Crunch time in California
Directors and advisers face ruinous claims. Richard Halstead reports
Sunday 03 November 1996
The legislative proposal, known as Proposition 211, would allow militant Californian shareholders to claim punitive damages from a company's directors and officers if they could persuade a state court that the company issued misleading financial statements. Auditors and financial advisers would also be liable.
The measure is the creation of William Lerach, a San Diego attorney who has led the "strike suit brigade", a group of lawyers who make large sums of money by leading shareholder suits against companies. Most companies cave in and settle rather than endure a prolonged and expensive court battle.
Opponents of the bill, who include big high-technology companies based in Silicon Valley and Wall Street investment banks, say that Proposition 211 will make such actions even easier to launch and much harder to defend. They have spent an estimated $35m (pounds 22m) on lobbying and advertising to defeat the measure.
They have been led by Intel Corporation, which last week said it would not make any more forward-looking trading statements until the issue was resolved.
Other commentators, led by former presidential candidate Steve Forbes, have labelled the proposition "old-style extortion from mobsters", which will "destroy Silicon Valley faster than the Independence Day aliens". Both Bob Dole and President Bill Clinton have said they oppose the measure.
Much of the battle between the two sides centres on what Proposition 211 would actually do if passed. The answer, according to the pro lobby, is that it would merely offer investors protection against misleading financial statements by companies and their advisers.
"High-technology companies may be in a volatile market, but that does not give them the right to break securities laws," said Jeff McCord, a Washington lobbyist employed by the pro-211 faction. He dismissed the actions of Intel and other electronics companies as "scare tactics".
Opponents challenge Mr McCord's interpretation and contend that the measure would reduce investors' ability to get useful financial information out of a company.
"We are not grandstanding here," said Chuck Molloy, head of investor relations for Intel. "If we make a quarterly forecast, and it is inaccurate in the tiniest way, and the market marks our shares down, we will be liable."
In the end, Proposition 211 may be defeated by ignorance among the Californian electorate and the $35m spent by the Silicon Valley-Wall Street alliance - much of it on emotionally-charged television advert- ising that attacks "bloodsucking" lawyers and lobbyists.
According to a recent survey conducted by the Field Poll Group, 18 per cent of California voters said they would vote against the proposition and 12 per cent for, with 70 per cent saying they were unaware of the measure or undecided.
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