Lawyers Battle Securities-Fraud Law

Companies around the nation are threatened with expensive lawsuits because of an upcoming vote in California

California's infotech industry is gearing up to defeat a statewide ballot initiative drafted by lawyers and intended to bypass Congress' reform of the securities-fraud law.


"This overturns everything the federal legislature has accomplished" by reforming the securities-fraud law last December, said John Adler, chairman of Adaptec Inc. in Milpitas, Calif., which earns $600 million a year selling communications technology. Even companies based outside California may be exposed to expensive new lawsuits if the ballot initiative passes, he warned.

The ballot initiative, titled the Retirement Savings and Consumer Protection Act, was drafted by the L.A.-based Citizens for Retirement Protection and Security. Backed by lawyers, the group has raised more than $5 million for a publicity campaign prior to the Nov. 5 ballot.

If voters approve the ballot initiative, California's laws would be changed to ease securities-fraud lawsuits in California's courts.

Securities-fraud lawsuits are class-action suits brought on behalf of shareholders when a company's stock price fails to meet expectations, or when companies fail to comply with guidelines established by the Washington-based Securities and Exchange Commission. Infotech executives dub the lawsuits "strike-suits," and say they are frequently a shakedown by attorneys confident that companies will accept a multimillion dollar settlement rather than undergo an uncertain and expensive trial.

To defeat the initiative, infotech executives are rallying behind the Sacramento, Calif.-based group, Taxpayers Against Frivolous Lawsuits.

This group has raised almost $3 million from the infotech industry, said Richard Claussen, a partner in Goddard Claussen/First Tuesday, a Sacramento-based public relations firm that is managing the campaign for TAFL. But more funds will be needed to match pro-ballot campaign spending by the attorneys, he said.

Members of TAFL include the American Electronics Association and Lockheed Martin Corp., Bethesda, Md.

TAFL is arguing that passage of the ballot will cost California businesses $1.5 billion per year, kill 16,000 jobs in Silicon Valley, drive companies from the state and benefit only a small group of lawyers, said Claussen.

The infotech industry won congressional approval last December, despite a White House veto, for a law that sharply restricts securities-fraud lawsuits launched through the federal courts.

Infotech executives say hundreds of companies had been hit every year by the lawsuits, at an average cost to the companies of $8 million per case.

But the California attorneys say the federal law weakened protection for shareholders of infotech company stock.

"This is not just a lawyers' issue. It is a fraud victims' issue," said Sean Crowley, a spokesman for Citizens for Retirement Protection and Security.

Industry executives are using scare tactics to defeat the ballot initiative, he said. Claims that companies outside California will be exposed to lawsuits if the ballot passes are not necessarily true, he said. "That is up to the judge in each particular case to determine that," he said.

But TAFL supporters say that much of the pro-ballot campaign funds are provided by law firms based outside California, showing that lawyers expect to sue companies based outside the state if the ballot passes.

In March, California's trial lawyers celebrated after voters rejected an anti-lawyer ballot initiative drafted by the infotech industry, which would have imposed tougher rules for securities-fraud lawsuits launched in California courts.


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