Will Shareholder Rights Be Trampled In The Rush Toward Reform?Michael Schroeder
When he headed the American Stock Exchange, Arthur Levitt Jr. slammed lawyers who filed frivolous shareholder lawsuits to force companies into exorbitant settlements. Now, as chairman of the Securities & Exchange Commission, Levitt is about to see Congress stem such abuses. So why isn't he cheering? The SEC chief frets that an overzealous GOP may weaken investor protections.
With securities-lawsuit reform rushing through Congress, Levitt is working behind the scenes with lawmakers, legal experts, and business groups to shape legislation that balances shareholder rights with company interests. His goal: ensuring the bill "won't compromise investor protection and market efficiency."
"SAFE HARBOR." That won't be easy--even the SEC is divided. General Counsel Simon M. Lorne and Commissioner Steven M.H. Wallman, both ex-corporate lawyers, advocate aggressive reform. But agency staffers defend class actions as valuable adjuncts to their policing efforts and say minor tinkering is needed. "The SEC is like a large Italian family at the dinner table," says William R. McLucas, the SEC's enforcement director. "There's a lot of arguing, disagreement, and debate."
Levitt, who favors a middle-of-the-road approach, has jawboned the Senate Banking Committee to produce a compromise less radical than the House overhaul, which passed by a lopsided 325-99 in March. The Senate bill, likely to become law, eliminates bounty payments that lawyers pay investors who agree to sue, and it caps attorneys' fees. It also gives companies "safe harbor" from liability for making business forecasts that don't come true--so long as they warn that projections are speculative, and they don't engage in fraud.
High-tech companies have long sought a safe-harbor provision because they have volatile stock prices, and they are continually being sued when they miss their growth forecasts. In 9 out of 10 cases, they settle for an average of $8.6 million to avoid even costlier litigation. "We view that as high-tech extortion," says Kenneth Glueck, director of finance policy at the American Electronics Assn.
Levitt's lobbying helped strip from the Senate measure a House requirement that losers pay both sides' legal fees. The SEC chief--backed by consumer groups--complained that a "loser pays" rule would scare off legitimate suits. And the Senate trimmed the House's safe-harbor rule by limiting it to public companies, not brokers and financial institutions.
But corporate interests bested Levitt elsewhere in the compromise bill, sponsored by Banking Committee Chairman Alfonse M. D'Amato (R-N.Y). The legislation lacks two items the SEC had urged to help investors recover damages: a longer statute of limitations and the option to sue accountants and outsiders who assist in a fraud.
Not surprisingly, shareholders' attorneys are livid over D'Amato's bill. "It makes it all but impossible to hold swindlers accountable for fraud," fumes Jonathan W. Cuneo, general counsel of the National Association of Securities & Commercial Law Attorneys. And the Consumer Federation of America says the reforms essentially give companies a "license to lie" about their prospects, making it next to impossible to file even the strongest cases.
Still, momentum for relief from what Corporate America calls legal shakedowns appears unstoppable. With both parties on board, a bill is likely to arrive on President Clinton's desk by summer. Although it will tilt the balance toward corporations, Clinton may be forced to sign it: Given the current political climate, it's the best he can get.