Court Rules on Shareholders’ Right to Sue

A federal appeals court ruled Friday that shareholders who did not purchase stock in a company’s public offering could still file a securities fraud lawsuit against the firm for omitting critical information in its registration documents.

The ruling revived shareholders’ claims against Dignity Partners Inc., a San Francisco firm that was established to buy life insurance policies mainly from terminally ill people with AIDS. But the decision came after both sides in the case tentatively agreed to settle the matter.

However, the ruling by the U.S. 9th Circuit Court of Appeals in San Francisco can be cited as precedent in similar cases across the nation. It marked the first time that a federal appeals court decided the issue. Other lower courts have ruled otherwise.

The 1996 suit targeted Dignity--which has since changed its name to Point West Capital Corp.--for not telling investors that people with AIDS were living longer than expected because of newer treatments. Shareholders contended that information should have been included in statements filed with the Securities and Exchange Commission when the company went public in early 1996.

Shareholders who bought Dignity’s stock at $12 saw their investments plummet to about $1 a share. On Friday, Point West’s shares fell 13 cents to close at $5.75 on Nasdaq.

Dignity, which has denied any wrongdoing, announced in mid-1996 that it would stop buying policies from people with AIDS after health experts reported that a combination of drugs was helping to keep many of them alive.

Dignity was formed mainly to deal in viatical settlements for AIDS patients. Under such a settlement, an insured person who is terminally ill sells his or her policy to a private party, who is then named as the policy’s beneficiary.

Generally, viatical settlements are available only to those patients whose medical diagnosis indicates they have less than two years to live.

Last year, a federal judge in San Francisco handed Dignity a small victory when he dismissed some of the shareholders’ claims. Because these investors had not purchased stock in the IPO or within 25 days of it, they had no right to sue, the judge said.

But a three-judge panel of the appeals court disagreed, saying purchasers of stock in the aftermarket could maintain such suits.

Gerald Palmer, an attorney for Point West, said he was “obviously disappointed” with the court’s decision, but has not decided whether to appeal to the U.S. Supreme Court.

Eric Isaacson, an attorney with Milberg Weiss in San Diego, which represents the shareholders, applauded the decision.

“If the ruling was upheld, only big institutional investors who got in on the IPO would be allowed to bring suits,” Isaacson said. “This gives the small investor a chance to have some meaningful remedy.”