California Ballot Effort Would Make Loser Pay in Securities Suits

In an effort that parallels the tort-reform movement in Congress, a group led by Silicon Valley entrepreneurs Thursday said it has filed a California ballot initiative with a “loser pays” provision to discourage what it calls frivolous shareholder lawsuits.

The initiative, aimed at California’s March, 1996, presidential primary ballot, would rewrite state law to require the losing party in a securities class-action lawsuit or a so-called shareholder derivative lawsuit to pay the winner’s attorney’s fees and other expenses. Similar federal legislation cleared the House on Wednesday.

In cases where plaintiffs reject a pretrial settlement offer that is greater than or equal to the amount finally awarded at trial, the plaintiffs would also be liable for their opponents’ expenses.

The goal is “to change a legal system that has created an industry of lawyers whose entire business is filing meritless shareholder lawsuits on behalf of professional plaintiffs,” said Tom Proulx, co-founder of software giant Intuit Inc. and chairman of the sponsoring group, the Alliance to Revitalize California.

The initiative drew fire Thursday from trial lawyers who said it would shut the door on all kinds of shareholder suits, even in cases of blatant fraud or insider trading.

“This is just an attempt by some rich corporate executives to shield themselves from being called into account,” said William S. Lerach, a San Diego lawyer who has brought successful shareholder lawsuits against firms, including disk drive maker Seagate Technology Inc., whose chairman, Al Shugart, is another sponsor of the initiative.

After the initiative’s wording is approved by the attorney general, the sponsors must collect 435,000 signatures to place the measure on the ballot. Sponsors estimate that effort will cost about $600,000. The alliance previously filed two other tort-reform initiatives for the 1996 ballot.