NCPA - National Center for Policy Analysis

Lawyers Take Stockholder Suits To States

May 7, 1997

In response to federal legislation passed in 1995 to curb frivolous stockholder "strike suits" against companies, lawyers are shifting the filing of such class-action suits to state courts, records show.

The suits claim companies mislead investors about their financial prospects, damaging shareholders' interests when stock prices fall. The federal legislation was passed overwhelmingly by Congress following President Clinton's veto.

  • A study out of Stanford Law School revealed that some 26 percent of class-action securities suits have shifted from federal to state courts.
  • Between December 1995 and the end of 1996, 69 companies were sued for alleged securities fraud in state courts -- 30 of which cases were also filed in federal courts.
  • Overall, 148 class-action suits were filed in either state or federal courts.

Leaders of 181 high-tech companies have called upon Congress to pass national class-action standards that would keep these suits out of state courts.

High-tech companies are especially vulnerable to these types of suits. Of 348 settlements between 1989 and 1992, some 30 percent involved high-tech firms. Some 73 percent of complaints involving high-tech firms allege insider sales, compared with 39 percent of strike suits overall.

Experts explain that the way high-tech firms often pay their employees -- through stock options -- helps make them targets. That means high-tech firms are more likely to have "insiders" trading their stock -- a situation which plaintiffs use to make their case.

Source: Jeff A. Taylor, "Why Stockholder Suits Rage On," Investor's Business Daily, May 7, 1997.


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