Copyright 2000 The Denver Post Corporation
The
Denver Post
November 19, 2000 Sunday 2D EDITION
SECTION: BUSINESS; Pg. L-01
LENGTH: 1855 words
HEADLINE:
Stock-loss lawsuits climb Securities Litigation Reform Act not
slowing down class actions
BYLINE: By
Anne Colden, Denver Post Business Writer,
BODY:
Like many people who have enjoyed the fruits of a robust economy,
Mitch Gilbert has become an active investor, dedicating a small
percentage of his portfolio to certain stocks he buys and sells.
'I like to invest in local companies,' said Gilbert,
a 44-year-old real estate broker from Greenwood Village.
'They're easier to follow. You can drive by their building and know
they exist. You feel better.'
Although he's had some
successes, he said, 'I'm just a regular guy who tries to do my
homework.' Now Gilbert finds himself in a different role - suing
two local companies for allegedly misleading him and other
investors. He lost about $ 13,000 on the stock of ICG Communications
Inc. and about $ 12,000 on Ribozyme Pharmaceuticals Inc. Both
companies face numerous complaints in U.S. District Court in Denver
alleging that they violated securities laws.
'I've never had
this happen before. Now it's happened twice in a year,' he said.
Gilbert is one of thousands of investors who will
join class-action securities lawsuits against American companies
this year, despite federal efforts to make it tougher to sue. With
the number of such suits approaching record levels in 1994 - 231
were filed that year - Congress decided to act. Under heavy
lobbying from corporations, it passed the Private Securities
Litigation Reform Act in late 1995.
The jury is still out on
whether the reform act did what it was intended to do. It forced
plaintiffs' attorneys to include more details in their complaints,
which has benefited companies, observers agreed. It also halted
discovery - termed 'fishing expeditions' by defendant companies -
when plaintiffs' attorneys conducted months of research in hopes of
finding smoking guns.
But it hasn't significantly cut the number of
securities class-action suits. After dropping off for a couple of
years while attorneys figured out how to play by the new rules, the
number has climbed. Last year, 237 securities class-action suits were
filed, according to National Economic Research Associates Inc.,
an economic consulting firm based in White Plains, N.Y. This
year, the group predicts 226 will be filed.
Nationally,
technology companies are the targets of about 35 percent of the
so-called 'strike suits.' And Colorado, with its large number of
start-up technology companies, gets its share. About 13 companies
have been named as defendants in strike suits in U.S. District Court
in Denver in the last two years.
'It's a confused mess now,' said Philip
Feigin, former Colorado securities commissioner and now an attorney
with Rothgerber Johnson & Lyons in Denver. Proponents of the
reform act looked at the number of lawsuits filed in the early '90s
and concluded that there must have been an increase in the number
of frivolous suits, he said.
'They didn't know that,' Feigin
said. The increase in class-action filings was 'a very technical
legal problem that was subjected to a fairly inelegant political
solution,' he said.
Federal courts, where most of the cases are filed,
have each interpreted the law differently, a fact that has
bothered defendant companies, said Sara Brody, a partner in the
San Francisco office of Brobeck Phleger & Harrison, which has
offices in Broomfield and defends many Colorado companies in
securities cases.
Because the cases often involve investors
across the country, attorneys can choose to file in a court where
they think they have a better chance of succeeding. Colorado is one
popular venue because most cases filed here survive a defense motion
to dismiss, Brody said.
In the Ribozyme case in which Gilbert
is a plaintiff, Chief Judge Lewis Babcock of U.S. District Court in
Denver recently denied such a defense motion.
Ribozyme, a
Boulder-based biotech firm, is alleged to have issued a 'false and
misleading press release' on Nov. 15, 1999.
In it, the company said it
would soon announce that one of its drugs in development 'had taken
an important step forward making both clinical history
and industry news.' The news was to be an 'achievement which may be
of great significance to cancer patients everywhere.'
Thousands bought shares
Gilbert was in his office watching this
come across a financial newswire. He and thousands of other investors
climbed aboard the stock as it rose from about $ 10 a share to $ 22
in less than two hours before trading was halted.
Two days
later, the price had dropped back to $ 9.31, as the company said it
had no history-making news to report.
'The plaintiffs have met their
burden in pleading that defendants' statements were materially false
or misleading,' Babcock wrote in his order denying the motion to
dismiss.
'They have a fiduciary responsibility not to give you
false news,' Gilbert said. 'Thousands of investors rely on that to
buy the stock.'
He even recalls saying to an office buddy:
'This is definitely a lawsuit. This can't be legal.' So when he saw a
press release that said a lawsuit had been filed, he e-mailed the
New York attorneys and signed up.
Exabyte, a computer tape
storage company from Boulder, was one company that felt unfairly
targeted by a shareholder suit and decided to fight back. It took on
the biggest gun in the plaintiffs' bar - Milberg Weiss, a national
firm that handles at least 60 percent of securities class actions
filed nationally - and won.
