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Published by:
Stanford Business School (1997)
October 1997
15 pages
Data source:
Field research


In 1996, Silicon Valley companies and their leaders organized a successful campaign to defeat a ballot initiative that would have circumvented federal law and made securities fraud lawsuits, which the companies believed were largely frivolous, easier to win. Approximately 1, 300 federal class action securities fraud lawsuits were filed from 1988 to 1996, resulting in settlements averaging $7.3 million. The lawsuits, which alleged securities fraud resulting from inflated earnings projections by the firms, were typically filed after a sharp fall in a company's share price. High technology firms, which frequently have volatile share prices, were the principal target of the lawsuits. Several law firms, led by Bill Lerach, specialized in these lawsuits, and some were believed to have stables of shareholders who would file a lawsuit as soon as a company's share price fell significantly. Even though the defendant companies were confident that no fraud had been committed and that the lawsuits were frivolous, the defendants felt compelled to settle to avoid a prolonged and costly court battle. In 1995, high technology, accounting, and other firms succeeded in having Congress enact federal legislation limiting the circumstances under which such lawsuits would be successful. Restricted at the federal level, the plaintiff's bar sought to use state laws as the basis for their lawsuits. To strengthen their position under state law, the plaintiff's bar qualified a referendum, proposition 211, for the November 1996 California ballot. If passed by the voters, not only would securities fraud lawsuits be easier to win but virtually all publicly traded companies in the United States could be subject to lawsuits.


Government and business; Government stats; Interest groups; Legislation; Legal aspects; Strategy formulation
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