," says Schatz.

The heyday for securities plaintiffs is far from over. And some companies have themselves to blame, as earnings management techniques become more prevalent. "Look at all the companies that are restating their earnings," says James Newman, publisher of the Securities Class Action Alert. "The use of stock as currency to pay employees puts more pressure on companies to have higher earnings and higher revenues," and more companies are willing to commit fraud to do it, he says.

Current events, too, may help line more lawyers' pockets. The Y2K Bug is certain to snag companies that mistakenly thought they were compliant. And the music is sure to stop at some point for the lofty Internet companies. "A liability for being sued right now is the high valuations of Internet companies with little profits," says Michael Morris, general counsel of Sun Microsystems, a maker of enterprise network computing products based in Palo Alto, California. "Some of them have disclosures that would curl your hair."

Defensive Measures

• Make sure everyone in the company adheres to revenue-recognition policies. "I see cases all the time where the CFO is unaware of the potential deviation from the policy," says Steven Schatz, an attorney with the law firm Wilson Sonsini Goodrich & Rosati.
• Use the safe-harbor language even during live correspondence, such as conference calls. "The safe harbor is the best protection," says Lou Thompson, president of the National Investor Relations Institute, in Vienna, Virginia. "But don't use the safe harbor when there are no forward-looking statements. Boilerplate is not going to work," he warns.
• To the extent that you give guidance to analysts, be conservative. And be careful not to disclose material information in casual conversation.
• Institute blackout periods for insider trading by senior officials and directors. Experts recommend blackout periods lasting from the last month of each quarter to two days after results are announced.
• Be careful with pre-announcements. They could make the company responsible for updating the information every time conditions change.
• Avoid hyping products and services. Speculating about the prospects for products, especially in trade journals and at trade shows, where safe-harbor language is rarely used, can be construed as false and misleading if they don't bear out.

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