We have fulminated so often here about the damage done to high-tech companies by meretricious shareholder class action lawsuits that we are delighted that the issue is at last getting some attention back home in the US. Representatives of four companies – Silicon Graphic Inc, Intel Corp, Adaptec Inc and EMC Corp, all members of the American Electronics Association testified last Thursday before a subcommittee of the Senate Banking, Housing, and Urban Affairs Committee, and urged Congress to act to halt the dramatic rise in these frivolous shareholder suits. US high tech companies are extimated to have paid more than $500m in out-of-court settlements over the past five years. Edward McCracken, president and chief executive of Silicon Graphics Inc described the suits as an uncontrolled tax on innovation – even when companies like Silicon Graphics are successful, there is a threat of a securities class-action. Because stock price volatility goes hand-in-hand with risk-taking, innovative companies become targets of these abusive suits, McCracken said. The current system exposes companies to potential litigation whenever their stock price falls by more than a few percent, even if there was absolutely no violation of securities laws or fiduciary responsibility. For example, he said, Silicon Graphics disclosed on April 3 1991 that the Gulf War had caused a disruption in customers’ purchasing decisions and that revenues for the quarter, which ended three days prior, would be lower than expectations. After the announcement – which McCracken said was made two weeks earlier than usual in order to inform the market of the unexpected downturn – the company’s share price fell about 10%, and despite the company’s disclosure, Silicon Graphics was sued for securities fraud. The case was finally dismissed after two years and more than $500,000 in attorney’s fees.Richard Egan, chairman of EMC Corp said that the suits are popular because it costs plaintiffs’ attorneys little to file them. Companies, on the other hand, have to pay the legal costs of defending the suits, even if they are eventually thrown out of court, he said. But lawmakers, while sympathetic to the executives’ concerns, appeared to be reluctant to take steps that could prevent investors from bringing legitimate suits. All of which suggests that the only solution is for shareholders not covered by the class should gang together and sue the class for damage done to their company.
