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http://moneycentral.msn.com/articles/news/extra/6956.asp

It took a little while, but the lawsuits from the stock market crash are starting to pile up.
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So far this year, according to the Securities Class Action Clearinghouse at the Stanford University Law School, 89 class-action lawsuits involving securities fraud have been filed in federal court. At that rate, the total could top 250 by the end of the year, well above the 231 similar lawsuits filed in 1994. Six class-action lawsuits have been filed against Cisco Systems in the last month alone.

What's causing the rise in class-action lawsuits seems to be the tech stock crash of the last year or so. Many investors are livid, and the lawyers who specialize in class-action securities lawsuits sense an opportunity. They're accusing companies and investment banks of disclosing misleading information, insider trading and disclosure and distribution practices that artificially pump up stock prices during initial public offerings. What's more, some are even challenging the idea of matching 401(k) plan contributions only in the form of company stock.

While exactly how much anyone can recover from these lawsuits is anyone's guess, it's most likely that shareholders won't get anything near a full recovery of their lost investing dollars.

Five cents on the dollar invested is possible. Sometimes, settlements have included cash and additional shares.

A spate of IPO lawsuits
The current batch of lawsuits concerns company practices during initial public offerings (IPOs). On April 23, shareholders sued Avici Systems, NetZero and Autoweb.com, claiming that the companies failed to disclose the magnitude of commissions paid to underwriters as well as other practices used to artificially inflate the IPO stock price. Earlier, MarketWatch.com, Ariba and VA Linux Systems were hit with similar lawsuits. The lawsuits cover shareholders who purchased stocks in the companies during various periods since 1999, when the IPO market was red hot.


On April 24, investors sued Marimba, charging that its prospectus was "materially false and misleading" at the time of its IPO. The suit also accuses investment bankers Morgan Stanley Dean Witter, Credit Suisse First Boston and Bear Stearns of practices that pumped up the price of the stock at the time.

Here's what the Marimba case charges:

First, that Marimba and the investment banks allegedly failed to disclose important ("material," in the language of securities law) information in the prospectus. Perhaps more importantly, the lawsuit claims that the investment banks received significant unreported commissions from some investors. In return, the banks and Marimba made sure these investors received more shares at the $20 a share price.

(Marimba closed at $60.75 on April 30, 1999, the first day its shares traded publicly. The stock peaked at $66.44 on the next trading day, May 3, 1999. The stock has been selling at about $3 recently.).

Further, the lawsuit claims that the investment banks first secured promises from investors to buy additional Marimba shares in the aftermarket at higher prices than the offering price. These practices, if proved, could be violations of securities laws that ban practices that compensate brokers unfairly and that inflate stock prices.

In fact, the Securities and Exchange Commission is reported to be investigating these practices, which were apparently widespread during the IPO boom. Their investigation reportedly involves whether the large commissions constitute "kickbacks" to the investment banks and whether the "tie in" arrangements with customers -- the promise to buy more shares in the aftermarket in exchange for receiving allocations of shares at the IPO price -- artificially inflated the stock's price. The SEC is concerned that these practices may have lured small investors into the IPO frenzy, leading to huge investment losses.

Failure to disclose
Other shareholder lawsuits center around misleading disclosures or failure to disclose material information in press releases, SEC filings, analysts' conferences and other corporate communications. Last November, for example, computer network-equipment maker 3Com agreed to pay $259 million to settle a shareholder lawsuit that alleged that 3Com hid derogatory information about the $7.3 billion acquisition of U.S. Robotics in 1997.

The 3Com lawsuit included shareholders who purchased 3Com between April 23, 1997, and Nov. 5, 1997. In the two months before the U.S. Robotics purchase in June 1997, 3Com's stock price more than doubled in price. During the same period, the lawsuit claims, insiders sold 4 million shares of 3Com stock, pocketing $200 million in profit.

In the Cisco cases, lawsuits are claiming the company depended on its rising stock price to finance its growth and engaged in inappropriate accounting practices that made the company's business look stronger than it was. At the same time, the suits say that insiders were able to sell millions of dollars of stock at inflated prices because the company failed to disclose growing problems.

Safe harbor is not exactly safe
Shareholder suits have been part of the landscape of corporate management since Congress passed the Securities Acts of 1933 and 1934, the foundations of modern securities law. They often don't produce big recoveries for shareholders, but, for a management team, it can be "like getting a kick in the butt," says David Rosenstein, director of external affairs at Milberg Weiss Bershad Hynes & Lerach, which files easily the largest share of shareholder suits against companies.

In the early 1990s, technology companies in particular lobbied strongly to limit what they regarded as frivolous lawsuits. Congress responded with the Private Securities Litigation Reform Act of 1995 and overrode a veto by then-President Clinton. The act essentially did two things:
It protected executives from litigation if they made sales and earnings projections that were ultimately not met. That's why you now see companies including boilerplate text saying they can't guarantee earnings sales and profits.
It forced litigants to find investors who had big stakes in companies to sue. That way at least, the clients, not the lawyers, appeared to be directing the litigation.
The result, says Joseph Grundfest, a Stanford law professor and a former Securities and Exchange commissioner, was not a reduction in the number of lawsuits. In fact, more than 1,000 securities-related class-action lawsuits have been filed since 1995. Instead, the plaintiff's bar began to focus its efforts on proving deceptive or inappropriate accounting methods and insider trading. About 90% of complaints filed today focus on these questions, he says.


Participants in 401(k) plans can be vulnerable to huge losses if their company's stock tanks. Why? Many companies match employee contributions with company stock.
Fraudulent insider trading is especially tricky to prove with technology companies, Grundfest says, because so many tech companies use stock and options as compensation. If an executive is selling, when does that activity allow you to infer that the executive "acted with conscious intent to defraud?"

New twist: 401(k) plan shareholders
In a new twist on shareholder lawsuits, the Communications Workers of America joined a shareholder lawsuit against Lucent Technologies on behalf of its members in the company's 401(k) plan. It also asked its members to join in the lawsuit. The complaint charges Lucent with "the dissemination of materially false and misleading statements concerning, among other things, the company's deteriorating financial condition, the lack of demand for the company's products, its inability to control costs and maintain profit margins, and the effects these adverse undisclosed conditions would ultimately have on the company's operations, liquidity, and stock price."

These are fairly standard charges in shareholder lawsuits.

What makes the Lucent case unique is that a large number of members of the shareholder class in the suit are investors in Lucent's 401(k) plan. As fellow MSN MoneyCentral writer Ginger Applegarth recently pointed out in her article, "One way to reduce risk in your 401(k)," participants in 401(k) plans can be vulnerable to huge losses if their company's stock tanks. Why? Many companies match employee contributions with company stock. That part may be OK for both the employer and plan participant. The problem arises when a situation like Lucent occurs -- losing more than 80% of its stock value in 2000 alone. Most 401(k) plans put significant restrictions on the ability of participants to unload company stock. Usually, only events like termination of employment, reaching age 55 or retirement grant participants the right to sell the stock. Such limitations make 401(k) participants much more vulnerable to losses than shareholders in general.

The issue is the nightmare that critics of the practice have feared. A company's management is inherently in conflict with itself when it offers company stock as the match in a 401(k) plan, says Nell Minow, a longtime shareholder activist. "We may want employees to be motivated to produce and be loyal to companies, but, on the other hand, we do not want them to be overly dependent on the company's fortunes for their own retirement income security."

So, stay tuned. We may see more participation in lawsuits from 401(k) plan participants in the future.

Happy Posting! ----