Let's say you run a video game company. You've just been told
that promised deliveries of this year's planned blockbuster,
"Burn 'Em in Salem," will be delayed at least three months. The
trouble is that the pitiful screams of the witches in the test
version cannot be heard above the roar of the flames.
Who do you call first? Your ad agency? The big retail chains?
Members of the corporate board? Ghostbusters?
More likely, the company's lawyers. For once the delay is
announced, your stock is probably headed for a nose dive. And
frequently _ arguably much too frequently _ securities fraud
lawyers will be filing lawsuits on behalf of those who bought the
stock (or chose not to sell it) on the implied promise that you
were all set to send children to bed each night dreaming of
Admittedly, not all cases in which a stock takes a sudden
plunge lead to shareholder lawsuits. The law, after all, requires
evidence of fraud or deceit to win a suit in federal court. But
enough horror stories about frivolous lawsuits aimed more at
extracting big settlements than proving malfeasance have made the
rounds that many lawmakers are convinced something needs to be
done to curb the practice.
Rep. Christopher Cox, R-Calif., wrote the original draft of
what is now known as the Securities Litigation Reform Act and
shepherded a modified version of the proposal through the House.
It is now pending in the Senate, where it faces a tougher battle.
"The bill addresses all the key concerns," he said.
But does it? Experts who are sympathetic to the need to rein
in securities suits see the final House bill as an unwieldy
patchwork that will require years of court tests before its
impact becomes clear.
"Eventually," concluded Lester Brickman, a professor at the
Benjamin Cardozo Law School in New York City, "we'd find out just
how many angels can dance on the head of this pin."
Instead, Brickman just may have a better idea.
In recent years, stockholders' lawsuits have grown like weeds.
Originally seen as a desirable way to encourage full and timely
disclosure, many people now believe that such litigation on
behalf of injured "classes" has taken on a life of its own.
The law has not changed, but the aggressiveness of the
plaintiffs' bar has. Hundreds of class action suits on securities
fraud are filed in federal court each year.
So what is wrong with that? Plenty. As Elliot Weiss of the
University of Arizona Law School and John Beckerman of Cardozo
Law School write in a forthcoming article in the Yale Law
Journal, the market for such litigation responds to perverse
incentives in which the cost of defending against these suits far
exceeds the cost of pursuing them. …