Under Legal Pressure: Litigation Overload

Under Legal Pressure: Litigation Overload

2001 is shaping up to be a banner year for aggrieved shareholders and their attorneys seeking to punish companies for alleged misdeeds.

Corporate America had hoped that the Private Securities Litigation Reform Act of 1995 would curb a flood of shareholder class-action lawsuits that were sapping coffers and tying up valuable CEO time with marathon depositions. Those hopes, as it turns out, were hopelessly naïve.

The National Economic Research Associates estimates that the number of shareholder lawsuits this year will easily surpass 200–in keeping with a recent trend. More alarming for those in the board rooms, statistics show that the average settlement or judgment is more than $12 million, up from an average of about $8 million prior to the Reform Act.

The Reform Act made it harder for attorneys to file class-action claims by forcing them to at least make a convincing case of corporate malfeasance before a judge would accept a case and allow depositions. The boomerang effect has resulted in attorneys logging more hours researching their cases. More billing hours has translated into bigger settlements and judgments.

While some corporate counselors grouse about the need for more reform, the fact remains that many public companies have brought these class-action suits upon themselves. Executives at Oracle, for example, sold nearly a billion dollars of their own company’s stock in December, then spent January and February boasting that Oracle’s prospects never looked brighter, only to admit in March that the financial outlook wasn’t so rosy. While these facts do not prove corporate wrongdoing, they sure don’t make the company look good.

After the market hype of last year, public companies need to show more restraint. Rein in massive insider trading. Curtail repricing of stock options, which only dilutes shareholder value. And, for God’s sake, muzzle the public relations sirens, which fuel unrealistic expectations–and provoke trigger-happy class-action attorneys.

Posted by on May 15, 2001