SUITS STILL IN STYLE
Economic Slowdown May Be Ending, but Shareholder Lawsuits Will Linger
By CHRIS CZIBORR
Despite the nascent economic recovery, Orange County securities litigators likely will be busy for some time handling a surge in shareholder class-action lawsuits that started hot on the heels of the dot-com meltdown in 2000 and accelerated during the 2001 slump.
Last year the number of shareholder class-action suits in the U.S. more than doubled, to nearly 500. Dot-coms and other technology companies that hit the skids in 2000 or 2001 are taking the brunt of the suits, but the telecommunications sector also has been a major area.
“Any time you have a market where companies are experiencing sharp drops of their stock prices you have a target-rich environment for the plaintiffs’ lawyers,” said Wayne Smith, Irvine-based co-chair of securities litigation for Los Angeles law firm Gibson, Dunn & Crutcher LLP, who defends corporations in suits.
“When the economy started down, the tons of companies experiencing business difficulties with sharp price declines were ripe for securities fraud cases,” he said
But, the high-profile suit against Irvine-based Broadcom Corp. notwithstanding, Todd Gordinier. Securities litigation partner at Newport Beach law firm Stradling, Yocca, Carlson & Rauth, said, “Orange County has weathered this pretty well,most of the cases, especially the bigger ones I have, are not here right now.”
And the defense attorneys said the Securities Reform Act of 1995, intended to curb such lawsuits, is filtering out some cases but has not stemmed the current tide.
Meanwhile, some plaintiff law firms have come away with some lucrative payoffs.
There have been a handful of securities litigation settlements in excess of $200 million since 1995. The largest by far involved New York real estate, financial, travel and hospitality company Cendant Corp., which settled for $3.5 billion.
Other big settlements include: Bank of America Corp. litigation, $490 million; Houston-based Waste Management Inc., $457 million and $220 million in separate cases; and Santa Clara-based 3Com Corp., $259 million.
But plaintiff attorneys say it’s not the lure of dollar signs that is attracting more shareholder litigants.
Alan Schulman, San Diego partner-in-charge for New York and San Diego co-headquartered plaintiff securities litigation firm Bernstein, Litowitz, Berger & Grossmann LLP, said he believes the Securities Reform Act actually fueled the increase in shareholder suits by encouraging fraudulent accounting practices.
“The act has created an environment where the risk of liability is far outweighed by the possible financial gains from wrongdoing,cases went up in 2001 because there’s more fraud,” Schulman said. “It’s pretty obvious that there’s been a marked increase in incidents of corporate fraud and some spectacular instances of major accounting scandals that have become obvious to the general public lately, like Enron, Cendant, Waste Management,the list goes on.”
Bernstein’s New York office represented the plaintiffs in the Cendant suit, and the San Diego office handled a recent case against Arthur Andersen, which resulted in a settlement to the Phoenix-based Baptist Foundation of Arizona for $217 million.
Typically, shareholder suits can be precipitated by a company announcement of “bad news” that sparks a sharp fall in its share price, especially if the company’s principals sold shares in the weeks preceding the announcement.
“Plaintiffs only are concerned with alleged misrepresentations if their stock prices are declining,” Gordinier said.
Plaintiffs in cases argue that a company that knew of that bad news when they announced it must have known about the bad news earlier and failed to announce, according to Smith.
“And if they find that insiders had traded any stock any time in close proximity to when the bad news came out, then the plaintiffs will allege that the insiders obviously withheld the bad news so they could sell off their stock,” he said.
In such instances, the plaintiff would argue that the company is guilty of securities fraud, Smith said.
Robert Gooding, firm-wide securities litigation partner at the Irvine office of Washington, D.C.-based Howrey, Simon, Arnold & White LLP and co-chair of the securities litigation committee of the American Bar Association, said that restating financial results can make a company a target for litigation.
“Lots of companies, especially larger companies, restated financials with alleged accounting irregularities or fraud,and that is almost always the case when a company has restated its financials,” Gooding said.
The firm saw a 19-fold increase in its securities litigation practice last year,which was the first year Howrey focused on the area.
Howrey is representing a former director of Los Angeles-based Global Crossing Ltd. and has represented outside directors of Enron Corp. in connection with congressional, SEC and grand jury proceedings.
Gibson’s Smith has represented Intel Corp., Hewlett-Packard Co., Lake Forest disk-drive maker Western Digital Corp. and Costa Mesa networking products maker Emulex Corp.
“Most of the cases filed have been in areas where you have market volatility, and you have higher volatility when you’re dealing with high-tech companies,” said Smith. “Western Digital’s disk drive business for example has sharp ups and downs.”
Western Digital drew a securities class action suit in 1998, which the courts eventually threw out.
Gibson’s Smith said people can’t come into court without specificity of what occurred as mandated by the act.
“You have to allege that it showed up in a memorandum on a specific day that this person talked to this person,” he said.
