A Better Way To Protect Investors
The current congressional effort to gut investor protection is one more example of ideological extremism that will provoke a public backlash in the years ahead. But among the bills being proposed, those on litigation reform do have virtue.
Frivolous lawsuits demanding retribution because a company's stock took a tumble have gotten out of hand. It's too easy for some lawyer to allege on flimsy evidence that the company misled investors and then claim to represent all of the thousands of a stock's owners. The current system is particularly hard on high-tech companies, which need heavy doses of market capital but are subject to wide stock swings.
Under the new reforms, executives would have more freedom to discuss their company's future without having to worry about being sued for fraud if some unforeseen problem crops up. The courts would get additional powers to evaluate cases early on and weed out frivolous suits. And injured parties--not their lawyers--would decide whether to go on with the suit and what settlement to accept.
Good as it is, the legislation needs to be tightened. Say, a top executive announces that an exciting new product is about to come out. The company's stock then soars. But the official fails to check if the product actually works. It doesn't, and the stock crashes. Under the new legislation, the executive would not be held liable.
We think shareholders deserve better. They should be able to sue not only if an executive knew but also should have known that a statement was false. We're for measures that prohibit penalizing companies for inaccurate predictions made in good faith. But if Congress and President Clinton leave a loophole this large, a counterattack is certain from justly outraged investors.