Will Congress Build A Safer Harbor Against Investor Lawsuits?

Eighteen months ago, when Congress overruled President Clinton and enacted a law making it harder for investors to sue public companies for fraud, cheers resounded throughout Silicon Valley. But the celebration has proven premature. High-tech execs claim the Private Securities Litigation Reform Act hasn't produced the promised relief from "frivolous" lawsuits, and they're clamoring for a new fix.

The problem: Investors' lawyers are getting around the federal law by filing class actions under more lenient state statutes. In April, the Securities & Exchange Commission reported the number of federal securities cases dropped by 34% in the first year after passage of the new law, while state suits rose 63% in the first 10 months of 1996 vs. 1995. So now a coalition of high-tech companies, venture capitalists, the securities industry, and accounting firms is pressing Congress to ban securities class actions in state courts. On May 21, Representatives Anna G. Eshoo (D-Calif.) and Rick White (R-Wash.) introduced a bill that would do just that. Representative Tom Campbell (R-Calif.) has introduced a similar bill, and Senator Christopher J. Dodd (D-Conn.) is expected to, also. "State courts are being used as an end run around federal reforms," gripes Douglas B. Comer, Intel Corp.'s legal affairs director. "Nationally traded companies shouldn't have to follow 50 sets of rules in 50 different states."

EXPOSED? Intel is one of 181 high-tech companies that wrote Congress in April calling for new reforms. One beef: They're not benefiting from the most hard-fought provision in the 1995 law: creation of a "safe harbor" to protect companies from being sued by angry investors if optimistic projections turn out to be wrong and their shares tank.

Backers of the original reforms say the safe harbor encourages high-tech companies, which tend to have volatile stocks, to give investors valuable information without fear of being sued. But Mark H. Gitenstein, an attorney for the high-tech group, says companies are still withholding projections because of fears of state suits. "These new companies are the very ones that investors need to know about," he says.

The prospect of closing state courts to litigation is spurring furious opposition from consumer and investor groups, trial lawyers, and state and local governments that invest public funds. The federal law is so strict, they contend, that defrauded investors would have little protection from stock manipulators if state courts are off limits. "It's astounding that Congress would say to people, `We will leave you exposed,"' says Richard Vuernick, legal policy director of Citizen Action, a consumer group.

The opponents' fears were heightened by a federal district judge's May 22 decision to dismiss a fraud class action against Silicon Graphics Inc. in Mountain View, Calif. The plaintiffs accused the company of inflating stock prices by releasing upbeat statements it knew to be wrong. In a rare move, the SEC weighed in with the investors. But the judge ruled the plaintiffs had to prove intentional misconduct, rather than the standard of recklessness that had been sufficient in pre-reform cases. "There's nothing about this suit that is frivolous," says Mern Horan, executive director of the National Association of Securities & Commercial Law Attorneys. "It's exactly what we were afraid of."

For now, Clinton isn't taking sides. Instead, he's named a task force to study the issue. In 1995, he backed trial lawyers by vetoing the original bill, but high-tech support on the Hill was so strong that lawmakers overrode him. Clinton is unlikely to be more supportive this time. And that means he could be heading for another nasty showdown with Congress.

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