Infotech Fights State Securities Laws

A nationwide law is needed to replace the states' patchwork of securities-fraud laws, say infotech executives

Infotech executives want Congress to close a California-sized loophole in last December's reform of securities-fraud laws.

"The class-action attorneys have packed their bags and have gone to the state courts," exposing infotech companies to frivolous and costly lawsuits, said Jonathan Dickey, of Gibson, Dunn & Crutcher, Menlo Park, Calif.

"It is critical... that there be only one forum for these lawsuits -- the federal courts," said Dickey, who specializes in defending infotech companies accused of securities fraud.

But winning Congress' approval for a pre-emption law "would be very difficult to achieve," warned Teresa Casazza, a Sacramento-based lobbyist for the Washington-based American Electronics Association, which has lobbied hard for legal reforms. To pass a pre-emption law, the industry would have to overcome lawmakers' reluctance to override their own states' particular securities-fraud laws, she said.

The lawsuits can be filed when a company's stock price fails to meet expectations or when companies fail to comply with guidelines established by the 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. Hundreds of companies have been hit by the lawsuits at an average cost of $8 million per case, say the infotech executives.

The industry's call for federal pre-emption follows the shift of class-action, securities-fraud lawsuits toward state-level courts. The shift was prompted by legal reforms passed last December by Congress, which curbed such lawsuits in the federal courts.

But companies are not shielded from frivolous lawsuits in state courts, and state judges have less experience with securities-fraud lawsuits and are unwilling to punish class-action lawyers who file frivolous lawsuits, Dickey said.

A federal law overriding the various state laws "is the only practical solution," argued Dickey.

Although Congress overrode President Bill Clinton's veto in December to pass the securities-litigation reform, a federal pre-emption lawsuit would be difficult to achieve, said Casazza. Congress has failed to agree on a similar product-liability bill, which is intended to curb lawsuits brought when a product fails or is unsafe. The industry pressure for reform is backed by other companies, including Detroit-based Chrysler Corp., which is fighting 18 class-action lawsuits relating to product safety and reliability. For example, Congress should pass a law requiring that class-action lawyers prove their client suffered significant harm before launching an expensive lawsuit, said Lewis Goldfarb, Chrysler's assistant general counsel.

Without a federal law, infotech executives are trying alternative solutions. For example, California's infotech industry will try next year to get a securities-fraud reform law through the California assembly, said Dickey. However, lawyers have defeated many state-level reform plans proposed in Arkansas and California.

Chrysler is setting up a "class-action clearinghouse" to share information on prominent class- action lawyers, Goldfarb said. "There is widespread interest [in the clearinghouse] in every sector, particularly in consumer goods and services," said Goldfarb.

Chrysler is seeking to deter future lawsuits by suing several class-action lawyers in Michigan, whom Goldfarb says dragged Chrysler into frivolous and costly lawsuits. "We are focusing basically on ways to go after lawyers," he said at a July meeting hosted by the Washington-based Economic Strategy Institute.

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