A Measure That Mainly Would Line Lawyers’ Pockets

The campaign over Proposition 211 is more contentious and expensive than almost any on the Nov. 5 ballot. Both sides have already spent more than $32 million to blanket the state with radio and television ads and mailers. Ads began to run even before the proposition had been assigned an official ballot number.

The near-record sums spent is one gauge of the heat generated by this measure dealing with securities litigation. The claims made about Proposition 211 are another. Opponents promote the fact that presidential contenders Bill Clinton and Bob Dole find common ground in their fears that Proposition 211 could prompt businesses to leave the state. Proponents parade heart-tugging videos of seniors who say they lost their life savings through stock fraud.

But while the sympathetic picture of defrauded seniors manipulates, it does not inform. Passage of Proposition 211 would not automatically make it harder to defraud seniors. But it would, without question, generate more lawsuits and economic uncertainty in the state. That would undermine California businesses as well as the security of individual investors. Proposition 211 is not good news for California.

The measure is the brainchild of San Diego attorney William Lerach. He has gained national attention representing shareholders in suits alleging that slides in corporate stock prices can be evidence that corporate officers have engaged in securities fraud. This measure was prompted in part by congressional restrictions on such suits in federal court.

Proposition 211 would make it easier for shareholders to sue public companies in California courts over unexpected changes in their stock price. Indeed, this measure would make it easier to sue than in other states or in federal courts. As such, California could become a magnet for securities litigation without necessarily making shareholders--current and future retirees--any safer from fraud.

Specifically, the measure permits state courts to consider a doctrine known as “fraud on the market,” allowing shareholders to sue without having to point to specific examples of fraudulent information on which they may have relied in buying a stock. This doctrine is a prescription for frivolous litigation. The measure also bars companies from covering the cost of defending company executives and directors charged with securities fraud but allows them to purchase insurance, which generally covers about half the cost of monetary damages. Lawyers and accountants who attest to the veracity of a company’s financial statement could be held liable for the full amount of damages.

These changes would largely benefit lawyers--maximizing their opportunity to sue and raise fees. Stock fraud suits often proceed with a handful of lawyers representing thousands of stockholders, each perhaps with a small number of shares. As a result, the recoveries to each plaintiff can be small and lawyers’ fees potentially quite large.

Prosecuting such suits is not the same thing as preventing shareholder fraud. Proposition 211 does not strengthen the law on securities fraud or empower a new watchdog agency to protect California investors. It merely opens the door to much more speculative litigation. Proposition 211 is bad law that would invite bad consequences. Vote “no” on Proposition 211.