JEFFREY KAYE: The stock market has always been a roller coaster ride. But when an investment goes bad, what should be the liability of a company and executives who wrongly mislead stockholders? That's a question for California voters this year in the form of a hotly-debated ballot measure Proposition 211. Kelly Hayes-Raitt is an advocate for the measure.
KELLY HAYES-RAITT, Proposition Supporter: Prop 211 is needed because Americans lose $40 billion every year from their investment funds. I mean, that's according to the Department of Justice. Prop 211 will help swindled seniors get their money back, and it will punish fraud.
JEFFREY KAYE: Pursuing stock fraud, according to initiative supporters, became harder after December 1995. That's when Congress passed a new federal securities law over President Clinton's veto. The law made it more difficult for investors to go to federal court to sue companies that make fraudulent statements. Proposition 211 would effectively circumvent federal law by making it easier for shareholders to file stock fraud suits in California courts. If it passes any company official who knowingly recklessly engages in deception would be personally liable for damages, although a business could buy insurance to cover the liability; lawyers and accountants who participate or assist in the fraud could he held liable for the full amount of the damages; shareholders would not have to prove they were aware of false statements when they made their investments, just that the stock price reflected the false information, and companies which lose class action suits could have to pay punitive damages.
COMMERCIAL ANNOUNCER: 911 could save your life, Prop 211 will save your life savings.
JEFFREY KAYE: TV commercials for and against Prop 211 cast the choice in extreme terms.
COMMERCIAL ANNOUNCER: Those lawsuits will target companies like this one, forcing many of them to leave California, taking hundreds of thousands of jobs with them.
JEFFREY KAYE: The measure has been vigorously opposed by high tech, Wall Street, and accounting firms which have so far raised nearly $37 million this year--four times as much as the initiative's supporters. Opponents fear the number of class action lawsuits--currently about 300 per year nationally--would increase if the measure passes. TJ Rodgers, CEO of Cypress Semiconductors, proudly displays the order dismissing a class action lawsuit filed against him--a suit containing what Rodgers considers groundless charges.
T.J. RODGERS, Proposition Opponent: They were unfounded. They were so unfounded that the judge didn't even think it was worth his time or jury's time to hear them.
JEFFREY KAYE: In his case, lawyers for the stockholders were unable to prove their contention that Cypress knew earnings would drop, but failed to warn investors. That's the typical allegation in class action cases filed against high-tech and bio-tech companies. Those industries are competitive and rapidly changing; the volatility is reflected in stock prices. When they drop, lawsuits can follow.
T.J. RODGERS: And it's a bad deal for us.
JEFFREY KAYE: Rodgers worries that Proposition 211 would create an open season on executives who fail to accurately predict the future.
T. J. RODGERS: This law is not about responsibility, it's not about greedy CEO's, it's about suing technology companies for profit when their stock goes down, period, the end. A bad deal for California.
JEFFREY KAYE: At a recent Silicon Valley debate on the initiative, Rodgers spoke to a receptive audience of fellow high-tech executives. Proponents were in enemy territory
KELLY HAYES-RAITT: It will hold individual directors, CEO'S, lawyers, accountants, brokers, and bankers personally and financially responsible when they engage in what is currently defined as fraud. We think everyone who engages in fraud should be held responsible.
T.J. RODGERS: We don't defraud our shareholders, and I'm completely confident can win any suit brought against us. I'm here, for a bigger reasons, for a bigger problem for California and that is the unraveling of the economic fabric of Silicon Valley if Proposition 211 passes. How will that happen? I'm a director. I serve on the boards of two companies. I get 750 bucks, a meeting and, a stock option. If 211 passes, my net worth, my house, will be on the line. So that if an engineer in one of those companies writes a memo which turns out to be a silver bullet in the trial, or even if we have a good case and we're just accused of fraud, and it turns out that the jury is the same one that gave the lady 2 million bucks for dumping McDonald's coffee on her lap, my house and my car go. So what will I do? Simple. What any rational human would do. I'll quit.
KELLY HAYES-RAITT: Now Prop 211 says that the individual who engages in the fraud is held personally responsible. It's just as if a surgeon were to cut off the wrong leg, you don't just sue the hospital, you sue the surgeon and hold the surgeon personally responsible. We think that's a good idea.
JEFFREY KAYE: Opponents claim the initiative is a special interest tool of plaintiffs' lawyers, particularly William Lerach of San Diego.
COMMERCIAL SPOKESMAN: One man is taking the law into his own hands. Bill Lerach.
Last year his firm made one million dollars from such suits. 211 is a fraud. And a loophole for Bill Lerach.
JEFFREY KAYE: Lerach, one of the proposition's authors, is also the chief contributor to the campaign. He says class action lawsuits are often the only legitimate weapons defrauded investors can get their money back.
BILL LERACH, Proposition Supporter: It's a good, honest, worthwhile work. It's helping ordinary people stand up to the dishonest companies and dishonest executives and call them to account. I'm proud to have spent my life doing that work, and I hope I can do more of it whether or not 211 passes.
JEFFREY KAYE: That's what his opponents are afraid of. Since high-tech firms are frequently named in class action lawsuits, many executives see Lerach as their number one enemy.
T. J. RODGERS: Lerach, in my opinion, is a parasite who feeds on the wealth that people like me create. There wouldn't be any Lerachs if there weren't companies creating jobs and wealth to be attacked by people like Lerach.
WILLIAM LERACH: Securities fraud lawsuits alone call into question the integrity and the honesty of the very top people with the company and focuses on their behavior. And therefore the corporate executives can't slough them off as a mere cost of doing business. They have to answer themselves for their conduct, and they hate it.
JEFFREY KAYE: Initiatives foes such as George Sollman, chairman of the 3,000-member American Electronics Association, say the proposition would be costly. Sollman is CEO of Centigram Communications which recently settled a suite brought by Lerach. The settlement was for a million and a half dollars. Sollman says it is often cheaper to pay off than to fight, and that more lawsuits would mean more settlements.
GEORGE SOLLMAN, Proposition Opponent: The risks of loss far outweigh the chances that you are going to be taking, for example, if I am going to be putting up, if I will fight lawsuit through the courts today, I'm looking at a million dollars. There's no question it will be in that ball park. So I'm going to--
JEFFREY KAYE: Whether, you are right or wrong.
GEORGE SOLLMAN: Right or wrong, it's a million dollars.
JEFFREY KAYE: Sollman says some businesses, fearful that Prop 211 may pass, are already refraining from making financial forecasts. They're afraid that if they're wrong, they'll be sued for fraud. But supporters of the proposition say their intent is not to discourage financial forecasts; it's to keep companies honest. The latest "LA Times" poll shows 52 percent of likely voters are against the measures, but a quarter of the electorate is undecided.