Q & A : New Law for Wronged Investors : Courts: Reforms make it tougher to sue companies over soured projections, but may encourage companies to give out more information.

TIMES STAFF WRITER

New securities litigation reforms--hotly debated and enacted on Friday over President Clinton's veto--will make it harder for investors to sue a company for making misleading statements but also may mean that more truly wronged investors will get back more of their losses.

What does the new law say and what will it mean to you? Here are some questions and answers:

Q: How will existing and prospective investors be affected by the new law and what exactly does it do?

A: By reducing the threat of litigation, the law may make companies more forthcoming with information--although investors will still need to be very cautious about how they act on it. Proponents expect a more open "marketplace of information" while opponents fear an "open season" on unwary investors.

The effect will be widespread, as thousands of lawsuits are filed each year by investors who maintain that corporate officers defrauded them out of their investment dollars by misleading them about the direction of the company or the value of the company's stock.

Specifically, the law:

* Prevents people from suing a company for making misleading statements, unless they have reason to believe that the statement was made with intent to defraud.

* Creates a safe harbor for executives making forward-looking statements about the company's prospects, as long as the company cautions investors about pertinent risks and is clear about the fact that the statement is only a projection.

* Limits the amount of damages that can be collected from secondary defendants to an amount not to exceed 150% of their proportionate share of the liability, except in cases where a small investor has lost more than 10% of his or her net worth in a securities fraud.

* Bars "professional plaintiffs" from filing federal securities suits.

* Allows judges to force plaintiffs and their attorneys to pay the defendant's legal fees and damages in certain instances.

* Changes a number of legal procedures which now determine how attorneys fees are calculated, how so-called "lead" plaintiffs are chosen in class action suits, and the kind of information that must be given to members in a class.

Q: Does this mean that a company can grossly overstate its future prospects without worry of being sued?

A: That's debatable. Proponents of the law say no. Under the law, if a company made exaggerated claims about its future without stating pertinent risks about why these projections might not come true, investors could sue just as before.

However, opponents counter that you won't be able to sue without showing intent to defraud. And, it can be tough--if not impossible--to prove intent without fishing through company documents through a legal process called discovery, which can only take place after a lawsuit is filed.

Q: What is a professional plaintiff?

A: In the law, it's someone who has filed more than five federal securities cases in the previous three years. They would be barred from serving as the lead plaintiff in additional cases.

Q: How would the limitations on damages work?

A: In each case won by a plaintiff, a judge would determine the relative culpability of each of the defendants. For instance, if an investor sued a company for making misleading statements about its financial health, and secondarily sued the company's auditors and the broker who sold the investor that company's shares, the judge might say that the company was 70% liable; the auditors 20% liable; and the broker, 10% liable. If the damages then turned out to be $1 million, the company would pay $700,000, the auditors would pay $200,000 and the broker, $100,000.

However, if the company were insolvent and unable to pay the whole $700,000, the auditors and broker could be on the hook for up to 150% of their proportionate share. So, in this case, the auditors would have to pay $300,000 and the broker $150,000.

Q: You said there's an exception, though, for small investors?

A: Yes. When an investor has less than $200,000 in net worth, and loses more than 10% of that net worth to a securities fraud, he or she may collect 100% of the damages from any defendant that has the money to pay.

Q: Would investors be on the hook for paying the legal fees of the companies they sued, if they were to lose?

A: Possibly, although it is unlikely. If the judge thinks that the case was brought without adequate evidence, the case goes to trial and the plaintiff loses, the defendant can petition the judge to ask that the plaintiff pay their fees. Attorneys could also be on the hook if they file a suit that a judge rules to be frivolous. Consequently, attorneys are likely to become far more selective about the cases they'd be willing to take.

Q: How does the law change the way attorneys fees are calculated?

A: Today, when most class action suits are settled, the attorneys involved submit bills to the court indicating how many hours they worked on the case, and their standard billing rate. In many cases, the judge will then award attorneys fees off the top of the settlement. The actual victims get paid a proportionate share of what's left.

The new law will create a new standard for setting attorneys fees that's based on paying attorneys a percentage of the award, rather than an amount that relates to their actual hours. Proponents of the law say this will cause victims to get more. Opponents say it will discourage attorneys from filing and working on these cases.

Q: Does this law affect state securities suits?

A: No. You can continue to sue companies, brokers, banks or others in state court just as in the past.

Q: Should I do anything differently, in light of this law's passage?

A: Yes. Consumer advocates say you must be far more cautious and skeptical when considering an investment. You can no longer rely on verbal assurances that a company is strong or its earnings prospects are bright. If someone urges you to buy shares in a particular company, you should ask about the risks and ask to have the sales pitch--and all other pertinent details about the investment--sent to you in writing.

The law requires that all written projections include disclosure of the risks. If you read the materials and there is no such disclosure and then you invest and suffer a loss based on misrepresentations, you can sue just as before. But you have to read the disclosures, because, if they're there, a judge can say you should have known about the risks and throw your case out of court.

Q: If I lose a few hundred--or a few thousand--dollars because of misrepresentations by my bank or broker, can I sue in small claims court?

A: Sometimes. However, often you sign so-called "arbitration agreements" at the time that you open a bank or brokerage account. If you signed this agreement, you may have to take your case to arbitration instead of small claims, which could expose you to paying for part of the arbitrator's expenses. If you want to preserve your right to file a case in state court, including small claims courts, you must cross out that portion of the contract before you sign the new account documents.

* SENATE OVERRIDES VETO

A bill to curb investor lawsuits became law as the Senate overrode President Clinton's veto. A1

* LAWSUIT KING

San Diego lawyer William S. Lerach, pictured above, helped trigger the litigation curbs. D8

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