The SEC and Department of Corporations
are so slow, what’s the alternative?

San Diego was such a whirl of excitement last month with the Republican National Convention, who could have blamed readers for not noticing that our city was in the news for another political reason?

    One of San Diego’s more colorful attorneys, Bill Lerach, was skewered in a Wall Street Journal op-ed piece by Holman W. Jenkins Jr. Jenkins writes that Silicon Valley's support for President Clinton was collapsing because Clinton vetoed the Securities Litigation Reform Act, legislation designed to shield businesses from class action law suits.

    The veto, which was quickly overridden by Congress, came "right after San Diego attorney Bill Lerach was seen bending the President's ear at a White House dinner," Jenkins says. "And thereby, in fact, hangs the tale of Silicon Valley's souring on Mr. Clinton." Quoting some of Silicon Valley's luminary high tech executives, Jenkins' article calls Lerach "a cunning economic terrorist," and refers to his type as "pirates of the plaintiffs' bar."

    The whole point of Jenkins' Journal column was not about Silicon Valley's shaky support for Clinton, but rather about the second round of the 1996 California tort battle.

    The Wall Street Journal is especially fond of lashing Lerach, whom it calls "the king of the strike suit," suggesting that Lerach does not file suits on behalf of investors who have been manipulated out of their money, but rather to make big out of court settlements and line his own pockets. His lawsuits, say some news reports, amount to nothing more than green mail.

    Lerach often is described as suing corporations on behalf of shareholders following a big drop in the share price, on the basis that corporate management either made inflationary statements about the company’s prospects or withheld some important information. It has been estimated that Lerach is involved in about 25 percent of the class-action securities fraud suits filed nationwide.

    A search of local newspaper articles going back the 20 years that Lerach has practiced in San Diego shows that his suits are a little more complicated than they would appear on the surface. Lerach once sued (and won) when the executives of a large San Diego-based industrial company created huge golden parachutes for themselves in case their company was taken over, then within months initiated the sale of the company and cashed in the golden parachutes. The self-engineered windfall was by no means a management entitlement; it came right out of the capital contributed by shareholders. In other cases, Lerach was able to show that corporate executives sold their own shares, cashing in on profits, just before their company’s stock price took this - supposedly - entirely natural dive.

    In March, California voters defeated the "Terrible 200s," Propositions 200, 201 and 203 - proposals put forth by Silicon Valley executives and backed by the California Chamber of Commerce and other business groups. The three initiatives would have created a no-fault auto insurance system, limited shareholder lawsuits and put a lid on attorney fees.

    State legislation is a hot topic. By restructuring so-called "strike suits" in federal courts, the Securities Litigation Reform Act has driven the action into the state courts.

    Proposition 211, the Retirement Savings and Consumer Protection Act, is known as the Lerach bill because he is said to be providing it heavy financing support. The California Trial Lawyer's Association, consumer, senior citizens and individual investor groups also support the measure. Proposition 211 is a preemptive strike against future corporate sponsored legislation. It strengthens the ability to file class action suits when fraud has occurred, but also requires that if a judge finds the suit to be frivolous, those bringing the suit pay all legal costs.

    California voters are in for a wild debate over Proposition 211 this fall, if the discussions heard during the spring election and Jenkins piece in the Wall Street Journal are any indication. The rhetoric gets extreme.

    For example, the ballot argument for Proposition 201 last spring said that in a single year, "one lawyer took almost $250 million out of the California economy," robbing the state of jobs and making the state less competitive. Presumably that attorney was Lerach, but the San Diego Union-Tribune did a study of Lerach's 1994 suits, their settlement and the lawyers fees and did not come up with more than $105 million in total attorney's fees.

    Lerach told the Union-Tribune that the data was "bogus." His firm, he said, "has distributed over $5 billion to victims of fraud throughout the United States in the last 20 years, probably to 1 million people. Our phone rings off the hook here every day with people who feel they have been cheated."

    Whatever the numbers show, Lerach has made plenty of money off shareholder fraud lawsuits. But for investors who've tried turning to the Securities and Exchange Commission, California Department of Corporations or the District Attorney for help, the threat that a corporation may be "Lerached" may feel like the best protection they've got. Government agencies often act too slowly, or their authority to protect individual investors is limited. Law enforcement is aggressive against boiler room and penny stock promoters, who often are small peanuts, amateurish operators and not all that difficult to catch. The real pros know how to stay just enough inside the law that their wrong-doings can be difficult to prove.

    Nevertheless, voters may legitimately feel squeezed between forces they don’t fully trust. Who are the greater demons? Lawyers, or corporate chieftains and their allies on Wall Street?

    The large majority of attorneys and business executives are ethical, but those who stray can be extremely greedy and pose a genuine threat to society. Furthermore, to support shareholder rights is not anti-business. It is a position that favors honest and fair business practices. Investors supply the capital for our capitalistic system. If they are not treated equitably, they may well withdraw their financial contributions. That would truly harm both our state and national economies.

    Those who bring frivolous litigation should pay the legal fees of any person or company they victimize, as Proposition 211 requires. Yet after a decade that has seen the rise and fall of Michael Milkin, Charles Keating and dozens of S&L executives who were never charged with a crime but who nonetheless frittered away investors' money, it’s hard to believe that Californians would willingly vote away any of their legal prerogatives. Perhaps this is why last spring citizens rejected Propositions 201, 202 and 203.

    While few would disagree that our society has become far too litigious, many people realize that there are times when the courts are their best recourse. Certainly corporations don’t hesitate to sue when it is in their best interest. If you doubt that, just try infringing on a Microsoft copyright or overstepping the McDonald's trademark.

    Janet Lowe is the author of "Value Investing Made Easy," "Benjamin Graham on Value Investing," and a soon-to-be-published book on Warren Buffett.