Investor suits flood Valley

One of the hottest California election issues on the November ballot was Proposition 211, a shareholder rights initiative that proponents trumpeted as a way to protect investor interests and companies denounced as an excuse to file frivolous lawsuits.

After waging the most expensive political campaigns in state history, the measure was soundly defeated, by a three-to-one margin. But five months later, shareholder lawsuits--frivolous or not--have yet to show signs of slowing. Despite the demise of Prop. 211, which would have increased company liability for earnings forecasts and allowed out-of-state residents to join California class actions, elements of this initiative are surfacing in shareholder lawsuits filed throughout the state.

"Everyone was looking for these frivolous lawsuits to be stopped. They're costly to defend and we were hoping they'd come to an end," said Steve Polcyn, investor relations director for Read-Rite (RDRT), which was named in a shareholder lawsuit in December.

In the past few weeks alone, suits have been filed against networking company 3Com (COMS), software developer NetManage (NETM), and service provider America Online (AOL), among others.

"Rather than being slow, its been a tsunami," said Boris Feldman, an attorney with Wilson, Sonsini, Goodrich & Rosati in Palo Alto, whose firm represents companies accused of investment fraud. "The reason it's picked up is we're in a transition period. Since the federal reform act has shut out a number of shareholder suits, they're turning to the state courts, even without the benefit of Prop. 211."

Many recent securities fraud cases have been filed in state instead of federal court, analysts say, because there are fewer procedural hurdles that a plaintiff must overcome to have a case heard.

Although many companies denounced the federal Private Securities Litigation Reform Act for not providing them enough protections, the 1995 law did tighten up such requirements as new pleadings, joint-liability governance, and discovery stays--effectively making shareholders pass more tests to show that their cases had merit.

In addition, state courts, unlike federal ones, do not include something called a "comparative fault rule," under which a defendant must pay only those damages for which he or she could be help reasonably responsible. That means that it may be easier for plaintiffs to get more compensation from a state court even if the defendants are only partially at fault.

In turning to California state courts, Feldman said shareholders' attorneys are taking positions in their filings similar to what they likely would have if Prop. 211 had passed.