Risk Management

Securities Litigation

Now Everyone's a Target
Joseph McCaffertyAugust 1, 2002

On July 2, pharmaceuticals giant Merck & Co. was hit with a class-action securities lawsuit filed by Milberg Weiss Bershad Hynes & Lerach LLP, one of the most notorious class-action securities law firms. The suit marks a huge departure from the typical targets of securities suits: technology firms.

And Merck is not the only new target. A recent study by PricewaterhouseCoopers LLP shows that a lower portion of securities litigation cases filed so far this year involve high-tech companies. Instead, suits involve an array of industries, including energy, pharmaceuticals, and retail. “No publicly traded company is immune,” says Charles Laurence, a partner at PwC. Roughly two-thirds of securities suits in the first half of 2002 have been brought against nontech companies, he notes.

That trend does not surprise Kimberly Pinter, director of corporate finance and tax at the National Association of Manufacturers. “It has to do with a general decline in the stock market,” she says. “The biggest driver is still the stock price going down.”

Not so, argues Melvyn Weiss, senior partner at Milberg Weiss. “The reality is that many non-high-tech companies are fooling around with their financials,” he contends. He adds that the popularity of using stock options outside the tech sector has put pressure on more companies to artificially inflate results.

There have been 114 securities suits filed through June of this year, according to a Web site maintained by Stanford University (http://securities.stanford.edu). A record 483 securities suits were filed last year. However, 308 of those involved disputes over the allocation of initial public offering shares–so-called laddering cases. Of the remaining suits, a record 57 percent included allegations of accounting improprieties. As recent headlines suggest, that trend has continued.

The securities suit against Merck, for example, alleges that the company’s Medco unit boosted revenue by billions of dollars by improperly including copayments made to pharmacies that it never received. In the past Merck has defended the practice, which does not affect earnings, and claims that two independent auditors reviewed the procedure without objections.

The PwC study also finds that more New York Stock Exchange companies and foreign companies are being named in suits. “What is stunning is the number of cases against Fortune 500 companies,” adds Weiss. In the past year, Kmart, Halliburton, Merrill Lynch, Ford, and several others have been targeted.