Shareholders take action against artificially inflated stock prices
NEW YORK — “Sign Up and Join a Class Action,” prods the Web site of law firm Shiffrin & Barroway, offering a pop-up screen with 37 targets ranging from AOL Time Warner to Charter Communications, from Martha Stewart Living to Vivendi Universal.
As storm clouds hover over corporate America, it’s raining shareholder lawsuits.
Disgruntled investors have targeted three of the biggest showbiz congloms — AOL TW, Viv U and Walt Disney — plus a contingent of cablers and peripheral players including Gemstar-TV Guide. The suits, which may take several years to resolve, could have big repercussions for companies and top execs.
The sheer magnitude of market losses, in raw dollars, means damages and settlements could balloon. Companies generally carry less than $100 million in reserves to cover litigation.
Shareholder lawsuits are as old as the stock market. But the size of companies involved — more Fortune 500 than small-fry — and the scope of alleged fraud are setting records. Often, companies have already restated revenue or profit, which suggests fewer cases may be dismissed.
“Restatement is tantamount to an admission that what they previously reported was wrong,” says Norman Berman of Boston law firm Berman DeValerio.
Most class-action suits argue that shareholders bought the stock at a price that was artificially inflated by management’s omission or distortion of material information.
Generally, about 30% of shareholder class-action suits get thrown out. Of the rest, 80%-90% are settled out of court.
“The bar for these cases is high. If you manage to survive the pleading standards, it means you crossed most of the hurdles,” Berman says.
“We may be into a new era of giant lawsuits,” agrees Todd Berger of Berger & Montague.
Media shares were hit by the Internet crash, an ad slowdown and a soft economy: It’s hard to calculate what pushed the stocks lower when. Also, it’s immensely complex to assess damages when suits involve many investors moving in and out of a stock over a period of years.
A rising public outcry means plaintiffs now are more likely to chase execs’ personal wealth, which ballooned in the go-go, stock option-frenzied market of the 1990s.
“There will be more pressure to collect from individuals. People won’t tolerate (Bernie) Ebbers and (Gary) Winnick and (Kenneth) Lay and (Andrew) Fastow living in multimillion-dollar houses when 401(k)s have been raped,” says Melvin Weiss of Milberg Weiss, lead counsel for the shareholders in the Enron litigation.
The Rigases of Adelphia Cable, former Viv U topper Jean-Marie Messier and a host of former and current AOL execs including Robert Pittman, David Colburn, Wayne Pace and Michael Kelley are defendants in current suits.
Federal prosecutors want to freeze $23 million worth of bank accounts and other assets of former Enron chief financial officer Fastow, his family and other ex-Enron execs.
Former Sotheby’s chairman A. Alfred Taubman was jailed and fined $7.5 million after being convicted of price fixing this year.
And ex-Sunbeam chairman Albert Dunlap agreed to pay $15 million to settle a shareholder suit alleging securities fraud.
Only Adelphia is the focus of criminal charges. Shareholder suits against AOL TW, Viv U, Disney and others are civil cases.
Suits may be in vogue, but they’re coming under fire from some Wall Streeters who say greedy investors — and their lawyers — are looking to cast blame and cash in. They fear litigation could distract management from day-to-day operations.
“As a shareholder, do I want Dick Parsons spending all his time in court for potentially frivolous lawsuits?,” asks longtime media analyst Dennis McAlpine of McAllen & Associates.
America Online may have engaged in unorthodox accounting for ad deals worth at least $49 million (AOL TW will restate revenue by that amount). Lawsuits claim execs told investors that advertising was healthy when they knew it wasn’t.
That sets a scary precedent, McAlpine says. “In hindsight, you can always find something. You could argue advertising was going up, and reversed itself. The real issue is why did Jerry Levin do that deal in the first place?”
The suits “are like the lawyer full-employment act,” quips fund manager Sal Muoio of SM Partners. “Some of it is deserved, but some of it is a plague on the system.”
Lawyers insist that where there’s smoke, there’s fire.
Says Berger, “There are many more companies whose stocks have gone down than there are lawsuits.”