Fine Print in the 'Contract With America'

Like most other Republicans in his Leisure World Laguna Hills community, Kent Merrill endorsed the GOP-inspired "contract with America."

Speaker Newt Gingrich and other Republicans held up the pact as a promise to reform government, and the 75-year-old voter thought the change was long overdue. Among other things, he liked something called "common sense legal reforms"--the ninth item in the 10-point legislative package.

Then one recent day, Merrill attended a meeting at the Leisure World clubhouse and was warned that as with all contracts--legal or political--the small print can be cause for alarm. He heard that it could make it harder for groups of small investors who have been defrauded--even those who unknowingly had funds in the bankrupt Orange County investment pool--to file lawsuits.

He also learned that his congressman, Rep. Christopher Cox (R-Newport Beach), drafted the section in question.

"I think it's awful," Merrill said. "I was in a state of shock when I found out."

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Cox, of course, says Merrill's information, provided by a New Jersey lobbyist, is wrong. In fact, he insists that his bill would benefit small investors.

Merrill's concerns are another reminder of the political battles to come over Republican reforms. Special interest groups representing lawyers, senior citizens and consumers are dropping seeds of doubt across the country to grow opposition to the bill. Proponents of the so-called securities litigation reform--other powerful special interests including accounting firms and the high-tech industry--lobbied for similar legislation long before the GOP took control of Congress.

Cox says he's puzzled by critics' claims that the bill would hurt small investors. His targets, he maintains, are the "frivolous" suits brought against companies whenever share prices decline--even when the drop was caused by broad market conditions.

High-tech firms with volatile stock prices are the ones frequently hit, resulting in wasted legal fees, lost jobs and a damaged economy, Cox says.

(Opponents have their own studies showing that there is no rash of lawsuits--that while the number of suits has increased, their percentage of total federal court filings has gone down in recent years.)

Besides curbing "fishing expedition" lawsuits, Cox says, the bill would help investors recover all of their losses and ensure that settlements are in their best interest, not their lawyers'.

Should investors win their cases, the loser pays their attorneys' fees and other costs if the case is heard in federal court, under Cox's proposal.

But what if the investors lose?

Critics claim that the bill sets tougher standards that must be met before a suit can be filed, increases the burden of proof so that it's harder to win a case, and adds the risk that small investors will end up with the huge legal bills of the corporations they sue if they lose in federal court.

The real losers, critics claim, will not be the lawyers--lawyers will always find work--but the investors Cox is claiming to protect.

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Opponents are arguing their case with the help of past fraud victims such as Leah Kane, another Leisure World resident. She was one of the thousands of small investors--including many at Leisure World--who were bilked out of almost $200 million by Charles H. Keating Jr., former chairman of American Continental Corp., which owned defunct Lincoln Savings & Loan.

Kane organized the Leisure World plaintiffs in the Keating case and is a citizen-lobbyist against the bill. Had these rules been in effect a few years ago, Kane says, they might have had second thoughts about dragging Keating into court.

Cox says that case was so obvious that bondholders would not have been at risk in filing the suit.

Jeanne Varble, another Lincoln Savings bondholder, wants to maintain the legal rights of people with legitimate claims of fraud, but she also believes in the broader need for legal reform.

"I thought I had a right to sue; I knew what happened to me," she said of her own class-action suit. "But somebody has to make a judgment of whether I am telling the truth or am off my rocker. . . . And if somebody sues and it's frivolous, then they should have to pay for it."

Merrill, who was not part of the Keating case, disagrees.

"I would rather have frivolous lawsuits," he said. "As far as it costing the companies, if they are part of the fraud, they should be held responsible."

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