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July 25, 1994

AMERICAN ELECTRONICS ASSOCIATION WAGES WAR ON CLASS ACTION LAWSUITS

By CBR Staff Writer

Meretricious, parasytic, contemptible are just some of the words we have used about those deeply damaging shareholder class action lawsuits routinely filed whenever a US high technology company has to make a profits warning, so it is tremendous news that something may be done about it. The American Electronics Association in Santa Clara says that fearing meritless lawsuits filed by ‘professional’ plaintiffs and lawyers, 219 leading California high tech chief executives and senior executives have urged Senators Feinstein and Boxer [of that state] to support legislation that would filter out the rising number of abusive securities class action lawsuits. The current securities litigation system is broken, said Dick Iverson, president and chief executive of the Association. Instead of protecting company investors, it protects the pockets of a handful of trial lawyers – all at the expense of high tech companies. These suits often have no merit, and are filed solely for the purpose of extracting settlements from corporations, he noted. And it is the lawyers – not shareholders – who reap the rewards. According to a recent study, defending companies pay an average of $4.5m at settlement, with 39% going to plaintiff’s law firms. While law firms get huge awards, stockholders – the supposed injured parties in these cases – get pennies on the dollar from these settlements, Iverson added. Recent evidence has shown that most plaintiffs in securities class action suits hold only a few shares in the defendant corporation, and that most companies decide to settle since they can’t afford the risk, expense and distraction of a jury trial. Last year, companies paid a ludicrous and indefensible $1,550m to settle shareholder lawsuits, up from just $324m in 1988. The 219 senior executives signing the letter have not all been subject to a securities class action suit, but stated they live in fear of being sued. The new bill would create clear guidelines for damage calculation to determine the amount of damages owed to plaintiffs, such as when the price of a stock rebounds to the benefit of the plaintiff after the damaging disclosure. It would require plaintiffs to allege specific facts in their complaint demonstrating the state of mind of each defendant at the time the alleged violation occurred, and to specify each statement made by the defendant to have been misleading. And it would direct the Securities & Exchange Commission to consider establishing a safe harbour so that statements on future economic performance of a company will not become the basis for a lawsuit.

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