Although the company was sued
eight years ago, Stephen F. Smith, Exabyte's general counsel, still
grows animated when talking about it.
'The system has been so
abused over the years, it's become a process that follows a stock
drop,' he said. 'There are definite cases of real fraud out there,
but there should be something that distinguishes that from the
garden-variety stock drop.'
Exabyte felt it did the right thing in
warning investors that earnings would fall short of Wall Street
analysts' estimates in the third quarter of 1992. Two days after its
stock dropped $ 9 a share in reaction, the lawsuits started. They
alleged, among other things, that executives sold shares before the
stock fell.
'Plaintiffs defined the class period going back 15
months before the stock drop in order to increase the scope
of discovery,' Smith said. 'That's the game they play.'
Judge
Kane of federal court in Denver dismissed the complaint in June 1993,
saying the plaintiffs had failed to state a claim for securities
fraud.
Smith understands, however, why companies settle. 'If
a defendant loses on a motion to dismiss, the case is going to go
to a jury. It's a wild card, and a tremendous expense. It turns
a company inside out to respond to something like this.'
Nationally, the number of securities class actions
dismissed by the courts is hovering around 20 percent, a number that
has perhaps doubled since before the act, said Brody of
Brobeck Phleger. She attributed that to the higher standard of
pleadings that lawyers must now follow.
'Our investigation
has to be more detailed and thorough than before,' said Kip Shuman, a
partner with Dyer & Shuman, one of the state's most active
plaintiffs' class-action firms. Attorneys look through all public
documents, all Securities and Exchange Commission filings, and they
contact former employees, he said. 'We put a lot of time and effort
in before we file a case,' he said.
'The fact is that
multimillion-dollar recoveries simply do not occur in frivolous or
even weak cases,' Shuman said. The reform act provides for sanctions
against lawyers who bring actions that are deemed by a court to be
frivolous.
Dyer & Shuman recently obtained settlements of $ 24
million with Samsonite Corp., $ 26.5 million with Tele-Communications
Inc. and $ 13 million with Einstein/Noah Bagel Corp.
He
decried the difficulty shareholders have had in bringing legitimate
cases since the act.
'There have been very good securities cases thrown
out on motions because the standards were set too high. I don't
think that's good. The SEC isn't always there to follow up where
the private plaintiffs' bar can't,' he said.
Precisely,
agreed Feigin. While not condoning spurious lawsuits, he said the law
didn't address ways to weed out the good ones from the bad. 'They
didn't make it harder to file spurious suits, they made it harder to
file suits.'
Discovery delayed
Before the act, attorneys could
engage in discovery - the process of finding out what the other side
knows by reviewing documents and questioning key executives - before
a judge ruled on a motion to dismiss the case.
Now, a motion
to dismiss is considered before discovery can occur, forcing the
plaintiffs to find other ways to prove the merits of their case.
Companies like that provision, saying it removes some of the expense
and trauma of what Smith of Exabyte called 'the judicial version of
the Bataan death march.'
Plaintiffs' advocates said it puts shareholders
at a disadvantage. 'It's like having to require proof of a
conspiracy before you even start,' Feigin said.
The problem
is knowing whether a lawsuit has merit, especially when so few go to
trial. Some 90 percent of securities class-action cases are settled
before they reach that point.
There's no consensus on why the number of
securities class actions has risen. Some say it's simply because
there are more public companies and more volatile stock markets.
'The most vulnerable time is in a company's first
five years,' said Brody of Brobeck Phleger. 'And there are a
greater number of companies with less-experienced management.'
Other experts said that companies face increased pressures
to deliver consistent results. 'There is pressure to have
revenue recognized prematurely or to get products on the
market prematurely,' said Shuman of Dyer & Shuman.
'Another theory is that plaintiffs' lawyers are
like wildcatters drilling for oil, filing lawsuits in the hope that
one or two will be gushers,' said Lisa Casey, a visiting professor
at the University of Denver College of Law.
According to the
National Economic Research Association, the average value of
settlements was $ 8.4 million before the Reform Act.
Since
then, it has risen to $ 12.2 million, excluding a record-breaking $
2.8 billion settlement with Cendant Corp. last year. (This year saw
the second-biggest ever settlement - $ 259 million against 3Com
Corp.)
Of course, as the value of settlements goes up, so does
the typical one-third contingency fee collected by
plaintiffs' lawyers.
For his part, investor Gilbert doesn't
begrudge them that.
'I don't think you should be able to sue a company
for no reason, but I definitely feel that I got screwed,' he said.
'We invest our hard-earned money in these companies, and you
don't want to be deceived.'
GRAPHIC:
PHOTO: The Denver Post /Glen Martin Mitch Gilbert, a Greenwood village real
estate broker who lost $ 25,000 on two companies and has joined class-action
suits against them, says, 'We invest our hard-earned money in these companies,
and you don't want to be deceived.' GRAPHICS: The Denver Post/Cindy Enright The
class-action bite Tracking a lawsuit The Denver Post Class-action targets
LOAD-DATE: November 21, 2000 
